Late Fees – Pitfalls and Benefits

Landlords often try to charge “Late Fees” in hopes of encouraging timely rental payments. Sometimes it works, other times it slows the process down for enforcement through the courts should an unlawful detainer (eviction complaint) be required.

The problem can occur when a sizable late charge imposed by a rental agreement or lease may be unenforceable as invalid “liquidated damages” and therefore a late fee under residential rental agreement may be held void pursuant to California Civil Code section 1671(d). This was the holding by the appellate court in a case when the landlord failed to plead or present evidence that damages for late payment of rent were “impracticable or extremely difficult to fix”.

On the positive side, late fees charged as interest on overdue accounts (apparently, past due rent included) do not risk violating the state usury law, which limits interest payable “for any loan or forbearance of any money”. The reason the court found was the rental of property is akin to the “transfer of property in a thing for a price in money” and as such, a late fee assessed on overdue rent does not involve payment for a “loan” (the delivery of a sum of money under a contract to return an equivalent amount at some future time) or a “forbearance of money” (the giving of further time for payment of a debt or an agreement not to enforce a claim at its due date).

It is strongly advisable that landlords wishing to take advantage of this position should make sure the rental agreement clearly specifies the accrual date for the late fee. The agreement should also clearly provide that accrual of the late fee obligation will not permit the tenant to defer payment over time. In other words, the tenant has an immediate obligation under the rental agreement to pay both the rent and the late fee.

It may be helpful to call late fees “additional rent.” Landlords that want to pursue late charges accrued under a late-charge provision in the rental agreement should consider actually serving two (2) notices on the tenant: 1) a three-day notice to pay rent or quit (based on the rent default) and 2) a separate three-day notice to cure the independent (late-charge) covenant or quit.

If the tenant pays neither the rent nor the late charges, the landlord may pursue the unlawful detainer with two separate causes of action. Of course the landlord could file a single cause of action unlawful detainer based on the nonpayment of rent and then seek to collect the late charges in a separate small claims action.

One of the problems that may arise when “late charges” are used is that it can be argued that if there is a late charge, then there is a “grace period” when the rent must be paid. Because it is logical to presume that the “grace period” extends the time for a certain number of days (often 5 or 10 days) after the “due date” (usually the 1st of the month) the landlord may have to wait to file his or her unlawful detainer.

To avoid the risk of deferring for several days the right to serve a defaulting tenant with a three-day notice to pay or quit, landlords who want to include late-charge provisions should use language that clearly establishes and segregates the late fees from the rent and the rent due date. It is important that the lease or rental agreement expressly state that timely payment of the rent by the due date is of the essence and that notwithstanding the late-charge provision, failure to pay the contract rent on or before the specified due date will subject the tenant to immediate service of a three-day notice to pay or quit.

Finally, it is important to check whether there are any local ordinances that prohibit or effect the landlord’s ability to include late charges.

The foregoing information is offered to help inform you, however it is not intended as a substitute for professional legal help. Only a licensed lawyer can provide such help. Contact us online or call (949) 438-2660 to set an appointment.

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