07/05/2011 "Rent Concession" Being Challenged as "Illegal Late Fee"



ISSUE BEFORE THE COURT

A class action lawsuit has recently been filed in the Wake County Superior Court against a developer/owner/manager of a multi-family apartment community in the Raleigh area. Michael Sweeny, on behalf of himself and others similarly situated, through his attorneys at the North Carolina Justice Center and the law firm of Womble, Carlyle, brought claims of violation of (I) the North Carolina's Residential Rental Agreements Act (ii) The Uniform Commercial Code and (iii) The Fair Debt Collections Act. The Plaintiff's complaint alleges that the Defendants violated N.C.G.S. 42-46 by and through their having collected late fees and/or penalties that exceeded the greater of 5% of the monthly rent or $15.00.

FACTS OF CASE

Mr. Sweeny entered a lease agreement for an apartment whose market rent was $908.00 per month but received a "discount/concession" of $209.00 lowering the rent to $699.00 per month. Sweeny signed the December 2006 version of the AANC lease requiring a late fee not to exceed $15 or 15% of the rent if the owner chose to accept late rent, and requiring a $25 "returned check fee" for each check returned for insufficient funds. In addition, Mr. Sweeny signed an addendum to the lease that stated "Resident agrees to repay all past and current concessions or discounts and forfeits all future concessions of discounts should Resident pay rent late, or have a check returned from Resident's bank for any reason. "

Mr. Sweeny's son, the occupant of the apartment, attempted to pay the rent with a check that was returned for non-sufficient funds. Mr. Sweeny was given notice that all future rent concessions were revoked and that in order to avoid termination of the lease, Mr. Sweeny needed to pay the rent in arrears and all concessions/discounts given from the previous months. The concessions/discounts given in previous months totaled $1,504.00.

Mr. Sweeny claims that the demand to pay the concessions previously given to reinstate the lease is simply a late fee disguised by the term "Rent Concession" and therefore exceeds the limitations for late fees set by N.C.G.S. 42-46. He also claims that the Landlord's efforts to impose and collect an illegal late fee by disguising them as a "Rent Concession" is an attempt to collect an illegal and unenforceable penalty within the meaning of N.C.G.S. 75-1.2 (the Fair Debt Collection Act) entitling him (and all others similarly situated) to receive $4,000.00 for each violation. In addition, he claims that requiring the payment of all concessions given in the past constitutes an unfair trade practice within the meaning of N.C.G.S. 75-1.1 thereby entitling the Plaintiff to multiply his damages by three times and recover all of his attorney's fees and costs in this action. It is very important to note as well that the plaintiff is acting not only on his own behalf, but on behalf of all those others who experienced the same within the apartment community and claims that the landlord has been doing this for four years. As you can see, what started as a request for repayment of $1,504.00 in discounts given for the late payment of rent turned into a class action lawsuit that, if successful, could result in a verdict in excess of One Million Dollars ($1,000,000.00).

ANALYSIS

In this case, the Court is being called upon to determine whether the practice of "charging back" rent concessions following a default by a tenant is a violation of North Carolina law. Although we do not have a crystal ball, based upon our review of the relevant facts and the law, we believe the Landlord's actions do violate N.C.G.S. 42-46. This section reads as follows:

42.46 Authorized fees.


  • (a) In all residential rental agreements in which a definite time for the payment of the rent is fixed, the parties may agree to a late fee not inconsistent with the provisions of this subsection, to be chargeable only if any rental payment is five days or more late. If the rent:
  • (1) Is due in monthly installments, a landlord may charge a late fee not to exceed fifteen dollars ($15.00) or five percent (5%) of the monthly rent, whichever is greater.
  • (2) Is due in weekly installments, a landlord may charge a late fee not to exceed four dollars ($4.00) or five percent (5%) of the weekly rent, whichever is greater.
  • (3) Repealed by Session Laws 2009 279, s. 4, effective October 1, 2009, and applicable to leases entered into on or after that date.
  • (b) A late fee under subsection (a) of this section may be imposed only one time for each late rental payment. A late fee for a specific late rental payment may not be deducted from a subsequent rental payment so as to cause the subsequent rental payment to be in default.
  • (c) Repealed by Session Laws 2009 279, s. 4, effective October 1, 2009, and applicable to leases entered into on or after that date.
  • (d) A lessor shall not charge a late fee to a lessee pursuant to subsection (a) of this section because of the lessee's failure to pay for water or sewer services provided pursuant to G.S. 62 110(g).
  • (4) Any provision of a residential rental agreement contrary to the provisions of this section is against the public policy of this State and therefore void and unenforceable.
  • (5) If the rent is subsidized by the United States Department of Housing and Urban Development, by the United States Department of Agriculture, by a State agency, by a public housing authority, or by a local government, any fee charged pursuant to this section shall be calculated on the tenant's share of the contract rent only, and the rent subsidy shall not be included. (1987, c. 530, s. 1; 2001 502, s. 4; 2003 370, s. 1; 2004 143, s. 5; 2009 279, s. 4.)
The challenge for the Defendants is in convincing the Court that the inclusion of a Rent/Concession is not a late fee is disguise. If one looks at the purpose of the Rent/Concession as applied to the legislative intent behind N.C.G.S. 42-46, a logical conclusion would be that a Rent/Concession provision has the exact same effect as a late fee provision and thus, it is illegal. Under either provision, if a Tenant fails to pay rent timely, a charge is incurred by the Tenant. In summary, we believe the Court may well conclude that the imposition of a higher rate of rent via a Rent/Concession fee is effectively an additional late fee and therefore violates N.C.G.S. 42-46.

Due to the fact that this is the first time this issue has been brought before a Court and due to the amount of money in controversy in this matter, the case will not likely be resolved by our Courts for quite some time. Should you have any questions concerning this article or how you may wish to proceed with Rent/Concession provisions until the Court enters a final disposition in the case discussed herein, please do not hesitate to call us.