Charging interest on delinquent rent and fees?

Question

Is it customary and legal to charge interest on delinquent rent and fees?  In the lease provided with his book on managing rental property, @Brandon Turner, includes a clause requiring 18% interest per year on delinquent rent and fees.  Do others do this?

Account Closed · Answer

It wouldn't be legal in California, unless you could prove actual out-of-pocket losses that equaled all of that.

But, for goodness sake, just evict them.

Brandon Turner · Answer

Hey @Nick Brubaker- good question. So, I've never actually charged the interest, and every state is going to have a different maximum that can be charged. The main purpose for this is, if for some reason, the debt is not paid over a long period of time (which, of course, shouldn't be the case because you should just evict) but if that debt did remain unpaid, then it would accrue interest just like any other debt like credit cards, etc. I suppose I'd use that provision in the lease, perhaps, if someone trashed a unit and owed me a bunch of money, and I fought for that money for a long time (several years.) Then I'd be able to use it. But honestly - it never really gets that far.

Account Closed · Answer

@Nick Brubaker I'm pretty sure that there are laws that govern collections.  That lease clause just sounds hinky to me.  I'd run that by a lawyer, honestly.

But, the process to evict someone means you use the court to evict them.  Then you use the court to get a judgment.  Then, I believe, you have to follow the laws regarding collecting on judgments.  I don't think that includes making up your own interest rate on judgments.

On a loan, sure.  I suppose you could charge some crazy interest rate.

But, putting anything in your lease can't go against the city/state/federal laws.  Some states allow pretty much anything, so maybe you could write something into the lease that says if they ever owe you money, and you have to collect it, that they agree to pay interest on the amount owed at 18%.  That still raises my hinky hairs.

People put all kinds of stuff in leases that aren't legal.  Some lawyers even do this, possibly because they haven't read all the laws.  Lawyers don't instantly know all laws when they pass the bar.  A lot of them get away with this, because tenants aren't savvy.  It's a gamble, though.

Just be sure what you do is legal.  This doesn't sound legal to me.

Account Closed · Answer

This really seems like a horrible idea. Only gives your tenants a chance to sue you if you aren't 100% correct. If "for some odd reason" your debt does not get paid, you should already have a judgement, in which case, the interest is already set, and you have no control over it. I can't think of any situation where you could ever collect that 18%. Ever!

In what situation would a tenant ever owe you money, for years, without also having a judgement against said tenant?

Account Closed · Answer

If rent is delinquent for more than a few weeks, you should be taking them to court to get it paid, at which time interest is automatically added by a statutory amount. Most every lease includes fees for late payments. 18% per year is unusually high and odd in general.

Jay Hinrichs · Answer

@Nick Brubaker  Sue K.  As Sue pointed out.. check with your state regs... one thing I could see with 18% between private parties is a Usurious situation.. whereby you charge too much and the judge awards Treble damages to the victim .

The bottom line is your going to have to evict just do it and move on.. chasing MOST tenants for small dollars is a waste of time.. unless you don't value your time much... So it really depends on what your time is worth.. will you spend 20 hours chasing 1000 bucks... I would not but you may think its a good use of time..

Jay Hinrichs · Answer

@Nick Brubaker  if they are not paying rent.. good luck collecting penalty interest.. that's just reality of being a landlord.

Account Closed · Answer

If you mean will the rest of the lease be invalid?  No.  Just the clause that's not legal.

The worst consequences would be getting sued and having to pay a bunch of money.  Or being fined by a government agency, if it's something governed by federal banking laws, I suppose, for instance.

In some states, if a tenant sues you because you didn't handle their deposit correctly, for example, you can owe them 2 or 3 times their deposit plus their court/lawyer fees.

Nick Brubaker · Answer

Thanks Sue K. turner will chime in with his experience with this clause.

Your other comments raised another question in my mind.  If parts of your lease are not strictly legal, are there worse consequences than simply those specific clauses and any actions taken based on them being invalidated?

Nick Brubaker · Answer

Thanks guys.

Sue K. I guess this interest rate would be included with the collection process in mind after eviction.  Perhaps it was included in Brandon's lease because that's what many creditors might charge.  I guess if there are statutory interests rates already in place there would be even less need for a clause in the lease.

Charging interest on delinquent rent and fees?

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