Late fees in CA

[John McDermon]

I have a tenant 1 one year into a 2-yr lease in a 4 BR/3 Ba SFR in SoCal. He's a good tenant as far as taking care of the property and not complaining about the little things. But, recently he's begun to pay late. The rent is $3,000/mo, due on the 15th. There's a 10% late fee ($300) if he doesn't pay before the 20th (5 days). Whenever he's late he pays the late fee without complaint. However, he seems to be getting latter and later and now he's going to be almost a full month late. He's caught up in the past (briefly), so I've got my fingers crossed. My question is: in light of his habit of being later and later, is it legal in CA to have escalating late fees, say an addition $100/wk he's late after the initial 5-day grace period? If so, I assume I would need to renegotiate the lease or wait until his initial 2-year lease is up. Thoughts?

[Penny Clark]

@John McDermon, be careful about charging late fees in excess of 6 percent because many Cali judges may see this as excessive if you end up in court. You are better off to charge them a flat fee, just under 6 percent. I would definitely not charge an escalating fee, because a landlord is not supposed to profit from late fees. The late fee is compensation to the landlord to offset the cost to their business for not having a timely rent payment (BTW, have this figured out so you can substantiate this if a tenant ever challenges you on this in the courtroom because you tried to deduct unpaid late fees from their security deposit).

You could have the property manager or yourself (if you self manage) query the tenant as to why the rent is consistently late. Perhaps the date changed when he receives his pay check or he got his work hours reduced, making it more difficult to pay the rent. However, since this seems to be an ongoing situation which is getting worse, your tenant is likely taking advantage of you. I would start issuing three day notices, the day you determine it is late (late fee or no late fee). Tenants respond to this because it is a business communication and it shows you know how to exercise your rights as a landlord to expect timely payments. You can issue a 3 day for non-payment of a late fee, but only if it is written into the rental agreement. If this is the case, I might do both. Good tenants try to avoid receiving 3 day notices because it alerts other property owners they are a rental risk making it more difficult to find housing in the future. Bottom line is good tenants find a way to pay their rent on time.

The California Apartment Association's education arm (Sacramento Valley RHA) has these tips for owners who use late fees:

- Put your fee into the rental agreement.

- Include language in the agreement that states the late charge does not establish a grace period and that all parties agree the charge is presumed to be the amount of damage sustained because of late payment and that it is impracticable or very difficult to fix the actual charge. Failure to pay the fee is a material breach of the lease.

- Have info on file about how you arrived at the amount of the fee. The administrative cost, additional interest, etc.

- A one time fee or flat fee is less likely to be viewed as a penalty that a per day fee or percentage. The per day or escalating fee may be more challenged because admin costs of a late payment probably would not increase from one day to the next, and the portion of the fee that represents admin costs may not increase proportionate to the amount of rent.

- Before adding late fees to your agreement, consult with an attorney (familiar with CA landlord-tenant law, in your case) to determine both the amount and the documentation you should maintain.