Open/Close Menu
Your Rental Housing Solution
Open/Close Menu
Your Rental Housing Solution
Your Rental Housing Solution 866.579.2262
Home · Property Management · Latest News : The 411 on Late Fees

by Janet Portman, Inman News

Law booksQ: I want to impose a late fee when my tenants pay late. My apartment association form lease specifies that the fee will be $100 if the rent is three days late or more. In an earlier column, you wrote that I’d have to charge only what it really cost me when I get the rent late.

That’s ridiculous — I’ll never be able to calculate that, and besides, it would be too small to deter late payments. –Jack S. A: You aren’t alone — many landlords are using form leases that specify hefty late fees.

These fees accomplish what’s intended — their amount makes tenants either think twice about paying late or go to extremes to borrow the money. Some landlords are candid enough to admit that this policy is a nice profit-generator, too.

But the longevity of an industry practice doesn’t insulate it from legal challenges. And as odd as you may think it to be, setting a late fee that doesn’t bear a close resemblance to what you actually lose when the rent arrives late is contrary to a very old and well-established principle of law. Namely, when someone breaks a contract, the other side is entitled only to be made whole (to be compensated for his actual damages).

A pre-set fee that isn’t even close to your losses is legally speaking a penalty. Penalties in consumer contracts are not enforceable, period.

In case you think this is new-fangled, take a look at one state’s very old law regarding late fees for mortgage payments, a very similar situation. Since 1975 in California, lending institutions have been limited to the late fee they can impose for tardy payment on a loan secured by a mortgage or a deed of trust on real property containing only a single-family, owner-occupied dwelling. That fee may not exceed either 6 percent of the installment due that is applicable to payment of principal and interest on the loan, or $5, whichever is greater. (California Civil Code section 2954.4.)

Careful attorneys in California use this rule as a safe harbor when counseling their landlord clients on how to craft a defensible late-fee policy.

If you were to do the same, you’d be on solid ground in California at least only if that $100 late fee in your form lease is tacked onto a rent of $1,667. If your rent is less, you might consider lowering the fee.

Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of “Every Landlord’s Legal Guide” and “Every Tenant’s Legal Guide.” She can be reached at janet@inman.com. Copyright 2009 Janet Portman

For more see Are Late Fees Legal?

American Apartment Owners Association offers discounts on products and services for landlords related to your real estate investment including REAL ESTATE FORMS, tenant debt collection, tenant background checks, insurance and financing. Find out more at joinaaoa.

To subscribe to our blog, click here.

Copyright © 2004 - 2017 AAOA.com. All Rights Reserved.