A Landlord’s Guide to Late Fees, Penalties and Reasonable Charges
"Check's in the mail, he he he." What’s a landlord to do when tenants never bother to pay the rent on time? Rest assured once a tenant pays late and gets away with it, it will happen again. Most landlords, newbies and veterans alike, can agree there should be some consequence to paying the rent past its due date. The question though is how much to charge, and how to structure the late rent fees.
The answer to how much to charge is generally based on what your individual jurisdiction allows (this is usually covered by state or province law, but can also be county-specific). In some states like Maine and Massachusetts, there are timelines in place as well. Massachusetts has statutory law that requires landlords to wait thirty days before charging a late fee. There is currently a House Bill #1670 to change this but it has been stagnant since January 2013. (Word to the wise: in the Late Fees section of the lease wizard, the State Assist or Province Assist tip will let you know your state's law for late fees.)
Sometimes the law only restricts late fees to being "reasonable", defined by the courts as the amount that a "reasonably prudent" landlord or property manager would charge under similar circumstances. The word "subjective" also comes to mind.
According to attorney James Laughlin, “Courts generally find a late fee of 5% or less (of the monthly rent) to be reasonable but this does not hold true across the board.” As a general rule of thumb, landlords should provide a grace period of at least five days before the rent is considered late, and should never charge more than 10% of the rent as a late fee (to err on the side of caution, charge 5%).
A somewhat more convoluted issue regarding tenant late payments is the concept of penalties. Charging an unusually high late fee, even when a state only restricts to "reasonable" charges, can raise questions of penalization. Penalties and punative damages are deeply frowned upon (to say the least) by rent courts. Charging penalties in some states may result in a fine to landlords. For instance, in a 1998 Oklahoma Supreme Court decision, judges ruled that, “In reviewing the case at bar, we find that the $5.00 per day “additional rent” sought to be imposed for late-payment or non-payment of rent is a penalty, in the absence of any evidence to the contrary showing actual costs incurred by the Landlord. The Landlord's damages as a result of late payment of rent are not so difficult to ascertain so as to fall within the exception to the statute. The $5.00 per diem late charges, in addition to the $20.00 late fee, is excessive in this case.” The court further acknowledged, “If the per diem charges are liquidated damages, then they are allowable. If they are a penalty for breach of the lease, they are punishment and therefore not allowable.
To simplify, if the late fees are to cover actual costs incurred because the rent is late (e.g. mortgage late fees), it would be allowable. But if the amount is so high that it feels like a penalty, this could be an issue for the landlord.
What should landlords do to ensure rent payments are made on time and cover any expenses incurred when they are not? Here are five things landlords should do to collect rent on time and reduce the hassle of late fees.
1. Stop the behavior immediately. Acting immediately is imperative to show that late rent will not be tolerated; even once and no matter what the reason. So even if your tenant gives you a story and even if that tenant gives you this heads up prior to the due date; make sure that you have your procedures in place and follow them through like clockwork, the day the rent becomes late.
2. Everything must be in writing. Every stipulation in your lease agreement must be in writing. Landlords should take extra precautions when it comes to relaying information regarding late fees and other finance-related items in the lease. The specific amount should be detailed in the lease agreement and defined clearly as to whether it represents a percentage of rent or just a specified amount determined by the landlord. Send a late rent notice. Do not call! All communication must be in writing to create a paper trail. This prevents the he-said/she-said scenario fo often found in court.
3. Call it a late fee. Landlords are forewarned to be careful to call it a "late fee" and not a "penalty fee", as some jurisdictions do not allow “penalty fees” for late rental payments. Also, even when referring to late fees as such, if they are somehow deemed to be penalties based on the amount, landlords could find themselves faced with legal action against them. Judges seldom look favorably upon any fees considered as "penalties" or "punishment" to the tenants.
4. Beware of per diem late charges. This practice may be permissible in your state, but there are many cases where a daily late charge or fee assessment can be construed as a penalty or considered as punitive. That being said, they can be used if not prohibited in your state, but beware and be careful. (Read more about per diem late fees here.)
5. Remember Fair Housing laws. Treat all tenants the same when it comes to applying late fees. Don’t play favorites; follow the same procedures and amounts for every tenant who is late, every time. Make all of your tenants aware of the policy up front and in writing, and follow through with the same consequences for each of them like clockwork.
How do you handle late payments? Do you agree with the definition of reasonable charges?