Is it Legal to Charge a 5 Percent Late Fee for Rent?

By on April 1, 2015 in Real Estate with 0 Comments

Don't let late fees for rent lead to your eviction.In a word, NO.

At least in California.

Printed form leases for apartments and other residential real estate almost always have a clause that adds on a late fee for rent, often in the range of 5 to 6 percent.  In California, many landlords use one of the standard lease forms provided by the California Association of Realtors (CAR).  Form LR, which is often used for leases of apartments, condominiums and houses, includes just such a late fee clause.

Nevertheless, in California at least, these late fees are almost always unenforceable.

Liquidated Damages

A late fee for rent is an example of what is known in the law as “liquidated damages.” These are damages for a breach of contract that are agreed to in advance by the parties in the contract itself, specifying the amount that the injured party may collect as damages if the other party breaches the contract. It has long been the law in the United States that for a liquidated damages clause to be enforceable (a) the amount of liquidated damages must approximate the actual damages likely to be incurred in the event of a breach, and (b) the amount of actual damages must be uncertain at the time the contract is made so that the liquidated damages clause will save the parties the difficulty of estimating the actual damages in advance.

The Uniform Commercial Code, which governs contracts for the sale of goods in every U.S. State, has a more modern formulation:

Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. [UCC §2-718(1)]

A Late Fee for Rent  is Unenforceable in California

For contracts that are not governed by the UCC, Section 1671(b) of the California Civil Code is the governing statute. It states:

[A] provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.

However, if the liquidated damages are sought to be recovered by a party to (1) a contract that is for retail purchase, or rental, by such party of personal property or services, primarily for the party’s personal, family, or household purposes, or (2) a lease of real property for use as a dwelling by the party or those dependent upon the party for support, then a special rule applies, which is contained in Section 1671(d) of the California Civil Code:

In the cases described [above], a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.

So the general rule for contracts is that a liquidated damages clause is valid unless one of the parties can demonstrate it was unreasonable.  But if the contract is a residential lease or a retail purchase or rental contract for goods or services, the presumption is that the liquidated damages clause is void unless the amount is presumed to be the amount of damage sustained by a breach of the contract and it would be impractical or extremely difficult to fix the actual damage.

In the case Orozco v. Casimiro [(2004) 121 Cal.App.4th Supp. 7], the Court of Appeal held that late fees under a residential lease are liquidated damages within the meaning of Section 1671(d), and declared them to be void except under extraordinary circumstances when it would be impracticable or extremely difficult to fix the actual damage. The Orozco Court quoted with approval the earlier case Hitz v. First Interstate Bank [(1995) 38 Cal.App.4th 274, 278, 44 Cal.Rptr.2d 890], which applied Section 1671(d) in the context of a bank that attempted to impose late fees on a credit card account. In Hitz, the Court emphasized that for a liquidated damages provision of a contract subject to Section 1671(d) to be enforceable, two conditions must both be satisfied: (1) it must have been impracticable or extremely difficult to fix the actual damages, and (2) the liquidated damages clause must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained.

In virtually all cases, the late payment of rent is not a situation where it is impracticable or extremely difficult to fix the actual damages. In fact, the actual damages are very easy to fix: they are simply interest on the amount of the overdue rent for the period of time that the rent was in fact overdue. This common sense conclusion is affirmed by Civil Code §3302, which states: “The detriment caused by the breach of an obligation to pay money only, is deemed to be the amount due by the terms of the obligation, with interest thereon.”

And, by the way, the maximum rate of interest that may be charged under the California Constitution is 10% per year. Contrast this with a 5% late fee imposed for a rent payment that is 10 days late: that works out to over 180% per year!

Now What?

Late fees illegally collected by a landlord should probably be treated as an additional security deposit, returnable at the end of the lease with interest. If the landlord is attempting to evict the tenant, illegally collected late fees should be allowed to be credited towards the over due rent. And of course, any demand by the landlord for a late fee charged as a percentage of the rent is unenforceable, whether made directly to the tenant or in the course of an eviction proceeding. More information on this topic can be found at the California Tenant Law website.

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