To charge or not to charge late fees?
Our industry has struggled in recent years over the question of whether to demand a fee on rent received beyond the due date or for payments that are returned for insufficient funds. Years ago, leases commonly permitted housing providers to charge a percentage of the rent, such as 5%, as a penalty. Indeed, in the commercial rental market, such practices remain commonplace. However, because residential residents are entitled to far greater consumer protection, the courts have increasingly scrutinized the imposition of late fees when a lessee fails for whatever reason to pay on time.
For starters, no fee may be issued unless the lease agreement expressly permits the assessment. The SFAA Residential Tenancy Agreement has allowed a charge for late payment of rent as well as for NSF payments in all prior versions with the property owner filling in the actual amount of the fee. This year, for the first time, the lease authors have pre-set the rate at $50.00 per late payment, and even this figure is, for the reasons set forth below, legally questionable.
As referenced above, courts have been increasingly skeptical of residential late fees. In Del Monte Properties & Investments, Inc. v. Dolan (2018), 26 Cal.App.5th Supp. 20, the appellate court reiterated that an automatic and set late fee must be reasonable because it resembles what is known as “liquidated damages.” To be valid under state law (Civil Code section 1671), a liquidated damages clause must be the result of a reasonable endeavor to approximate actual losses caused by the breach being compensated. In other words, the late fee you charge must reflect the actual monetary loss you incurred as a result of receiving payment late. The court noted that setting the damages to a percentage of rent was therefore wrong. Citing an earlier case, Orozco v. Casimiro (2004) 121 Cal.App.4th Supp. 7, the Dolan court affirmed the rule that the losses caused by the tardy payment of residential rent shall be limited to (i) interest and (ii) administrative costs of collecting and accounting for the late rent, period. Moreover, the landlord bears the burden of proving these losses, meaning you must show through competent and admissible evidence that you incurred the monetary loss now claimed as a late fee for each time rent was paid late.
The courts have also warned that calculating the losses caused by a tardy payment better be done before, not after the lease is entered into. In other words, housing providers must compute and assess the resulting damage prior to including a late fee clause in the rental agreement. Composing this calculation after there is a breach is not acceptable. In addition, don’t even think about evicting someone for failing to pay assessed late fees. Your remedy lies in small claims court, not in the unlawful detainer forum.
In sum, tread lightly when imposing late fees. You will have to prove that interest and administrative costs justify the charge. Receiving a $2,000 rent payment on the sixth or seventh day as opposed to the fourth or fifth day of the month likely won’t persuade a court that you lost $50. Instead, you may just want to supplant going down this path with a stern warning email.