2% Prompt Payment Discounts: Worth enforcing?
A simple solution to the question above is to take all of the N4’s and late payment notices you issued last month for your portfolio and multiply that by 2% of your average rent. If your average rents are $1200 per month and you issued 20 notices, and if you are using the standard industry lease, then chances are you lost about $500.00. If you issue the same average number of notices each month, then on an annual basis it has cost you about $6000.00 and you may have waived entitlement to about 2% NOI. An explanation follows.
The standard industry lease (GTAA, FRPO, LPMA, WRAMA, HDAA) incorporates, by default, a 2% “prompt payment discount”, as permitted by the RTA. The default rent cited in rental applications and the lease is the “discounted” rent. So if the tenant applies to rent a unit where the rent shown in the application is $1200, the “lawful, undiscounted rent” is actually $1224.00. The additional $24.00 is the 2% that is not payable so long as the tenant pays the rent on time, but if the tenant is late, the leases provide that the tenant is to pay the full, undiscounted rent.
In our experience, the LTB gives judgment for the 2% late payment “penalty” but most landlords don’t bother enforcing it and in enforcement proceedings they fail to include the 2% as part of the rent owed. Depending on the size of your portfolio and the frequency with which you enforce collection of rent owed, you stand to lose the following valuable benefits of prompt payment discounts if you do not enforce them:
- The dollar value of the discounts when payments are late.
- At a minimum, recovery of the 2% helps offset administrative time and/or fees paid to follow up on the receivable.
- Enforcement of the discount encourages delinquent tenants to place a higher priority on ensuring that the rent is paid on time, thus reducing admin time spent on collections.
- Your “rent roll” based on “lawful rents” is actually 2% higher than “actual rents”.
- If you preserve the discount in your annual NORI’s you can discontinue it at a future date, thereby effectively increasing net rent increase payable by an additional 2%.
Enforcement of the prompt payment discount provisions in standard industry leases comes with some administrative costs; however, in a large portfolio with relatively high default rates, enforcement of discount provisions can be an effective tool in encouraging prompt payment and in recovering some of the administrative costs of enforcing late payment of rent.
Questions about enforcement?
Contact Joe Hoffer, Emma Sims or Shannon Kiekens at Cohen Highley LLP.