The practice of imposing late fees for their tenant’s failure to timely pay rent raises many issues for landlords. Unfortunately, these issues continue to cause many problems for landlords desiring to enforce late fee provisions contained in their rental agreements.

While it’s pretty clear that a landlord can impose a reasonable late fee, success in doing so depends on several factors.

Proper Drafting
To be enforceable by law, a late fee provision must be properly drafted. Basically, a late fee provision is a “liquidated damages” clause; an agreement to agree to a fixed sum of “damages” in the event of a future failure to timely pay rent.

Consequently, to be enforceable, a provision for “late fees” must:

  • be in writing;
  • reflect an amount which is “presumed to be the amount of damage sustained” for your tenant’s failure to timely pay rent; and,
  • be “impracticable or extremely difficult” to determine the actual amount of damage incurred by the landlord for the tenant’s breach.

 

Obviously, if your rental agreement is oral, you cannot charge “late fees”. If it is in writing, a “late fee” provision not meeting these drafting requirements is probably not enforceable.

Reasonableness of Amount

In addition to being properly drafted, the amount of “damages” imposed for late payment of rent must be reasonable.
Unfortunately, there are no cases or statutes which can guide us in determining whether a late fee amount is or is not reasonable. But, some guidance can be found by looking to another situation where the law does limit the amount that can be charged for late payments. Civil Code §2954.4 authorizes a late charge amount of up to 6% of the monthly installment where a borrower fails to timely pay their mortgage payment. Since this is a very similar situation to a tenant not timely paying their rent, it may be wise to limit the amount of any late charge to no more than 6% of the amount of the monthly rent.
In any event, whatever the amount, it is clear that the late fee provision cannot be an amount that would “penalize” the tenant for late payment. But what might be the consequences of imposing and collecting a late fee of an amount that isn’t “reasonable”? This could have significant, unintended consequences.

Say you have previously been imposing and collecting a late charge of 10% against a tenant that you have just had to file an unlawful detainer against for non-payment. Say further that, in defense, the tenant claims you have charged excessive late fees in the past. This is an argument used regularly by eviction defense attorneys and could be a good defense to your eviction for current rent.  Here’s why:

Assuming your late fee provision is enforceable, if the judge determines your 10% late fee is excessive, the tenant has actually overpaid the amount of rent previously due by the amount of the unreasonable portion of the late fee. Because a pay/quit notice that overstates the amount actually due is invalid, your eviction would fail, and you would have to start over after deducting the previously-charged “excessive” late fees.

“Grace Periods”

Another issue raised by charging late fees is whether a late fee provision creates a “grace period” for payment of rent.

Say your rental agreement requires rent to be paid on the 1st day of the month and also includes a properly-worded late fee provision that imposes a late fee for payments not made by the 5th. Say further that you’re tired of dealing with a chronic late-payer and you serve a pay/quit notice on the 2nd and then sue for non-payment when your tenant doesn’t pay within three days. Tenants routinely defend evictions in this situation arguing that because they had been charged and paid late fees in the past, they have through the 5th to pay and a pay/quit notice cannot be served before then.
As more than one court has held, whether this argument is successful depends on the wording of your rental agreement.  With most “standard” rental agreements, the “grace period” argument probably wouldn’t be an issue; however, if you use a specially drafted agreement, it should expressly state that rent is delinquent if not paid by a date certain, and the late fee provision should contain qualifying language along the lines of “This late fee provision does not create a grace period for the payment of rent”.

Enforcing Late Fees as an Un-cured Breach of Covenant

As you know, per statute, a 3-Day Notice to Pay Rent or Quit may be served only after a “default in the payment of rent” and that the notice must demand “its payment, stating the amount which is due”. Since there is no provision for including other charges, a very good argument could be made that a rent pay/quit notice including late fees (or other charges) would be ineffective because the amount demanded would exceed the amount of rent due.
Then how can a landlord enforce a late fees provision? One way might be to serve a 3-Day Notice to Perform Covenants or Quit demanding their payment along with a 3-day notice to pay rent or quit. This creates two separately enforceable claims and works to eliminate the risk of a court finding that either the rent pay/quit notice: 

  • includes sums that are not properly deemed “rent” as contemplated by the statute, or,
  • the late charge is an unenforceable penalty or amounts to unreasonable liquidated damages.

If the late fees were included in the pay/quit notice, either of these findings would defeat your unlawful detainer. But, by separating the two claims, if one claim failed, the other would still be available. Whether a judge would evict someone just for failing to cure a late fees demand is another question however.

Including  Late Fees in a Pay/Quit Notice

It is clear that late fees are not “rent” and therefore, they cannot ordinarily be included in a pay/quit notice. While this is generally the case, an exception may be found where late fees are expressly designated “additional rent” in the rental agreement.
The term “rent” is generally defined as “consideration paid for the hiring of a thing”. If you would not have agreed to rent to your tenant without their promise to pay late fees if and when they were delinquent in their rent payments, the agreement to pay them becomes a material “consideration” for the rental.
Here, late fees become “rent” under the agreement and arguably can be included in a notice to pay rent or quit. In this instance, it would be very wise practice however to include a statement in your rental agreement’s late fee provision expressly deeming the late charges “additional rent”.  While this practice has worked in some courts, consider this situation:
Say contract rent of $1,000 is due on the 1st, a late fee of $50 attaches if rent is not paid by the 5th, and you serve a pay/quit notice on the 7th demanding a total of $1,050 in “rent”. Your tenant fails to pay within 3 days and you commence an eviction action.

Because your tenant has the right to notice of exactly what is owed, the demand here may not afford him his “due process” rights. Here’s why: the contract rent is $1,000, not $1,050. How would the tenant know that the $50 “additional rent” is included in the demand if it wasn’t expressly identified as such in the notice? At least one local court has ruled in this situation that even though the late fee deemed “additional rent” could properly be included in a pay/quit notice, the notice (and eviction) still failed because the $50 was not identified as a “late fee deemed additional rent” per the agreement.

While this may seem picky, it was actually a correct ruling from a “due process” perspective.  The judge ruled that the notice was “confusing” because the tenant couldn’t determine what the additional $50 “rent” was because the landlord had not given notice that the late charge had been imposed. With this perspective in mind, if you elect to include a late fee on a pay/quit notice (assuming the rental agreement designates the late charge as “additional rent”), so as not to confuse the tenant, it would be wise to identify the extra “rent” demanded as a “late fee deemed additional rent per the rental agreement.”

Concluding Thoughts
In summary, we’ve learned that to be enforceable, a “late fee” provision must be in writing, be properly drafted, and not be “excessive” or amount to a penalty. We’ve also discussed ways of enforcing late fee provisions through the notice process and identified risks in doing so.

One nagging question remains however: “Is it a wise practice to include late charges on a notice or to even demand them at all for that matter?” The answer is not so much “legal” as it is practical.
In most residential tenancies, it is probably best to omit late charges from any notice to pay rent or quit. This is because of the simple fact that judges just don’t like evicting people from their homes. Some will even affirmatively look for ways not to evict someone. With that in mind, the author’s experience suggests that the increased potential for challenge to a notice including late fees and the risk of a judge finding that including them renders the notice “defective” is so much greater that it far outweighs the benefits of including them. The lesson?  While including late fee provisions in your rental agreement is probably an effective way to coerce timely payment of rent, given the potential “pit falls” encountered when attempting to enforce them via the unlawful detainer process, it might well be wise to not include them at all.

Brett Wright is a partner in Owens & Wright, Attorneys at Law, a San Diego-based legal firm solely representing the interests of rental property owners and managers. Mr. Wright enjoys over 25 years’ experience specializing in all facets of landlord/tenant law with particular emphasis on mobile home and recreational vehicle park tenancies. He can be contacted at bwright@sdevict.com or through the Owens & Wright web site at www.sdevict.com.x

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