Are Property Managers Debt Collectors?
In December 1998, a case that has potential significance for residential property managers and others who routinely collect rent for property owners came before the U.S. Court of Appeals for the 2nd Circuit.
Romea v. Heiberger & Associates involved a tenant that filed a class action against the law firm that had sent a letter on behalf of the tenant’s landlord demanding back rent. The letter read:
Please take notice that you are hereby required to pay [to the landlord] the sum of $2,800 for rent of the premises. ... You are required to pay within three days from the day of service of this notice or to give up possession of the premises to the landlord. If you fail to pay or to give up the premises, the landlord will commence summary proceedings against you to recover possession of the premises.
The letter was a standard New York three-day demand notice to pay past-due rent, and the tenant argued that it violated the federal Fair Debt Collection Practices Act.
Is Rent a Debt?
According to the tenant’s argument, the demand notice violated the act in several ways: by failing to provide the tenant with a 30-day period to dispute the bill, by not disclosing clearly that the defendant was attempting to collect a debt, and by threatening to take actions that legally could not be taken.
In order for the tenant to prevail, the court had to determine that the back rent was a "debt," which the act defines as "any obligation ... of a consumer to pay money arising out of a transaction in which the money, property, insurance or services ... are primarily for personal, family or household purposes. ..."
Prior to Romea, no court had addressed whether or not back rent constitutes debt under the Fair Debt Collection Practices Act, although other federal district courts previously had held that condominium fees and homeowners’ assessments were not debt for purposes of the act.
The law firm argued that rent is not an extension of credit and therefore cannot be a debt, because a lease generally requires a tenant to prepay rent for a specified term, generally on a monthly basis. The law firm also maintained that if a tenant owing back rent has breached its lease, the lease terminates and no "transaction" between the landlord and the tenant exists to which the debt can relate.
The 2nd Circuit dismissed both grounds. It found that rent clearly is an obligation to pay money arising out of a personal, family, or household transaction and that "transaction" does not mean only an existing contractual relationship.
The court also rejected the defendant’s argument that the state statute governing the demand letter was designed primarily to entitle a landlord to regain possession of its property rather than to collect rent, finding that the two purposes were not mutually exclusive. It rejected the argument that the demand letter constituted a required attempt to serve legal process, which falls within an exemption to the act. The court also determined that the federal and state statutes were not in conflict, and that even if they were, the federal rather than the state statute should prevail under federal pre-emption consideration.
Who Is a Debt Collector?
Having found that back rent constitutes a debt under the act, the court determined that a person who attempts to collect back rent for a landlord meets the definition of a "debt collector" — "any person who uses the instrumentality of interstate commerce or the mails ... who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another." The act does not apply to people who seek personally to collect debts owed to them. Accordingly, landlords are exempt from the act if they send a required three-day state notice.
The court’s Romea decision may extend well beyond New York. Many states, including California, have enacted statutes that require similar notices before landlords can regain possession of properties. If other courts follow this decision, property managers, attorneys, and others who seek to collect back rent on behalf of landlords will be required to comply with the act’s rather stringent requirements to "eliminate abusive debt collection practices." These rules include the following:
- The initial notice to the tenant must advise that the sender is attempting to collect a debt and that any information obtained will be used for that purpose.
- Within five days, the property manager or other debt collector must send a written notice setting forth the amount of the back rent, the name of the creditor, and that the tenant has 30 days to dispute the debt.
- Property managers or other debt collectors must attempt to communicate with the tenants’ attorney first, if possible. In addition, they generally only can contact tenants by phone between 8 a.m. and 9 p.m.
- Property managers or others collecting unpaid rent must avoid making false or misleading statements as to the amount, character, or legal status of the debt, the nature of the debt collector, or unenforceable results such as the threat of arrest or imprisonment.
- Those collecting unpaid rents or other debts must refrain from harassment or abuse, which includes threats of violence to people and their reputations or property, using obscenities, and making harassing phone calls.
- Unfair practices must be avoided. Unfair practices can include depositing (or threatening to deposit) postdated checks prior to the date on the check, making inappropriate charges (for example, collect phone calls), or communicating by postcard.
This is not a complete list of the act’s requirements; any property manager or other debt collector should review all requirements in detail. Violators can be liable for an amount equal to the sum of the tenant’s actual damages (which may include mental suffering), up to a $1,000 judicial award of additional damages to an individual (more in the case of a class action) and the costs of suit, including reasonable attorneys’ fees.
Residential property owners and managers should take notice: There is little doubt that tenant advocates will use Romea whenever possible in landlord-tenant litigation.