If you rely on late fees to entice tenants to pay rent on time, there’s something you need to know: Many common late fee policies are not enforceable in court.
Even if you find tenants who agree with the policy, or even those who will pay the fees, there will always be the risk that an illegal policy will be exposed at a later date, and profits will be lost.
Here are a few examples of late fee policies that did not pass legal scrutiny:
1. Stacking late fees — deducting the unpaid late fee charged for a previous month from the next month’s rent payment, and then charging another late fee for the partial payment. Late fees must have some relationship to actual, out-of-pocket losses, like late payment fees on the mortgage or costs of chasing down the tenant. By stacking fees, the amount owed in late fees will exceed the actual losses.
2. Charging an excessive daily figure. It’s also a problem to charge a low daily fee with no cap, resulting in a fee that is higher than actual losses.
3. Only charging the fee now and then. If one tenant pays, but another doesn’t get charged the late fee, that can lead to costly legal problems.
Bottom line, the late fees you collect must be reasonable. Any policy that results in an excessive fee will likely be thrown out by a judge and can result in penalties.
Don’t allow your late-paying tenants to call your bluff. Keep your late fee policy reasonable in order to keep it effective.
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