Negotiate Tough Remedies for Habitually Late Rent

Struggling tenants sometimes must prioritize which creditors to pay each month. If they think you'll put up with late rent, they may put you at the bottom of the list. If you don't want to lose the tenant for some reason—for example, the loss will upset the tenant mix or co-tenancy rights of the other tenants at your center or you're having trouble leasing up your office building—you may be tempted not to take any action the first couple of times that the tenant is late with its rent and hope that it'll start paying on time again. If your late payments carry fewer penalties than those imposed by other types of creditors, such as banks and credit card companies, it could become a bad habit, though. And a late rent cycle could eventually give the tenant the right to pay late. Negotiate a get-tough lease clause like our Model Lease Clause: Draft Get-Tough Lease Clause for Late Rent to discourage chronic late rent payments.

Break ‘Violation Cure’ Cycle

It's exasperating when a tenant repeatedly violates the lease by failing to pay its rent on time but then cures—that is, fixes—each violation by paying the late rent before it becomes a lease default. In the meantime, you've wasted time and money sending the tenant violation notices and asking it to pay. But you can't get damages from the tenant or evict it, because the tenant pays the rent it owes before or during the lawsuit or before the eviction proceeding has been scheduled.

Solve this problem by first giving yourself flexibility by setting out the circumstances in your get-tough clause that trigger your right to take action against a late-paying tenant. Say that this right is triggered if the tenant fails to pay its rent or any other lease charges on time more than a certain number of times—for example, more than two times—within a 12-month period [Clause, intro].

Add Four Late Payment Deterrents

Additionally, consider adapting for your get-tough clause one or more of the following four remedies that you can take advantage of whether or not the tenant cures the late payment violation. Ask your attorney before including these in your lease:

Remedy #1: Termination. Give yourself the right to terminate the lease and evict the tenant if it chronically pays its rent late [Clause, par. a]. Creating a tough remedy like this one gives the tenant greater incentive to pay its rent in a timely manner. Remember that this remedy should also reduce the amount of time and money you spend chasing a tenant for unpaid rent amounts. This way, you can terminate the lease before a tenant accumulates a huge rent debt that you may never be able to collect if the tenant goes out of business or becomes bankrupt.

Remedy #2: Advance payments. “Get the right to require the chronic late payer to pay your base rent in advance—say, in quarterly installments on the first day of the quarter, recommends New Jersey real estate attorney and Insider board member Marc L. Ripp [Clause, par. b]. That way, you'll get one month's base rent on time and two months' base rent paid in advance, he points out. “Getting advance rent payments even lets you earn additional interest, if you promptly deposit the payments in the bank, and pay off building costs or loans sooner, Ripp explains. Note, however, that since some mortgages prohibit owners from collecting base rent more than one month in advance, be sure to check with your attorney before invoking this remedy.

Remedy #3: Automatic rent program. Get the right to require the tenant to pay base rent, additional rent, and any other lease charges by automatic transfer [Clause, par. c]. With automatic transfer, the base rent, additional rent, and other charges are automatically deducted from the tenant's bank account on an agreed-upon day and automatically transferred to your bank account. Remember that you need to give the tenant information about that bank account so that the tenant's bank knows where to send the rent money. “If you include this remedy in your lease, also include an automatic transfer clause in the lease to set up the automatic rent payment program,” notes Ripp.

Remedy #4: Security deposit increase. Get the right to increase the security deposit, but don't put a specific dollar increase in the lease. Instead, get the right to increase the security deposit up to, for example, three times the current monthly base rent. And require the tenant to pay the security deposit increase when you specify [Clause, par. d]. However, if the increase is too high, a tenant could avoid paying it by arguing that it's really an illegal penalty that you can't enforce, warns Ripp. He recommends that owners check with an attorney before setting up this type of remedy.

Consider Additional Rights

Think about creating a middle ground by negotiating some remedies that are not as harsh as evictions, yet are convincing enough for the tenant to pay rent. One common initial remedy you could put in your get-tough lease clause is the right to impose a stiff late fee and high interest on late payments, and short grace periods for all payments. “All of those components are a good reason for the tenant not to pay late,” he stresses.

Some owners also include language in the lease either temporarily or permanently stripping the tenant of valuable rights and privileges it has under the lease, rather than requiring a lump sum of money. The threat of losing benefits like renewal or expansion options or an exclusive use right if the rent is late could motivate the tenant to pay promptly.

Insider Source

Marc L. Ripp, Esq.: Senior Associate General Counsel, Mack-Cali Realty Corporation, 343 Thornall St., Edison, NJ 08837; www.mack-cali.com.

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Get Right to Enforce Right to Timely Payments at Your Option

By accepting habitually late rent payments, you could inadvertently give the tenant the right to pay its rent at its own convenience. Taking immediate action as soon as your tenant misses its due date is the best way to ensure that your finances won't be hindered by the situation and also set an example that late rent won't be tolerated. What if you've already tolerated a pattern of chronic late payments? A no-waiver clause can still protect your right to payment.

A no-waiver clause provides that an owner doesn't permanently waive its right to timely payment just because on some occasions it waived its right. Negotiate a no-waiver clause in your lease to give yourself the flexibility to not enforce the right every month, without preventing you from invoking your right to on-time payments in the future.

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