Lease's Allocation Clause Ruled Invalid

Facts: A resident sued the site owners for use of an allocation clause in the resident’s lease. The clause requires a resident to specifically and in writing designate his monthly payment as “rent” or “for rent” for it to be considered as such. The clause allows the owners to apply undesignated payments from a tenant first toward outstanding maintenance charges, late fees, or legal fees, and then to rent.

In this case, the resident was notified by letter that she owed $380 in maintenance charges for “flooding,” “excessive cleaning,” and “kitchen sink.” The letter informed her of her right to an informal hearing and of her right to a formal grievance proceeding, where she could be represented by counsel.

The resident eventually requested a formal grievance proceeding. Throughout the grievance process, she continued to make timely rental payments. And on March 7, 2011, the owners exercised the option under the allocation clause to apply her March 1 undesignated payment toward the outstanding maintenance charges. The owners did the same with her April 2011 payment. And it was undisputed that these payments were for $192, the exact amount of her rent. But the resident didn’t designate either of these payments as “rent” or “for rent.”

On March 4, the owners filed a Failure to Pay Rent action and sought an eviction. The resident produced a receipt for rent paid in March, and the case was dismissed. At a second eviction hearing in April, however, the judge ruled in favor of the owner, after the owner showed that it had used the resident’s April payment toward maintenance charges, leaving rent due. The judge determined that the resident owed $384 in unpaid rent. The resident appealed the ruling and asked the court to declare the allocation clause invalid as a matter of law.

Ruling: A Maryland district court granted a judgment without a trial in the resident’s favor.

Reasoning: The court determined that the clause violates the United States Housing Act and the Brooke Amendment. The Housing Act seeks to “remedy . . . the acute shortage of decent and safe dwellings for low-income families” [42 U.S.C. 1437(a)(1)(A)]. The act furthers this purpose by ensuring that public housing leases include fair and reasonable terms that allow low-income tenants to maintain a residence in affordable housing. Title 42 of the United States Code, Section 1437a(a)(1), commonly known as the Brooke Amendment, caps a public housing tenant’s rent at 30 percent of the “family’s adjusted monthly income.”

According to the court, the allocation clause imposes on residents an unnecessary obligation in order to retain their statutory right to tenancy. That is, a resident must mark each of her monthly rental payments as “rent” or “for rent,” with potentially dire consequences if she fails to do so. It’s always in a tenant’s interest to have her payments applied first to rent, and then to maintenance or other fees. No rational tenant would knowingly choose to allow owners to divert her rent payment—essentially volunteering for an eviction proceeding and potential eviction for nonpayment of rent. This is a “gotcha” provision that deprives residents of the protection of the law with no identifiable counter-balancing benefit to the tenant.

Although the court acknowledged the owners’ need to efficiently collect maintenance charges, it found this particular method predatory, unlawful, and unreasonable. It found that the allocation clause attempts a short cut—a “work around” the more protective procedural and substantive rights afforded all tenants under federal and state housing law.

• Sager v. Housing Commission of Anne Arundel County, July 2013