Are Late Fees Legal?

The clause below is an excerpt from an actual lease agreement used in the Bay Area:

LATE CHARGE: If any installment of rent is not received by Landlord in 5 calendar days after date due, Tenant shall pay Landlord an additional sum of $105.00 as a late charge, which shall be deemed additional rent.  Landlord and Tenant agree that this late charge represents a fair and reasonable estimate of the costs that Landlord may incur by reason of Tenant’s late payments. Any late charge shall be paid with the current installment of rent.  Landlord’s acceptance of any late charge shall not constitute a waiver as to any default of Tenant or Tenant  or prevent Landlord from exercising any other rights and remedies under this agreement and as provided by law.

Is this this clause “legal?”

Under Cal. Civil Code § 1671 and case law, a late fee is a liquidated damage awarded for a contract breach. In Hitz v. First Interstate, 38 Cal.App.4th 274 (1995), p. 288, the Court decided that:

"For liquidated damages to be valid under [Cal. Civ. Code § 1671], it must have been 'impracticable or extremely difficult to fix the actual damage.'”

"The amount of liquidated damages 'must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained.’”

Finally, "absent either of these elements, a liquidated damages provision is void, although breaching parties remain liable for the actual damages resulting from the breach.” [Emphasis added.]

Here, if the $105 late fee described in the lease is arbitrary and was not negotiated between the parties, it may be considered invalid by the Court. As a general rule, a late fee is considered unreasonable if it is more than 5% of the monthly rent. In the lease clause shown above, the monthly rent was $1,900.  Five percent of the monthly rent is $95.00 ($1900 * .05), thus, the Court could consider the late fee somewhat unreasonable since the fee is slightly higher than 5% of the monthly rent. 

By including the sentence, “Landlord and Tenant agree that this late charge represents a fair and reasonable estimate of the costs that Landlord may incur by reason of Tenant’s late payments,” Tenant contractually agrees that the late fee is not a liquidated damage.  This lease clause would be more likely to be upheld in court if the clause also stated that “damages suffered due to a late payment are extremely difficult and impractical to fix." Damages suffered by a Landlord are penalties in increased interest rates for late mortgage payments and administrative costs to collect late rent.  Also see Orozco v.Casimiro, 121 Cal.App.4th Supp. 7 (2004).

Additionally note the first sentence in the lease clause which reads, “. . . Tenant shall pay Landlord an additional sum of $105.00 as a late charge, which shall be deemed additional rent.”

In an eviction proceeding for non-payment of rent, the lawsuit can only detail the actual rent monies owed by the Tenant(s) being evicted for no more than a 12-month period. The rent owed must be detailed to the exact penny in the Notice to Cure or to Quit and in the complaint. Here, if the tenant is late in paying their rent, the late fee is assessed AND considered additional rent. If the tenant is later evicted for non-payment of rent, the Landlord may include late fees as rent owed in the complaint which could invalidate the 3-Day Notice to Pay Rent or Quit and which is contestable. To contest the calculation of the rent owed, the Tenant would also need to attack the lease clause that transmutes late fees into rent.

In example below, the late charge may be void even though the late payment was less than 5% of the monthly rent of $1,350.00 because this clause does not include the phrase stating that the actual damages to the Landlord resulting from the late rent payment were “impracticable or extremely difficult to fix.”

LATE CHARGE.  In the event that any payment required to be paid by Tenant hereunder is not made within three (3) days of when due, Tenant shall pay to Landlord, in addition to such payment or other charges due hereunder, a "late fee" in the amount of Fifty-Five DOLLARS ($55.00).

In the following example, the late fee clause is particularly penalizing but could be challenged since the late fee is more than 5% and may be considered unreasonable by the court even with the phrases noted in bold included in the lease clause.  Here, the rent was $2,350, with a late fee of $141!

LATE CHARGES/INTEREST: Resident acknowledges that late payment of Rent will cause Owner/Agent to incur costs and expenses, the exact amount of such costs being extremely difficult and impractical to fix and ascertain. Therefore, if any installment of Rent due from Resident is not received by Owner/Agent by 5:00 p.m. on 2 days of the month, Resident shall pay to Owner/Agent an additional sum of 6% of Monthly Rent, as a late charge, which shall be deemed additional Rent.  The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Owner/Agent will incur by reason of late payment by Resident. . .”

If you live in a rent-controlled residence, some municipal law has additional requirements related to lease clauses and late fees.

Finally, if you pay the monthly rent late and fail to pay the late fee, your Landlord can serve with a Notice to Perform Covenant or Quit.  A “covenant” is a promise. By signing a lease with a fairly iron-clad late fee’s clause, you have locked yourself into paying late fees. If you fail to pay these fees and the Landlord exercises his/her rights concerning late fees and serves you with a Notice to pay these fees, pay up or face an eviction proceeding. By testing the waters and not paying these fees, you may find yourself in front of a judge explaining why you signed a lease with a valid late fees clause and failed to pay up. 

Net, net, try to negotiate the late charge itself, before you sign the lease agreement, if it’s more than 5% of the monthly rent and argue that Courts frown upon a late charge that exceeds 5%. Try to pay the rent on time and don’t argue with your Landlord over the late fee, if it is assessed.  If you are on month-to-month lease period all that is required under state law is a 30 to 60-day notice period to terminate your lease. If you are in a rent controlled municipality but are not covered by a “just cause for eviction” municipal code, under state law, no reason is required to terminate your lease at the end of a fixed-term lease or a month-to-month term.  And, remember that in seeking a new rental residence, prospective landlords will probably call your current landlord to determine if you timely paid the rent.  A bad landlord reference may impede your ability to find a new residence. Don't let late fees become a curve ball in your landlord-tenant relationship because the Court may decide in the Landlord's favor if the late fee's clause meets the Hitz standard.