A reminder about application of rental payments and the Oregon laws that landlords must comply with to correctly apply tenants back rent payments.
Bradley S. Kraus
Partner, Warren Allen LLP
With the March 1 deadline come and gone, the landlord/tenant world continues to return to some semblance of normalcy. Due to the same, large debts remain due, and bewildered landlords are rediscovering previously enacted laws governing how and where to apply tenants’ payments. I’m talking about ORS 90.220(9), affectionately known as the “application of payments statute” in the ORLTA.
Prior to ORS 90.220(9), any payments received from tenants could be applied in the manner described in the rental agreement. If the rental agreement was silent, the landlord could simply “fill the bottom of the barrel first.” During COVID, amounts had to be applied first toward the current month’s rent, thanks to SB 282. With ORS 90.220(9), the legislature requires landlords to apply payments received by tenants in a predetermined order. Pursuant to ORS 90.220(9), any payments received from your tenants must now be applied as follows:
“(A) Outstanding rent from prior rental periods;
(B) Rent for the current rental period;
(C) Utility or service charges;
(D) Late-rent-payment charges; and
(E) Fees or charges owed by the tenant under ORS 90.302 or other fees or charges related to damage claims or other claims against the tenant.”
At first glance, the statute is pretty straightforward. However, when put into practice, the statute causes waiver problems galore, especially when tenants carry arrearages from one month to the next. A simple example will illustrate the waiver problem:
Terry’s monthly rent is $1,000.00. If Terry pays only $500.00 in January, and the landlord accepts it, a partial payment has been created. If Terry thereafter pays $1,000.00 in February, $500.00 of that would first go to January’s outstanding balance. The remainder could then either be applied to February’s rent (thereby creating another partial-payment issue) or returned pursuant to ORS 90.414 (thereby preserving the landlord’s non-payment termination rights under ORS 90.394).
Simple enough… right? Not so fast! Here’s where it could get complicated . . .
Terry’s monthly rent is $1,000.00, but Terry also owes the landlord utilities every month (and hasn’t paid them for more than 10 months, causing a utility arrearage of $600.00). Terry also hasn’t paid his rent on time for the past 10 months, incurring a $100.00 late fee each month. Accordingly, Terry’s ledger balance, including his January and February unpaid rent, is $3,600.00. Yikes!
Let’s say that Terry tenders a payment of $1,500.00, which the landlord accepts. The landlord wrongly assumes that, due to Terry’s large balance, $2,100.00 (of the $3,600.00 balance) is still owed for rent. Accordingly, the landlord serves a Non-Payment of Rent Notice, Terry fails to cure, and the landlord files an FED. The parties then appear at the first appearance, and a tenants’ attorney appears on Terry’s behalf, demanding a dismissal (due to the waiver problem) and $750.00 in attorney’s fees. Unfortunately, the tenants’ attorney’s position is legally sound, and the landlord is in trouble.
Why? Remember, due to the application-of-payments statute, the first $1,000.00 applied to January’s outstanding rent due. The remaining $500.00 then applied to February’s outstanding rent, regardless of how much money Terry owed. Maddening, right?
So, what can be done to prevent such a disastrous outcome? While every situation must be analyzed on its own merits, some best practices can be articulated. First, landlords must know how the application-of-payments statute works in practice. This can be difficult when the landlord’s ledger software merely throws payments at the oldest (or total) balance. Second, landlords should protect themselves (and their books) by serving valid for-cause notices. Third, if the landlord desires to accept a partial payment, the parties should execute a partial-payment agreement, in order to protect the landlord. Finally, prior to service of any non-payment-of-rent notice upon tenants who carry a substantial balance, landlords should look at their ledgers and determine whether or not, in the current month, a payment of larger than the outstanding previous month’s rent was made. If so, the application of payments statute may negate the landlord’s ability to serve a non-payment-of-rent notice, and a for-cause notice may be the only remaining option.
While it’s difficult to discuss and outline every possible way ORS 90.220(9) can complicate your life, knowing that the statute exists is half the battle. Once you acclimate yourself with the statute, and understand its practical effects, you can better protect yourself from potential waiver issues.
About the author:
Bradley S. Kraus is an attorney at Warren Allen LLP. His primary practice area is landlord/tenant law, but he also assists clients with various litigation matters, probate matters, real estate disputes, and family law matters. You can reach him at firstname.lastname@example.org or at 503-255-8795.
Bradley Kraus, Portland attorney