Set Conditions Before Letting Tenants Pay Rent by Electronic Deposit

Unlike so many other aspects of the commercial leasing business, methods of paying rent haven’t changed all that much over the years. The majority of tenants still mail out their monthly checks to the landlord. However, a growing number of businesses prefer to remit their rent electronically using ACH or wire transfer. Agreeing to electronic transfer of rent can be a win-win, provided that you get the right lease protections, advises a seasoned New York City leasing attorney with experience in negotiating such arrangements.

The Benefits of Electronic Rent Payments

There are two basic kinds of electronic transfer methods that a tenant may seek to use to pay rent. An ACH transfer is an electronic transfer of funds in batches between banks and credit unions via a system called the automated clearing house. ACH transfer is similar to but slightly different from wire transfer in which money is transferred directly from one bank to another. Wire transfer tends to be faster than ACH transfer because it’s more direct. Regardless of mode, electronic rent payment is a convenience to tenants because it eliminates:

• The costs of stamps and envelopes;
• The time and effort required to process a check and address an envelope each month; and
• Perhaps most importantly, the risks of being penalized with late fees, interest, or delinquency service charges associated with mailed rent checks arriving late.

Electronic transfer benefits the landlord, too, by ensuring a steady, continuous, and uninterrupted stream of payments directly to the landlord’s bank.

Get 5 Protections When Allowing Electronic Rent Payments

“I tell my clients to include specific lease language before accepting a tenant’s request to pay rent electronically,” cautions the New York attorney. That language is incorporated in our Model Lease Clause: Establish Conditions for Electronic Payment of Monthly Rent.

1. Tenant must provide 30 days’ notice. Require the tenant to meet four conditions to make its rent payments via ACH or wire transfer. To start, the tenant must give the landlord at least 30 days’ written notice of its election to pay fixed and additional rent via electronic deposit. “The landlord needs to know in advance that the tenant will be remitting rent electronically and which part of the rent will be so remitted,” the attorney explains.

2. Landlord has right to consent. The clause specifies that the landlord must give prior, written consent to the tenant’s proposal to pay rent by electronic transfer. To make things more palatable to the tenant, it also assures that the landlord won’t unreasonably withhold, delay, or impose conditions on consent.

3. Tenant must comply with landlord’s bank protocols. To ensure that electronic transfer is properly executed, the clause requires the tenant to “strictly” comply, at its own cost, with all procedures, practices, and protocols the landlord or its bank may impose, including the completion of any necessary paperwork.

4. Tenant is responsible for transfer fees and costs. The final condition is that the tenant agree to pay all costs, fees, and expenses, both direct and indirect, related to the electronic transfer or receipt of funds.

5. Landlord has right to terminate electronic payment. In addition to the four conditions, landlords should reserve the right to pull the plug on the electronic deposit at any time and require the tenant to pay all future fixed and additional rent “using only good and valid checks.”