Q&A Regarding Electronic Payments

November 1, 2017

 Q: A tenant would like to pay rent by direct transfer to my checking account. I allowed this a few years ago, and a tenant transferred less than the agreed upon amount, and the mistake was difficult to correct. Because of this, I am wary of moving forward with electronic payments. Do you have advice?

A: Your question points out some of the pros and cons of the various forms of payment available to landlords and tenants. Unfortunately, no single method is ideal in all situations, so consider your priorities when setting up your payment procedures.

Cash payment is generally used for unsophisticated landlords and master tenants who manage their tenancies informally, and carries the disadvantage of lacking a convenient paper trail. Any rent received in cash for any reason should be documented with a receipt for the benefit of both sides. However, some landlords may require cash payment in the event of receiving bad checks from the tenant. This is legal, but only for three months after the last bad check. However, cash payments pursuant to a 3 Day Notice should not be rejected, unless the amount itself is insufficient.

Payment by check is the most common and typical payment method, because it is generally reliable and easy to track and document. However, it can pose certain logistical problems, such as in the case of NSF checks (as mentioned above) or delivery issues if they are transmitted by mail. However, certified checks, cashier’s checks, or money orders are usually superior options than cash payments, if the tenant has a history of passing bad checks, because they guarantee the value of the check. Electronic checks, such as transfers through PayPal, can be fast and secure, but require both sides to be technically savvy enough to employ them comfortably, and may be out of reach for low-income tenants.

Direct deposit or recurring wire transfer conveniently eliminates most of the obstacles for prompt delivery of payment, so it is an easier way for a landlord to track which tenants are or are not paying on-time reliably. However, as mentioned in the question, it puts the payment in the hands of a third party, which gives the landlord less control, such as in the case of a bank error. Low-income tenants may also not have a bank account at all.

Another common issue is when a landlord is terminating a tenancy not because of nonpayment of rent, and the rent continues to be paid automatically even after the termination date. This can be damaging to the landlord’s termination claim, because accepting rent after issuing a termination notice generally voids the notice. It is possible to avoid this if the rent is refunded to the tenant as quickly as possible, and if the landlord can show that the receipt of rent was inadvertent and unintentional. However, it is better to turn off direct deposit from tenants once their tenancies end, which requires additional coordination with the bank.

Carefully consider the risks and benefits of each method of payment, and be prepared to offer and accept at least two forms of payment from your tenants.  A landlord who is unreasonably narrow in how they handle or accept rent payment may be viewed as operating in bad faith when a tenant is otherwise ready, willing, and able to pay. But if you make it too easy, you may end up with less control when it is needed most.

 

Copyright © 2017 by Fried & Williams LLP. All Rights Reserved. The information in this article is general in nature and should not be considered legal advice. For any specific matter, please consult with an attorney.

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