Are Late Fees Worth the Trouble?

State and local laws can seriously hamper a landlord’s ability to use late fees as a tool to enforce on-time rent payments.

In Massachusetts, landlords can’t charge tenants a fee for late rent payments until the rent is more than 30 days past due.

California law does not require landlords to provide tenants with long grace periods before charging late fees; however, it does require that late fee provisions be in writing, and that the amount be based on the landlord’s actual out-of-pocket loss.

In Chicago, late fees must follow a formula — capped at $10 per month for the first $500.00 in monthly rent plus five percent per month for any amount in excess of $500.00. A Chicago landlord’s attempt to enforce the illegal late fee entitles the tenant to damages of two-months’ rent. What’s more, Chicago’s law prohibits discounting rent more than the formula just stated to encourage on-time payments.

Paying for late fees with security deposit deductions creates another area of legal problems for landlords. Local laws may prohibit the deduction, or require the landlord to prove the late fee constitutes “additional rent” under the security deposit deductions. Without an artfully crafted lease agreement, security deposit deductions for late fees may be illegal, prompting the payment of penalties to the late-paying tenant.

While state and city laws vary greatly on the issue of late fees, there are generally three steps a landlord must meet to collect these fees:

1. Late fee provisions must be in writing — spelled out clearly and in detail in the lease.

2. These provisions must fall within the scope of local laws, which may include caps on the maximum allowable charge, prohibitions on accruing fees — deducting a late fee from the next month’s rent payment triggering a second late payment fee for that month, or a specific grace period for paying late.

3. The overall amount charged to any tenant must be reasonably related to the actual amount of loss to the landlord. That can include time and expense of collecting rent as well as an potential penalty for paying the mortgage late.

While late fees may work in some instances, given the wimpy amount landlords can charge, it’s hard to create an effective deterrent against late rent. Add in the difficulty in enforcement, and the possible penalties if the fees are deemed illegal, and it may be better to consider other available strategies — like automated rent payments or tenant invoicing — for enforcing on-time rent payments.

What do you think? Have late fees worked for you?

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