How to Protect Against Bounced Rent Checks
Bounced rent checks are a major hassle. Your bank will charge you a fee for a bounced check, and then you will have to spend more time actually collecting the rent from the tenant. Also, by the time you redeposit the bounced check or get a new one from the tenant, the rent is way overdue.
Standard lease remedies often are no help, and it may not be in your best interests to use harsher remedies like terminating the lease and evicting a tenant. And collecting damages from the tenant may not be enough of a deterrent to stop it from being careless and/or bouncing another check.
How to Get Bounce-Proof Protection
There's a good way to nip this problem in the bud, says Atlanta attorney Jeremy D. Cohen: State in your lease that if the tenant gives you a check that isn't honored by the bank on which it is drawn, you may—at your option—require the tenant to make all its subsequent rent (and additional rent) payments over a set time period by a bounce-proof method, such as by certified check.
Here are five important tips to remember when drafting this lease language, says Cohen:
Cover all tenant checks. Make sure to cover all checks—not just the rent checks. You want to be able to enforce the language if the tenant's check for its share of operating expenses or taxes doesn't clear.
Cover any check not honored by the bank. It's important to cover any check not honored by the bank. This means more than just bounced checks—that is, checks that were rejected because there wasn't enough money in the account. There are multiple reasons for a bank to refuse to honor a check. For example, the tenant may have forgotten to sign the check or may have written it incorrectly.
Describe types of acceptable payment. What types of bounce-proof payments should you accept? You may want to give the tenant a choice of some or all of the following options: certified check, cashier's check, money order, or wire transfer.
Apply to at least 12 months of payments. Make the requirement cover all payments from the tenant for the next 12 months. If you impose the requirement only on the next one or two payments, it loses its effectiveness, says Cohen.
Exercise requirement at your option. Make sure you state in the lease that you can exercise this requirement at your option—that is, you don't have to require the tenant to pay by any of the alternative methods. Depending on your relationship with the tenant and the tenant's payment history, you may want to give the tenant a break on a bounced check. But at least, by preserving the right to choose, you have options.
Add Language to Lease
To implement this requirement, add the following language to the “remedies” section of your lease:
Model Lease Language
If any check given to Landlord by Tenant shall not be honored by the bank upon which it is drawn, Landlord, at its option, may require all payments made by Tenant to Landlord over the next twelve (12) months to be by [insert method: certified check, cashier's check, money order, wire transfer].
Is This Request Reasonable?
In Cohen's experience, smaller tenants usually agree to this type of request. Most of the resistance comes from larger tenants or tenants with substantial negotiation power, not wanting to go through the hassle of getting certified checks or money orders each month. The upside to dealing with the better positioned tenants is that they are less likely to bounce a check. And if they do bounce a check, you should consider terminating their lease, as that's a fairly clear sign that they are struggling financially.
Also, make sure the lease says that you're entitled to any other remedies available to you under the lease—or the law—if the tenant's rent is paid late. Then, for example, you can still treat the late payment of rent as a lease default and try to evict the tenant.
Practical Pointer: Make sure your lease clearly states elsewhere that the tenant will pay any costs you incur in connection with a bounced check, for example, a bounced check fee charged by your bank. This obligation should apply regardless of whether you require the tenant to pay by certified check in the future.
Insider Source
Jeremy D. Cohen, Esq.: Hartman, Simons, Spielman & Wood, LLP, 6400 Powers Ferry Rd. NW, Ste. 400, Atlanta, GA 30339; (770) 955-3555; jcohen@hssw.com.