Rent Collection

Legal Issues Regarding Autopay For Rent Collection

November 10, 2020

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What Are The Legal Issues Regarding Autopay For Rent Collection?

If you are just getting into property management or you are looking to go digital with your business’s processes, then undoubtedly, you’ve explored options, and you may be wondering if autopay is the way to go. Whether autopay for rent collection is right for your business depends on where you manage properties, how you like to operate, and the types of tenants you currently have or would like to attract. Let’s start by reviewing what autopay is. 

What is Autopay? 

Autopay is a method of automizing payments and the acceptance of payments, and it’s also a service provided by the entity that initiates and clears the transference of funds that are drawn from one account and deposited to another. Autopay can be a great way to conduct business or pay bills, and many landlords and tenants enjoy autopay as a method of rent collection. Generally, autopay prevents the incurrence of late fees, reduces the necessity of renters making individual payments each month, eliminates the costs of checks, envelopes and stamps for renters, and simplifies the collection process for the landlord without incurring as much of a cost for processing the payments as other methods like credit card charges.  

The Difference Between Autopay and Online Bill Pay 

Autopay comes with its own risks, and it’s important that renters and landlords alike know the fundamental differences between autopay and other electronic payment methods that provide similar benefits. For example, many enjoy the advantages of consolidating online payments through their bank with online bill pay, in which payers arrange for their banks to submit online payments or send print checks to the payee. In the instance of online bill pay, the renter is giving permission to his or her bank to make recurring payments from the renter’s account to the landlord. In the instance of autopay, the renter is giving permission to the landlord to debit the renter’s account to the landlord’s account on a recurring basis.  

This is noteworthy, as requiring your tenants to sign up for autopay means your tenants must provide you with access to their bank accounts, and not all tenants will game for such an arrangement. Let’s review how the setup process works so you understand the risks your tenants are taking in agreeing to pay you through autopay.  

How to Setup Autopay 

By and large, autopayments happen through the Automatic Clearing House, which facilitates these transfers (and hence payments made through the Automatic Clearing House are called ACH transfers). To set up autopay, landlords have tenants fill out an ACH form, which requires the tenant to provide his or her account information and other details. On the form, the renter provides his name, his permission for the landlord to debit his account, the name of the bank sponsoring the account, whether the account is a personal or business account, the account number, the routing number, and the payment amount. This can be a bit onerous to collect and properly handle and you may find tenants resistant to share. 

Alternatively, and increasingly more common, you can use rental management software that offers autopay as a service to your tenants. This gives them control over the process and minimizes the sensitive data you are required to collect. You also don’t have to worry about cancelling their autopay when it runs out as the system will either automatically do that at the end of the lease, or the tenant can handle it anytime. 

A rental management system will likely also send the tenant reminders and confirmations of autopay before and after it has run, keeping them in the loop if something should need to change.   

Establishing Autopay in Your Lease Agreement 

How your tenants pay you is something you should articulate, in detail, in your landlord/tenant lease agreement. This is the only way to guarantee how you will get paid. If you are signing new tenants, you may be able to specify that paying rent through autopay is a condition of living in your property. 

If you have current tenants who pay through non-automated methods, your best bet is to update the lease when it’s time to renew the lease, as that is when you are entitled to making significant changes to the agreement. You can only update the rent-collection policy mid-lease if your tenants agree to it.   

Legal Issues Regarding Rent Collection Through Autopay 

Regardless of your situation, there are several important legal factors to consider when using autopay for rent collection:

Providing Tenants with Multiple Options for Paying Rent 

As a measure to protect tenants, laws in certain states require landlords to provide at least one other option for paying rent in addition to paying through methods like autopay or cash. California is a good example of a state that requires landlords to give tenants a few options. According to California’s legislature in Civil Code 1947.3: “(a) (1) Except as provided in paragraph (2), a landlord or a landlord’s agent shall allow a tenant to pay rent and deposit of security by at least one form of payment that is neither cash nor electronic funds transfer.” So, while you can require that your tenants pay you through autopay, you may also have to provide them with other avenues. It just depends on the laws in the state where you manage properties.  

Whether you must accept cash is another area open to some debate. On one hand, U.S. currency in the form of paper bills and coins is legal tender and a legitimate form of settling debts. On the other hand, accepting cash can be risky for landlords. On the books, no federal laws exist that explicitly require landlords to accept cash as a method of payment, but state laws and what a presiding judge dictates might be another matter. The state might require you to accept cash as one option for payment, and a judge might expect you to take the money if a tenant has issues with other forms of payment but has the full rent amount in cash available.  

However you decide to proceed, you want to check the laws in the state where you manage properties.  

Issues Pertaining to Eviction 

Accepting even partial payments from tenants can throw off eviction proceedings, and using a system that automates the payments means you could receive payments you want to reject. If you decide to set up rent through autopay, be sure to learn how to stop and reverse unwanted payments so you can move forward with eviction. 

Another thing to keep in mind is that for tenants to pay you through autopay (or through any other online method), they must have regular access to a computer, they must possess computer literacy, and they must possess a bank account. By stipulating that making autopayments for rent a condition of living in your properties, you are potentially excluding anyone without a bank account and access to a computer from living in your units. This may not be an issue, depending on the type of tenant with whom you would like to do business. 

However, you want to be careful in updating your procedures with current tenants. They may argue that you are illegally using changes in your lease — by requiring that they pay rent through autopay, for example — to try and evict them. Regardless of whether these charges have merit, such allegations could entangle you in expensive, time-consuming legal battles. Again, California presents a good example.  

Several years ago, a group of long-time renters sued their landlord in California for updating rent collection to online methods, which they claimed was a violation of California’s Rent Stabilization Ordinance. Even though the property manager provided these tenants with waivers, the waivers were revocable, and these long-time renters charged that the change in policy was nothing other than a ploy to force out older residents.  

If you are unsure how best to go about updating your lease, consult an attorney. This person can help you minimize the likelihood of unnecessary legal exposure and put language in place that helps you reap the benefits of payment methods like autopay while ensuring that your tenants’ rights are protected at the same time. 

Data Security 

Data security may be one of your biggest considerations aside from the particulars of how you articulate rent collection in your lease. If you decide to facilitate payments through autopay, you’ll take on the responsibility of managing your tenants’ private data responsibly. NACHA—The Electronic Payments Association, has rules regarding security for both the businesses using ACH payments and the payment processors that the business selected to process the transfers. Make sure you work with a payment processor that is NACHA compliant, and then learn these rules yourself so you are prepared to handle information in the securest fashion possible for your tenants. 

For example, if you store information from the ACH forms on the computer, you’ll need to have the files encrypted, and any information that you send through electronic channels containing that sensitive information must also be encrypted. If you store this information in print format, you’ll need to keep them in a locked container like a cabinet and only provide access to those employees (if you have employees) who need access.  

Offering autopay through a rental management software of course eliminates all the risks and responsibilities listed above. The tenant will have control over their data and their autopay settings. You can continue to require them to sign up for it, but you are not obligated to handle their sensitive personal data in any way.  

A number laws at the state level protect renters from inappropriate distribution of their personal information, and you don’t want to be in a position where a security breach exposes your tenants’ sensitive information and therefore exposes you not just to the nightmare of the damage from the breach but to lawsuits as well. This is another reason you may want to turn to property management software.  

Other Items to Watch for with Autopay 

You also want to learn how to end the automated payments so you can stop them after a lease ends, and the tenant does not renew the lease. You don’t want to be in a situation where you are receiving payments for money that your former tenant does not owe. You can also coach your tenants on how to end the ACH payment on their end. The first step is to notify you that they no longer authorize the transfers. Of course, when the lease is ending, you’ll already know that. Then, the tenants should notify their banks that they discontinue their authorization of the transfers after the final payment. They need to notify their banks at least three days before the time of the next transfer in order to stop it, and it’s best to provide the notice to the bank in writing as an additional measure.   

Be aware, too, that the automatic nature of the payments with ACH transfers does not guarantee that you will be paid. It just guarantees that there will be an attempt to pay you automatically at a predetermined time when you set up the payments. ACH transfers can fail as a result of insufficient funds in the account that is making the payment (so it is sometimes called an ACH overdraft), and the insufficient or nonsufficient funds (NSF) will result in an insufficient funds fee for the renter unless the renter has overdraft protection.  

One of the biggest advantages of using ACH transfers is that you can count on your tenant not to forget rent. Still, it’s important to know that ACH transfers can fail so you aren’t blindsided by not having the rent money when you thought you would, and so you can put a plan in place for sending your tenants late-fee notices. After all, if the tenant’s payment fails to transfer, he or she might be late on rent. Be sure to familiarize yourself with ACH return codes you or your tenant might receive if a payment fails to transfer so you know what it means when you receive one. 


One of the advantages of working with property management software is that it is designed to help you sidestep some of these headaches. These tools may prevent you from needing to be responsible for sensitive tenant data, for example, because the software enables tenants to provide it for the transfer without giving that information to you, all while keeping it safe. That’s a win for you and your tenants. Property management software also keeps detailed records of payments and presents the data to you in ways that are easy to look at and understand. If you decide to set up autopay through a payment processor like your bank, you and your tenants can still reap the benefits of simplifying rent collection. You just need to be aware of the potential drawbacks and limitations. 

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