Should I Charge Per Diem Late Fees on Rent?
Libraries use them. So do banks and credit card companies. As a landlord, you probably charge late fees too, to encourage timely rent payments. But did you know that some states allow per diem (daily) late fees, until the rent is paid in full? That means for every day a tenant is late with his or her rent, the fee increases.
Late fees can be a strong incentive. Tenants don’t want to waste money, and most will be careful to avoid large late fees, thereby paying you on time every month. It creates a win-win situation.
But are there downsides to charging per diem late fees? What are you legally allowed to charge? Let’s take a closer look at the pros and cons of charging daily late fees on rent.
The Proverbial Stick
By charging late fees, you’re essentially creating a punishment which gives tenants an incentive to pay on time. It’s like the mule that pulls the cart because it moves away from the punishment: the stick. This method works well with certain tenants. Others may not be particularly bothered by the penalty. Some may even see it as permission to pay their rent late.
Is It Legal?
Yes, in most states, it’s legal to charge late fees, including daily amounts.
Most landlord-tenant acts don’t specify how much landlords may charge. However, the fee should be “reasonable”, and reflect costs incurred by the late rent. It must also be clearly written in the lease agreement.
Some states, like Delaware, Iowa and Maine, limit how much a landlord may charge. A few states, including Oklahoma, don’t allow late fees on rent. Check your state’s laws to see if you have any restrictions.
How Much Is “Reasonable”?
What’s reasonable to you and I as landlords may not be considered reasonable to a tenant or a judge. How much to charge can be tricky, because if it’s deemed “unreasonable”, your tenants might choose not to pay it. If it goes to court, the judge may rule that the charge is too high and rule against you. This can happen even if your tenant previously agreed to the high charge by signing the lease agreement.
Some landlords choose to charge a one-time late fee of 3-10 percent of rents due, plus an additional fee of $5 to $15 per additional day.
What Are The Downsides?
There are a few downsides to charging higher late fees. Larger late fees aren’t always enforceable. Since laws regarding late fees are often ambiguous, they can easily be dismissed in court.
Another problem is that fees can become overwhelming for tenants who are significantly late with their rent. Tenants may feel like they can’t catch up and won’t bother trying to do so, instead opting to simply stay in the rental property for free as long as possible and drawing out the eviction process.
How Do I Set It Up?
In order to start charging a daily late fee, it must be written in your lease agreement. With new tenants, or at the time of renewal, consider adding a per diem late fee clause (if permitted in your state – our State Assist information will let you know in the lease wizard). If late fees aren’t specified in your lease agreement, you can’t charge them.
Once written into the lease agreement, consistently issue notices as soon as they occur. To help you stay organized, have a late fee document ready to go. If a tenant’s rent is late, you can simply fill in the details and send it off. If rent comes in late but the tenant doesn’t pay the late fee, also issue a reminder. (EzLandlordForms offers both a Late Rent Notice and a Late Fee Due Notice on our website.)
By being consistent with all aspects of your rentals, including daily late fees, tenants will quickly learn that you run your business as a professional. Be sure to keep late fees reasonable, closely follow your state’s laws, and send notices and charge fees like clockwork to send the message that you will not be trampled on by your tenants.