California Law Limits Landlords’ Right to Require Their Tenants to Pay Rent Electronically

In today’s world where a person can pay bills with a few clicks on his or her computer or phone, some people prefer to pay or receive funds by Venmo, Zelle or other forms of electronic payments instead of paying by check or cash.  Many landlords and tenants likewise prefer electronic payments.  These landlords want their tenants to pay rent by automated clearinghouse (ACH) or other electronic funds transfer (EFT) because of the ease and efficiency of receiving electronic rent payments, particularly automatic payments.  Some landlords utilize property management software, such as Yardi, for their residential and commercial portfolios.  These integrated software packages offer built-in accounting software and online portals for easy rent collection.  Certain tenants also prefer electronic rent payments to avoid the inconvenience of physically sending monthly rent checks to the landlord and potential late notices or late charges if rent checks are inadvertently sent late.  

Due to the benefits of electronic rent payments, landlords may be tempted to require tenants to pay rent by electronic funds transfer.  Landlords, however, may be surprised to learn that California law limits their ability to require tenants to pay rent electronically.  In particular, California Civil Code § 1947.3(a)(1) provides, subject to certain exceptions set forth in the statute discussed below, that a landlord must allow a tenant to pay rent or a security deposit by at least one form of payment (e.g., personal check) other than cash or electronic funds transfer¹.   The statute applies to residential and commercial properties².   An “electronic funds transfer” is broadly defined as “any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, that is initiated through an electronic terminal, telephonic instrument, computer, or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account.  ‘Electronic funds transfer’ includes, but is not limited to, point-of-sale transfers, direct deposits or withdrawals of funds, transfers initiated by telephone, transfers via an automated clearinghouse, transfers initiated electronically that deliver a paper instrument (e.g., electronic checks), and transfers authorized in advance to recur at substantially regular intervals.”³    

CC Code § 1947.3 provides that landlords and tenants may agree that rent may be paid by electronic funds transfer, so long as another form of non-cash payment is also authorized.⁴   The provisions of CC Code § 1947.3 may not be waived; such waivers are deemed to be contrary to public policy and are void and unenforceable.⁵   Consequently, under CC Code § 1947.3, lease provisions that require tenants to pay rent by electronic funds transfers are enforceable only if the lease also allows the tenant to pay rent by check or other non-cash payment method.  If the lease does not authorize payment by a means other than cash or electronic funds transfer, then the tenant is still obligated to pay rent, but the landlord cannot require the tenant to pay rent by electronic funds transfer.  The tenant may still pay rent by check, money order, etc.  

CC Code § 1947.3(a)(2) contains an exception that if a tenant has previously attempted to pay its landlord with a check drawn on insufficient funds or the tenant has issued a stop payment on a check, draft, or money order, then a landlord may require cash as the exclusive form of payment of rent for up to three months.  To exercise this right, a landlord must provide the tenant with written notice stating the payment was dishonored and the tenant is required to pay in cash for a specific time period and attach a copy of the dishonored payment. 

Even though a tenant’s right to pay rent by a means other than cash or electronic payment cannot be waived, a lease may be drafted to encourage rent payment through electronic means and still comply with the statute.  For example, CC Code § 1947.3 appears to allow a landlord to require a tenant to pay rent by electronic funds transfer or cashier’s check, because the statute requires that the tenant have the right to pay by a method other than electronic funds transfer or cash, and a cashier’s check is not an “electronic funds transfer” (as defined by the statute) and does not appear to be “cash”, as used in the statute.⁶   Alternatively, a landlord may require a tenant to pay rent via electronic means but reserve the tenant’s right to pay by a method other than cash or electronic funds transfer.  Such a provision may state, “Tenant shall pay all Rent via [insert electronic funds transfer method]; provided, however, Tenant reserves the right, subject to California Civil Code Section 1947.3, to pay Rent by check.”  Finally, a landlord might consider offering a nominal discount on rent if the tenant agrees to pay rent electronically.

From the tenant’s perspective, California law is clear:  Landlords cannot require tenants to pay rent only by online tenant portals, websites or other forms of electronic payments.  A landlord must allow a tenant to pay by check or other payment method other than cash or electronic funds transfer.  CC Code § 1947.3 may have bigger impact on those residential tenants who prefer to pay rent by check and not electronically.  If a lease requires a tenant to pay rent by online portal or electronic payment only, the tenant may still choose to pay rent electronically or the tenant may pay by check or other means.

In sum, California law allows a landlord and tenant to agree that rent may be paid by electronic funds transfers, so long as the tenant retains the right to pay rent by a form of payment other than cash or electronic funds transfer.  Landlords and tenants should consult with their attorneys to determine their respective rights if a lease requires payment of rent by an online portal or other electronic funds transfer.  For landlords, CC Code § 1947.3 may require minor modifications to their lease form language regarding electronic rent payments to permit another form of payment to comply with the statute.  

(1)  Unless otherwise expressly stated, all references to a “CC Code §” refer to “California Civil Code §”.
(2)  CC Code §§ 1940(d), 1947.3(a)(1); Rich v. Schwab (1998) 63 Cal.App.4th 803, 813.
(3)  CC Code § 1947.3(c).
(4)  CC Code § 1947.3(d).
(5)  CC Code § 1947.3(e).
(6)  CC Code § 1947.3(b) appears to distinguish money orders and cashier’s checks from cash as follows:  “For the purposes of this section, the issuance of a money order or a cashier’s check is direct evidence only that the instrument was issued.”  Moreover, a cashier’s check has been determined to be not a “cash equivalent” in certain circumstances.  See e.g., California Golf, L.L.C. v. Cooper (2008) 163 Cal.App.4th 1053, 1069.