You Can Lose Rent Escalations If You Take Too Long to Bill Them

Whether out of neglect or clerical error, you may forget to invoice a tenant for a tax escalation or other charge it owes you. Or, if the tenant is struggling, you might decide to keep the bill in your back pocket and wait for its finances to improve. In either case, you’re taking a risk. The failure to bill the tenant promptly for the escalation may cost you your right to collect it later.

Landlord Makes $40,000 Billing Gaffe

A New York landlord learned this lesson the hard way. The lease required the tenant to make tax escalation payments. But the landlord waited before sending the bill. And waited. And waited. Finally, after eight years, the bill went out. And the tenant refused to pay it. So the landlord went to court to evict the tenant for nonpayment. But instead of the money, the landlord got a nasty surprise. The landlord couldn’t collect the escalation, the court ruled, listing two reasons.

First, the landlord’s delay cost the tenant a valuable right granted under the lease—namely, the right to challenge any real estate tax increases on the building. Under state law, challenges had to be made within 30 days after the completion and filing of the assessment. And the tenant didn’t know about the increased tax assessment until it received the bill for the escalation from the landlord. Of course, by then, it was far too late to meet the 30-day challenge deadline.

The court also found that the landlord had waived its right to collect the tax escalation payment from the tenant because of its “failure to act.” By waiting eight years to send the bill, the landlord effectively indicated that it had no intention of asserting its right to collect the payment [Soiefer Brothers Realty Corp. v. Honey Fashions, Ltd., New York Law Journal, 11/21/91, p. 29, col. 2 (Civ. Ct. Housing Part 18)].

The Bottom Line—Don’t Delay Billing

The longer you take to bill tenants for the payments they owe you, the more doubtful your right to collect them later becomes. In addition to waiver, billing delays may have other adverse effects on the tenant, as in the Soiefer Brothers case. The best way to avoid this trap is to act promptly and bill tenants for payments they owe as soon as they come due. If delays do occur, be sure to notify the tenant immediately so it knows the bill is coming and doesn’t misconstrue your tardiness as an indication that you’ve waived your right to collect the payment.