The Property Management Shop

by Marc Wilson

Q. One of my tenants is a habitual late payer. His rental agreement clearly stipulates a $100 late charge, but he never pays it. Can I deduct his past-due late fees from his security deposit when he vacates? Also, when do you have your new tenants sign the move-in/move-out itemized statement? My new tenants often balk at signing this document at the lease signing because they don’t remember the exact condition of the apartment. They usually want to see the apartment one more time before they sign the itemized statement. I hate to make an extra trip to the property. What do you do?

A. Chasing late fees can be fun and profitable, but it is important to not lose sight of the prize: timely rent payments. Try not to get fixated on late fees. You obviously have bigger fish to fry; you have a tenant who is habitually in breach of his rental agreement. You should have an absolute zero-tolerance policy for late rent payments. Always serve late payers with a three-day notice to pay rent and never call a tenant to inquire as to whether he plans on paying the rent. Keep all historical three-day notices in the tenant’s file. Always follow up errant rent payments with a letter that describes the breach of the rental agreement, your lack of tolerance for late rent payments and a request for the stipulated late fee. With regard to late rent payments, you should conduct your affairs as if you are the Bank of America and the tenant is a borrower: be systematic, pragmatic and mechanical. Do not personalize late rent payments; just enforce your rental agreement.

Can you deduct historical, unpaid late fees from the tenant’s security deposit when he vacates? Sure you can. But may you? The only two questions are: Is it legal? And, will you prevail if and when the tenant takes you to small claims court? Ultimately, everyone’s rights relative to security deposit dispositions are defined by the state’s security deposit law, Section 1950.5. Tenants, attorneys and property owners have been arguing about the interpretation of this section since the beginning of time. San Francisco’s small claims courts are full of security deposit beefs—a pure testimony to the ambiguous nature of Section 1950.5. The reality is that there is nothing within Section 1950.5 that expressly prohibits a property owner from deducting late fees from a tenant’s security deposit and there is nothing in the section that allows it. It is, therefore, up to you to define your rights and obligations within your rental agreement. I use a clause that states: “Tenant agrees that any and all unpaid late-payment charges ($100) and returned-check charges ($100) are due and payable at the time they are incurred. Any of these charges not paid by the tenant during the life of the tenancy will be deducted from the security deposit at the time of the disposition of the security deposit. Tenant further agrees that any unpaid late or returned check fees will accrue at 10% interest until such time that they are paid by the tenant.”

When a tenant pays late, I mail a copy of this rental agreement clause and a demand for the late fee. I remind the tenant that if left unpaid, the late fee will accrue interest at a rate of 10% until such time that it is paid. In most cases, the tenant not only pays the late fee but also pays his rent promptly from that time forward. I’m not concerned about my chances at small claims court. First, I have never been sued for enforcing this clause. Second, this clause is not ambiguous; no one can reasonably argue that the tenant did not agree to apply his security deposit to any unpaid late fees. Finally, the judges down at small claims court are as uncertain about the application of Section 1950.5 as the rest of us. The key is to have a clear and written understanding with your tenants and to utilize the aforementioned clause. But, please remember, your primary job is to insist on timely rent payments and to enforce your rental agreement. Late fees are just another tool in your toolbox. If you deduct late fees at the time of the security deposit disposition and your tenant raises hell, then just give him his money back. Nothing quiets angry mouths faster than cash.

Moving on to the move-in/move-out itemized statement, this document (available from SFAA) defines the condition of the apartment at the onset of the tenancy. This is the document that will establish any case you might or might not have to deduct monies from the security deposit for unit damage at the termination of the tenancy. Most tenants do not see this document until it is time to sign the rental agreement. Most tenants gave the apartment only a cursory glance during the open house and are understandably reticent to declare the unit perfect at the lease signing. It is simply not reasonable to expect a new tenant to declare in writing that the apartment is perfect without another look. The goal is to get the document signed without making an extra trip to the property. I only rent apartments that are in perfect condition. I find that life is easier this way. My tenants receive an itemized statement at the lease signing that stipulates that all aspects of the apartment are either clean or new. My new tenants always sign this document because I add a clause which states that tenants may amend this form and send it back within 15 days of taking possession of the apartment. Unless amended by the tenant, all categories of the move-in inspection will be assumed to be clean or new. Nine out of ten tenants do not amend the form.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Marc Wilson has specialized in the brokerage of San Francisco apartment buildings for 20 years. He can be reached at 415-229-1275. Copyright © 2007 by SF Apartment Magazine. All rights reserved.