Credit Card Refund

Mini- Storage Messenger - Credit Card Refund

QUESTION: This month’s question: I took an advance payment of rent for my self storage facility (for a full year) and my occupant paid it by credit card. Our policy is to refund the unused portion of the rent, less any concessions or other discounts received, if an occupant terminates their lease early. I had an occupant terminate early and tried to refund this money through the credit card company and they told me (a) it was illegal to take advance rent payments by credit card; and (b) that the credit card processing company’s policy was never to refund any charge that was not disputed within sixty (60) days of the billing. Am I am trouble and what do I do in the future?

Answer: This is certainly a question that may affect many of you. Let me start with some of the broader issues in this question.

First, can you in fact take a full advanced year of rent by credit card? The answer appears to be no according to at least the Visa™ Merchant Services Agreement. Although I do not understand why Visa™ prohibits this, I think it is more an issue of phrasing with the credit card companies. You are obviously able to pay a one installment payment on a years worth of auto insurance, newspaper delivery, life insurance, etc., on your credit card ™ and the credit card companies do not seem bothered by this. But for some reason they look at the payment of rent that is normally charged in monthly installments as prohibited by the Merchant Services Agreement.

The answer to this portion of the question is either be aware that accepting a full years rent might violate your credit card processing membership agreement and take cash or check certainly do not want to lose your right to accept credit cards. Otherwise consider rephrasing the proposition. Rather than taking a years worth of monthly rent, simply charge an annual rate for a one year (not twelve individual months) rental on a self storage unit. It may seem like we are splitting hairs, but so is the credit card company. Treat this situation the same way I believe the insurance companies, newspaper companies, get around “pre-charging” for a year in advance.

How do you refund the rent? Obviously, in light of what you learned above, you do not want to tell the credit card company that you are refunding pre-paid rent, as you might get in trouble. And, if you read your Cardmember Services Agreement you will realize that you have agreed that any money you charge on a credit card, if a refund is due, must also be refunded by the credit card and not by writing a check, which would seem like the simple solution to this problem.

All I can tell you is to be careful how you phrase the application of a refund to a credit card company. My suggestion is to do the refund to the credit card and you list it as some description that would not raise the credit card company’s concern about a violation of your agreement with them. Perhaps, consider using a refund of “disputed sums” or “customer settlement”. You also do not raise your “dispute” rate with the credit card company which would raise the amount the amount that they keep because of the number of disputed claims in a year. This alternative keeps the credit card company from being suspicious that you have accepted twelve months of rent rather than one year of pre-paid rent.

Always remember that even if it is your policy not to refund pre-paid rent, if the lease is a contract and if the lease that was set up to pay rent for a year, your contract has a one year term. Should the occupant breach it, even though they paid the rent in advance, if you are able to mitigate your damages, i.e. re-rent the space for at least the same amount of rent (which by the way you are under an obligation to do anytime there is a breach of contract in any situation, not just self storage) then you are not allowed to “double dip.” You will be obligated to refund to the former occupant the difference between the contract amount and the rent that you receive from somebody else who re-rents the same space. There is no safe way of making the one year payment completely non-refundable under any circumstances.

What is demonstrative about this question is that many of us have probably never read or not recently read, our Merchant Services Agreement with our national credit card providers or our processing banks. They are full of restrictions and rules which you must be careful about because if they catch you breaking a rule, the banks do not have to be nice about it. The banks can withdraw or cancel your merchant processing rights. For anyone who now takes credit cards, they know they do not want to lose their credit card processing abilities, so be careful.

You can send your questions, comments, or suggestions for future topics to Jeffrey Greenberger at info@selfstoragelegal.com or mail them to Jeffrey Greenberger c/o Katz Greenberger & Norton LLP, 105 E. Fourth Street, Suite 400, Cincinnati, Ohio 45202 or you can reach Mr. Greenberger at (513) 721-5151, or visit his website at www.selfstoragelegal.com.