Can you charge a late fee for rent in California?

[Tamara Abel]

Hi! I'm new to the landlord position and have a question. I'm setting up a lease and wanted to know if anyone knew if I could, as an individual landlord, have a late fee stipulation in the lease. I am not a property manager, obviously, and had heard that only property managers could charge late fees. So, if I can't...what wording COULD I use in the lease to kind of have the same thing in there but with different wording. Thanks!

[Brian Burke]

In short, yes. But there are limits on how much you can charge. The problem is, there is no bright-line rule.

Until a couple years ago, there was no reported case in California addressing “late fees” in the landlord/tenant context. In 2004, the Appellate Division of the Superior Court of Los Angeles, in Orozco v. Casimiro rejected the tenant’s argument that late fees are always void. In this case a tenant who was assessed a late fee of $50 (on rent of $600/month) argued that a fixed late fee in a residential lease is always void because (1) late fees are only allowed when it is impracticable or extremely difficult to fix actual damages, (2) the landlord is entitled only to interest for late payment of rent; and (3) interest is not impracticable or extremely difficult to fix. The tenant also argued that even if the fees are allowed, the owner must plead and prove that the damages were impracticable or extremely difficult to fix, which he did not do in this case.

The court rejected the tenant’s first argument that late fees are not impractical to fix because interest is the only damage allowed. The tenant’s argument was premised on Civil Code Section 3302, which states that “[t]he detriment caused by the breach of an obligation to pay money only, is deemed to be the amount due by the terms of the obligation, with interest thereon.” However, the court ruled that the owner is also entitled to “administrative costs related to collecting and accounting for late payments.”

Despite the favorable ruling on the validity of late fees in rental agreements, generally, the court ultimately invalidated the fee at issue because the owner had failed to plead or prove that the damages were extremely difficult to fix. The court stated “[a]lthough respondent may have been able to present evidence below that would have shown in this particular case that damages resulting from the late payment of rent were impracticable or extremely difficult to fix, he did not do so.” Therefore the late fee was not entitled to the presumption of validity.

Tips from the California Apartment Association on how you can increase the likelihood of having your fee upheld in court:

Put the fee in the rental agreement

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

Have some information in your file about how you arrived at the amount of the fee, demonstrating the difficulty of determining the actual administrative cost (in addition to interest). You will need this if your fee is challenged in court.

A one time fee of a fixed dollar amount is less likely to be viewed as a penalty than a per-day fee or percentage. The per-day fee is more subject to challenge, since the administrative costs of a late payment, in most circumstances, would not increase markedly from one day to the next. The percentage fee is susceptible to challenge because the portion of the fee the represents administrative costs may not increase proportionate to the amount of rent.

Consult with an attorney before you add a late fee to your rental agreement to determine both the amount and the documentation you should maintain.