Can Late Fees be Deducted from Security Deposit??

Question

Hi BP Nation! I hope you all are having a great week. I apologize in advance if this question was already asked. My father-in-law recently retired and relocated back to the Caribbean this past February. He rented out his single family home to a relative (who has taken advantage of his absence by paying rent late since moving in.)

According to the Lease, the tenant is to pay a late fee of $50 if the rent is more than 5 days late; and then another $20 for each additional day the rent is late. The tenant also changed the locks without the consent of the landlord. My wife has POA (power of attorney) over the property.

My FIL plans to give the tenant a 60 day notice stating he will not renew a lease with them. Great! The problem now is that my FIL doesn't think he can deduct late fees from the security deposit. The tenant has been late since moving into the unit until this present day so the likelihood of receiving the Security Deposit seems unlikely and depending on the condition of the property when he checks it. So there lies the question, can my FIL deduct the late fees from the security deposit? The property is in Pennsylvania. Thank You in advance!

Linval T. · Answer

@Ayodeji Kuponiyi

There are strict guidelines regarding the handling of security deposits. You need to check your State's landlord/tenant handbook or seek legal advice.

Below, is a link for your review.

https://www.biggerpockets.com/renewsblog/2007/11/2...

Jeff Rabinowitz · Answer

The courts in my areas will allow reasonable late fees to be added. Different judges have different interpretations of reasonable. Once in a while the tenant makes it easy. I recently had a tenant who had given notice to move. They were a couple weeks late on the second to last month rent. I assessed the late fee (my late fee is $10/day) and they sent a check for the full amount. That check was returned NSF. When I went for the judgment I didn't have to talk about the late fees at all. The tenant had acknowledged they owed it by writing the check. I asked for replacement of the check (plus the NSF fee, of course) and the current rent outstanding. The judge had no problem with my request.

Mike H. · Answer

Couple of things I would add.

Just because the lease has the additional fee per day of being late, doesn't mean you charge that.

Typically, there is some "reasonable" limit law in place that only allows a late fee to be a certain percentage of the rent.

So if the rent is 1,000, maybe they allow $50/mo max late fee. If 2,000, then 100 max late fee. It can't just go on forever.

In terms of can you deduct a late fee from the security deposit, here's the other thing I would point out. The late month, maybe not. But all the previous months, of course you can.

Here's how.

Lets say the tenant paid 1k in rent and was late in january by two weeks and you charge them $50 for the late fee.Then in february, they are late again and only pay 1k again.They don't get to apply that 1k toward feb and tell you to go fish for jan late fee.

You get to take $50 from the feb payment and apply it toward the january late fee and then 950 goes toward feb rent. So now they're short 50 for feb rent plus they get hit with another 50 late fee for feb and now they owe 100.

So when march comes in late, you do the same thing. They pay 1k for rent. 100 of that goes to the amount previously owed and 900 gets applied to march rent. And now their 1k payment in march only has 900 that gets applied to rent.

So if the tenant actually did that for 2 years, you can show that the last payment was actually toward back rent and that they made no rent payment during that last month so you are keeping the security deposit to cover that payment.

What you couldn't do - at least in some of those tricky states - is charge a late fee for that very final month.

But all the previous months, you can very much get those late fees covered by the security deposit. Because the late fees are technically being paid when the following month payment comes in and you're applying a portion of that payment to the previous month's late fee.

I don't care how crazy a states laws are, the one thing they can't do is tell you how that you're not entitled to apply the payments you received based on the amounts that are owed to under the law.

Its no different than if a tenant shorts you 500 on rent. And then the following month they pay you 1k and tell you that they've paid that month on time and should only be hit with one late fee.  Thats not how the rule works. If you're short 500 the previous month and pay up 1k the next month on time, 500 of that gets applied to the previous month's shortage and the other 500 gets applied to the current month - which still leaves them late on 500 of the current month's rent - and they should be hit with another late fee.

Jeff Rabinowitz · Answer

You should specify the priority of charges to which funds received are applied in your lease. Bills, fines, fees, etc. should take priority over rent. For instance: if the rent is $1,000 and has not yet been received a late rent notice should be sent. If the late fee is $50, the tenant now owes $1,050. If they now pay $1,000 that payment should be applied first to the late fee--it has been paid. Only $950 has been paid toward rent. If this continues every month the shortfall in the rent will become significant. When the tenant moves out you do not have to worry about being challenged over the late fees--you simply apply the security deposit toward the rent shortfall.

Ayodeji Kuponiyi · Answer

@Mike H. thank for the breakdown! Makes sense.

Jeff B. · Answer

In small claims or unlawful detain, late fees can not be added to the cause of action.

You can NEVER change the locks until a Writ of Possession has been granted, served and executed.  If you do so anyway, you are at risk and have charges brought against you, which might occur in an adversarial process.  CAVEAT EMPTOR.

Jeremy Dolan · Answer

Most likely not going to be an option. Read the guidelines in your area, but I highly doubt it.

Ayodeji Kuponiyi · Answer

@Matthew Vitlin thanks! I'm also going to relay @Jeff Rabinowitz tip to my FIL

Ayodeji Kuponiyi · Answer

@Jeff Rabinowitz I see what you're saying. We could do it that way as well. Thank you for that tip.

Matthew Vitlin · Answer

@Ayodeji Kuponiyi

As long as the lease doesn't violate any local laws then you should be fine.  Make sure you can document all the late charges such that you can account for them if any legal issue comes up.

e.g. March 2015 - Paid on the 8th - 8 days late = $60+20+20+20 = $120

Can Late Fees be Deducted from Security Deposit??

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