My late fee clause

11 Replies

Hello all, my first post here. Tried searching but couldn't come up with the answer I was looking for. First im looking for an opinion on the legality of my late fee clause pertaining to charging a 5% late fee for 1) unpaid rent, 2) unpaid late fee's, 3) repair and 4) utility charges. This is a no grace period clause charging a blanket 5% late fee for the total balance for any one or more of those 4 income accounts.  Also does 5% curb bad habits or would a 10% be more effective. I know 5% is the rule of thumb for Michigan late fees however in most cases by the time it gets to court having the late fee thrown out isn't our biggest concern.  Thank you in advance!

Clause 7. Late Charges

  1. If Tenant fails to remit payment of any one of the following charges:

1) Rent, 2) Outstanding late fee charges, 3) Utility charges, 4) Repair charges

IN FULL before 5:00PM on the 1st day of the month, Tenant will pay Landlord additional rent of: 5% of the total outstanding balance.

  1. If Tenant fails to pay the rent IN FULL before 5:00PM on the 1st day of the month, a 7 Day Pay or Quit Notice(dc100a) will be prepared and served by the 2nd day of the month. Tenant will then have 7 days to pay or vacate the premises. If Tenant does not pay the outstanding balance in full or vacate the premises by 5:00PM on the 7th day, Landlord will file a court case for eviction on the 8th day.

    Late charges are applied to the tenant’s total balance and deemed payable as additional rent. Habitually late rent will result in eviction proceedings.

Tenant acknowledges late payment of Rent, Outstanding late fee’s, Utility charges and Repair charges may cause Landlord to incur costs and expenses, some of which are difficult and impractical to determine. These costs and expenses include, but are not limited to, 7 day pay or quit notice preparation and service of process, additional accounting and paperwork. Landlord and Tenant agree that these charges [Clause 7. a, Clause 7. b.]represent a fair and reasonable estimate of the costs Landlord may incur by reason of Tenant's late payment.

(Tenant Initial) _________________

Chris Martin

    Well, what you're sort of trying to do here is create a liquidated damages clause.  These are frowned on by the court, and are only allowed when it's basically impossible to determine what your costs would be for breach of contract.  That's not the case for you.

    Your out-of-pocket costs for a tenant not paying their rent on time would be quantifiable.  Do you get a late charge from your mortgage company? Does the utility company charge you something?  Liquidated damages clauses cannot be used to impose penalties, if I remember correctly.

    So, that's not going to fly in court.

    Plus, you need to check your laws, but in CA anyway, you can't include late fees in rent owed when filing for an eviction for unpaid rent.  It can only include what they owe for rent.  Nothing else.

    Also, although it's common practice to include a late fee in a contract even in CA, in court here, you have to show the court that your late fee was your actual out-of-pocket cost.  You'd have to see if that's the case there.

    If you go to court, and your tenant has regularly been paying these late fees to you over their tenancy, you may end up having to reimburse them all.  It may not be just a matter of them getting "thrown out," but you may also be required to reimburse them, if the court determines they were not legal.

    Plus, you leave no option for any disagreement by the tenant.  I would never sign this contract, because you could charge me some crazy outrageous maintenance charge, and if I want to fight it, you say you will evict me, without my having time to talk to an attorney, etc.

    And really, good luck getting someone who can't afford their rent or their utilities to pay you a 5% or 10% fee on top  of what they already can't afford.

    So, in my opinion, not only will this not fly, but any tenant who can afford to keep shopping - will.  You'd be left with tenants who will agree to anything just to get into any rental. 

    Why don't you just forget about the late fee and just include a clause that says if rent isn't received on time, that you'll serve a pay or quit notice.

    And really, even if someone gets paid on the last day of the month, it's only reasonable to give them a few days to get the rent to you.  Give them until the 3rd, then serve them with a pay or quit.  You're going to have really hostile tenants if they get a pay or quit on the 2nd every month, before they get a chance to get the rent to you after they get paid.

    If you set up a hostile environment - that's what you'll get.  And it will be really unpleasant.  Plus, hostile tenants are a lot more likely to be a pain in the butt, and damage the place.

    Your best bet to get tenants who pay on time, is to do excellent screening and wait to rent the unit until you have a good tenant.

    Thanks Sue!

    My out of pocket expenses would be for the cost of mailing the proper notices and/or serving in person. The amount of wear and tear(not so quantifiable) and gas used for my vehicle to do so, and my time spent(variable) to: prepare these documents, call off work if necessary, serve documents, and additional accounting. Also included is interest lost due to that money not being in my bank (general interest i think they call it) My time being the most costly and rightfully applied to the cost as I am working for my company and I don't work for free. With these variables I would have to calculate a specific late fee on a case by case basis and by law the late fee has to be spelled out in the lease so that wont work.

    You are correct, late fees may not be punitive. Also you cannot evict soley based on unpaid late fees.. but if there are late fees, there is unpaid rent or utility charges. Late fees are legal here however Michigan does not specify a maximum amount. Ive been hearing rule of thumb is 5% flat fee, daily fees with no monthly limit are thrown out. Max fee for daily late fees would be the 5%. Currently (leases in effect before doing extensive research) my leases state $5 per day without a monthly cap and I don't have any problem with tenants not wanting to sign.

    I can see what you are saying about outrageous repair charges. Ill need to talk to a lawyer about late fees for that and utility charges. However there is no way to put a cap on those types of fees. If I put a cap of 50 bucks for things like holes in the walls and they leave for a week in the middle of winter and turn the furnace off I could only charge 50 bucks for thousands in damages? The idea behind this is to get things repaired as they come up and if the tenant is responsible they pay in a timely fashion. If they don't pay for the repairs, yes I will evict and it will come out of their sec. deposit and/or money judgement anyway.

    They have plenty of time to speak with their lawyer regarding the validity of the charges during the lengthy eviction process. If their lawyer thinks the charges are excessive or invalid they may present that in their defense on the court date. Just like how they can create a defense for non-payment of rent based on un-inhabitable property conditions. They can pay rent into escrow account at the court to show that they were capable of paying the rent however they are disputing the charges. 

    Re: grace period, my opinion is the rent is due when the rent is due and that's the 1st. If they want a grace period they can think to themselves that the rent is due on the 25th and have it ready. They do not have to sign the lease if they cannot adhere to the lease. In every instance of my experience when you include a grace period it becomes the new due date and they think they can walk all over you. Im their landlord not their financial planner, they should be able to figure that out.

    Whats the difference in having late charges vs no late charge? if rent is not paid by the 1st at 5pm I go to the post office to mail their 7 day notice which they receive on the 2nd. I do this everytime because eviction is a lenghty process. I dont always act on the notice right after it lapses but if i need to, the notice has been served as early as possible. Its considered late after 5pm on the 1st regardless of a grace period.. grace period only applies to when the late charge takes effect. I don't view this as breeding hostility, they know upon signing that I expect rent on time and if they cant do that then expect a notice in the mail and pay by the 7th day or prepare to move.

    Sorry for the length..  your thoughts?

    Chris Martin

      @Chris Martin Why make it so complicated? Tenants will be able to wrap their head around a flat fee much easier than a percentage. We've been managing our own rental properties for 20 years and one sentence has served us well. See our late fee clause:

      " LATE FEE.  If rent is not received or postmarked by the fifth (5th) day of the month, a fifty dollar ($50.00) late fee will charged immediately as additional rent for that month."

       

      I agree with Marcia: you are making it difficult. Check your laws, see what your options are, and amend the lease to make it easier for the tenant to understand. I have a $75 late fee if the payment is not post marked by the 5th of each month and that is stated in the lease. It is easy to understand for the tenant, and gives them a little leeway to get the payment in the mail. Easy..and so far effective with very few late payments.

      John Thedford, Real Estate Agent in FL (#BK3098153)

      Hi Marcia, thank for the input. It would seem less complicated with a flat fee however I have just been going with the 5% rule of thumb. Most of my rents are 8-900 (5% = $40-45 late fee) so the $50 flat fee would be a bit higher but close.  I don't think $50 is excessive and maybe should consider it. My tenants are required to log-in to their profile to view their statements and pay rent via the tenant website using their bank info.  My software(buildium) automatically calculates and posts the 5% fee to their statement for their outstanding balance if not paid by the 1st. This way they don't have to break out the calculator or anything.

      I was more looking for opinions on legality of charging the late fee for prior unpaid late fees. I.E.

      I have a lease including $50 late fee applied to all outstanding balances if not paid in full on the 1st. The accounts that contribute to their balance are rent, unpaid late fees, utilities and repair charges. All charges are deemed payable as additional rent, so the late fee becomes part of the total tenant balance. 

      So say tenant pays Januarys rent of $800 late but does not include the $50 late fee. The $50 late fee remains on their balance and Februarys rent is now due. They pay $800 for Februarys rent on time but again do not include the $50 late fee charged for being late last month. So that balance of $50 carries over after the 1st of feb. Now feb. 2nd another $50 late fee is assessed because the rent(balance) was not paid in full. Bringing their balance to $100. 

      The reason im including this is so I don't continue to be laxed on collecting unpaid late fees but I want to make sure its legal and makes sense.

      This math is much easier, I think I will switch to $50 flat fee haha

      Chris Martin

        Thanks John.

        As for checking laws.. MI law does not cover specifics on late fees like other states.. they are legal however the judge can throw them out if deemed excessive or punitive. I also don't have a grace period  on my new leases because its not required in MI. The end of the grace period always becomes the due date in the tenants mind. Im now requiring all my tenants to pay solely online. So snail mail transit time(rents in the mail) and arguments about postmark/received by dates are no longer valid.  

        Chris Martin

          I will share something my lawyer told me: You can charge anything you want, collecting it in court is another story. For example, I charge a $20 admin fee for serving a 7 day termination of lease. Completely unenforceable but I also have the right to give a 30 day "no reason" eviction notice if I don't think a "tenancy is working out" (hint hint).  Of course you have to have a lease vs. tenancy at will to get creative like you're doing in most states. I like the notice on the 2d. Even in Maine that's what we do. 

          @Chris Martin

          Check the landlord - tenant laws for Michigan and see what is permitted.   Here a late fee can be no more than an NSF / dishonoured payment fee levied by the landlord's financial institution ... which is ~$50.00 across the major banks.

          As Marcia and others have said, a flat fee is much easier to communicate to the tenants and simpler to administer.

          @Chris Martin , in NC a landlord cannot arbitrarily convert late fees (or any other fees) into "unpaid rent".  The only thing that can be deemed as "unpaid rent" is rent that has not been paid.  This is to eliminate the possibility that landlords will continually assess "late fee" charges if a tenant does not pay one late fee (or repair fee) because the tenant disagrees with it or for any other reason.  Also, in NC, the maximum allowable late fee is 5% of the monthly rent.  It should be easy enough to find out what is legal in MI.

          My late fee policy reads as follos:


          RENT OR ANY PART THEREOF NOT RECEIVED AT THE OFFICES OF SBG PROPERTIES LLC BY THE DUE DATE AS REQUIRED IN PARAGRAPH 5(b) SHALL BE SUBJECT TO THE FOLLOWING LATE CHARGES: $25.00 PLUS AN ADDITIONAL LATE FEE OF $ 16.43 PER DAY INCLUSIVE OF THE DAY OF RECEIPT.LATE FEES ARE RETROACTIVE TO THE FIRST OF THE MONTH AND SHALL ACCRUE FOR EACH MONTH UNTIL THE RENTS FOR THAT MONTH ARE PAID IN FULL OR A JUDGEMENT FOR SAID LATE FEES IS RENDERED BY A COURT OF COMPETENT JURISDICTION FOR ALL AMOUNTS THEN DUE AT THE TIME OF THE ENTRY OF JUDGEMENT.LESSOR ACKNOWLEDGES, UNDERSTANDS AND AGREES THAT PURSUANT TO ATCP §134.09(8) ALL FUNDS RECEIVED FROM LESSEE WHEN RENTS ARE DELINQUENT SHALL BE FIRST APPLIED TO DELINQUENT RENTS AND THEREAFTER TO ACCRUED LATE CHARGES.

          Didn't read it all.

          Bottom line is either a new tenant will not read all of this and agree to it or they will read it and very few will agree to it.

          It will deter some and not others. When you get to court a  judge usually will deem the fees excessive and then say if you win they are only giving you XX.

          We had a per day late charge in addition to the regular charge for eviction filings. Most times the judge would give use the regular charge and maybe some per day. The rest they would throw out as excessive. You can try to put whatever you want in your lease and it may or may not be legal. Where the rubber meets the road is where you get to court and the judge says what will go or not.

          We wanted a per day late charge so the tenants were motivated to pay soon after the late fee date. At least we wanted that to be the perception.

          No legal advice given. 

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