To be enforceable, Late fees must be considered reasonable in the eyes of the court and must not exceed the amount of the debt.
While many landlords don't charge enough in late fees, others go a bit overboard in collecting late charges. I know a few owners who spend a fair share of their daily time pursuing past due late fees. I recently had a student who had a tenant who owed accumulated late fees equivalent to approximately 3 times the total rent... and it was paid! He charged the tenant daily late fees each month continuously throughout the year with the months of daily charges overlapping. I'd hate to see him explain those calculations to a judge.
Most states have a statutory limitation on late fees, and when challenged, all state courts will limit them if the judge feels they are too high.
Some frequent questions are,
- "But what about if the tenant agrees to a higher late fee in the lease?"
My answer would be to keep it reasonable and keep the state limitations in mind. These things rarely become an issue, since it is one of the terms of the lease in which the tenant has given his word of honor and signature of agreement and approval. It is usually when you are in court with your tenant for other reasons that everything unenforceable in your agreement is then challenged.
- "I charge a higher late charge than my state's limit. Will I have a problem collecting those fees?"
Usually not in most tenancies, but it will become an issue if your late fees are challenged in court. In court I've seen late fees either reduced or completely eliminated by the judge.
Most landlords go to court with tenants for two reasons:
1. To kick the tenant out for non-payment or holdover in Eviction Court and
2. To settle disputes between the parties which may be for security deposits, damages, etc. in Small Claims Court.
One thing I learned is that a judge in eviction or small claims court is going to decide what he or she feels is reasonable according to the law. Keep in mind that there is a difference between "illegal" and "unenforceable".
The whole idea of the late fee is to encourage rent payments to be paid on time. A penalty fee should be enough to make paying late unpleasant and not so little that the tenant will be comfortable incurring late fees. Late fees should not be looked to as an additional stream of income, but as a deterrent to late payments!
Below are some links on limitations and the subject of Late Fees.