The 411 on late fees

Q: 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. ...CONTINUED

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