Friday, 24 March 2017

Late Payment Charges Cannot be Punitive

Written by Posted On Monday, 30 July 2007 00:00

Just about every residential rental or lease agreement contains a late charge provision. From time to time questions arise as to what is fair or reasonable in that regard. Can a late payment fee be too high? Are there legal limits or guidelines?

It is perhaps surprising, given the abundance of laws governing landlord-tenant matters, that the California Civil Code gives no definite guidance here. Unlike some other states, California does not set limits. (However, in some rent-control jurisdictions, local ordinances may apply.) Generally left to their own devices, then, many landlords settle in on an amount around 5 to 6 percent of the rent, others go as high as 10 percent, and still others, I am sure, go even higher. They should be careful.

Although there is no specific civil code setting forth late-payment limits, it is highly relevant that California Civil Code section 1951.5 specifies that Civil Code section 1671, "relating to liquidated damages, applies to a lease of real property." Consider, for example, the case of Orozco v. Casimiro.

In 1998 Jose Orozco leased a property to Olivo Casimiro for a monthly rent of $550. The rental agreement provided for a $50 "Late Rent Charge" if the rent was not paid by a certain time each month. In December of 2002, Orozco served Casimiro with a three-day notice for not having paid the late fee as required by the agreement. Casimiro obtained defense from the Legal Aid Foundation of Los Angeles. The matter proceeded to trial in Los Angeles Superior Court in early 2003.

Casimiro's defense in part was that "the $50 late fee was punitive in nature and not a 'good faith estimate of the damages likely to be suffered by [Orozco]'…" and that therefore "the late fee which bore no rational relationship to any actual damages … was 'void and unenforceable.'" Orozco noted that Casimiro had specifically agreed to the late fee amount. The trial court found in favor of the landlord.

On appeal, however, the Appellate Division of the Los Angeles Superior Court reversed the ruling and found in favor the tenant, Casimiro. Why?

The Court reasoned that the late fee in the rental agreement was really a liquidated damages clause. That is, it was not an amount that was taken to represent the actual damages that the landlord would suffer, should the rent be late. Rather, it was an amount, agreed upon by the parties, that would be treated as damages, in the event of a late payment. Many buyers, sellers, and real estate agents are familiar with the concept of liquidated damages, as it is often applied to the so-called "good faith deposit" in a purchase contract.

For a liquidated damages provision to be enforceable, two conditions must hold: (1) it must have been "impracticable or extremely difficult to fix the actual damage," and (2) 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."

The landlord, Orozco, failed to show that either of those provisions obtained, hence his liquidated damages provision (i.e. the late fee) was void.

The rental agreement published by the California Association of Realtors® (CAR) contains the following language in its Late Charge section: "Tenant acknowledges either late payment of Rent or issuance of a returned check may cause Landlord to incur costs and expenses, the exact amounts of which are extremely difficult and impractical to determine." And, also, "Landlord and Tenant agree that these charges [the late fee] represent a fair and reasonable estimate of the costs Landlord may incur by reason of Tenant's late or NSF payment."

The CAR form contains the language needed to meet the test required by the civil code (subject to the designated amount not being patently unreasonable). Many rental agreements do not contain such language, and would probably be void as far as late charges go. Landlords who want legally enforceable late charge provisions should take a careful look at their contracts.

Rate this item
(1 Vote)
Bob Hunt

Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at scbhunt@aol.com.

Login to post comments

From buying and selling advice for consumers to money-making tips for Agents, our content, updated daily, has made Realty Times® a must-read, and see, for anyone involved in Real Estate.