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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 Copyright 2009 Janet Portman

For more see Are Late Fees Legal?

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  • I think this varies by state. In North Carolina, where I’m a property manager, late fees cannot be more than $15 or 5% of the rent due, whichever is larger. If you are dealing with Section 8 tenants, the late fee calculation must be based on THEIR portion of the rent (not the total rent payment).

  • Steve Wolfe

    My lease uses a “loss of discount” clause which has been very good at keeping most tenants on time.
    The rent is a bit lower than most competitiors and the loss of discount is $100.
    We have a 5 day on time, and loss of discount afterward.
    As long as you’re consistent in the application, it’s a good tool.

  • Sheila K. Graves

    Very interesting. We have been blessed that our tenants have come close in some cases but have always paid within our 5 days. Our lease reads that the rent must be received or postmarked not later than the 5th of the month.

  • jon

    I put 9% as my late fee. WHO cares if its legal ?? The point is most peasants I mean tenants dont know this detail. And it makes the rent come in on time, which is the entire point its so high in the first place.. Lets see you complain to the City when your parking ticket DOUBLES if you are a day late! Is that their actual loss? GOOD GOD!!!!!

  • Flash Gordon

    I am a landloard in N.C.. My lease provides a “discount” if the rent is paid within 5 days of the due date. I avoid the use of “late fee”. I have use this method successful for 12 years,but recently a local magistrate presiding over the eviction of a tenant,ruled that the “discount clause” was in fact a late fee and limited the amount collected to $25.00

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