There are so many moving parts to managing an investment property. One of the more challenging items to address when creating your rental agreement is trying to figure out if you should setup any late rent fees and how much those should be.
In this article:
- Late rent fees, are they legal?
- How much should I charge?
- Collecting late rent fees
- Things to consider
The true reason for setting up late rent fees shouldn’t be to make money. The reason you should setup a late fee is to deter tenants from paying the rent late.
Late Rent Fees, Are They Legal?
There is no state law that specifically addresses late fees and courts vary in their rulings regarding these fees. An important note to consider is that a late fee cannot be charged to a tenant unless it is established and executed in a written rental agreement. So if you have an oral rental agreement, you shouldn’t be collecting late rent fees.
How Much Should I Charge?
The industry standard for late rent fees seems to be 10% of the monthly rent. The Department of Fair Housing states that 6% of the monthly rent is the best practice. I am going to guess that everyone in this industry you ask will give you a different answer.
I know that I am not giving you a rock solid answer either and that is because there isn’t one. What I can say though is that the courts are challenging late rent fees during unlawful detainer trials in most of Los Angeles rent control areas. They’re saying that there is no merit to the fee and it is gouging the resident.
Landlords can be asked to prove the late rent fee charged to the tenant is an actual expense incurred by the owner if a tenant pays their rent late. So, let’s say your tenant pays $2,500.00 a month for rent and your late fee is 10%, or $250.00. The late fee on your mortgage is $35.00, how do you explain the $215.00 surcharge to the tenant?
When you’re tryin to figure out your late rent fee, remember that this should be viewed as a deterrent from your tenant paying the rent late. So you don’t want to make it too low or too high. You should figure out the balance so that it does the job.
Another thing to avoid is a daily rental late fee. That’s just a recipe for disaster! You should make it a set fee that applies on a certain date and avoid all the unnecessary calculations. There is too much room for human error while using a daily late fee amount.
Collecting Late Rent Fees
Attempting to collect the late fee is another issue we need to consider. Collecting and enforcing payment of a late fee has its process and procedure. A three Day Curable Breech of Covenant (AKA Three Day Notice to Perform Covenant or Quit) is the correct notice to use to address this issue. You want to reference the paragraph of the rental agreement that defines the rules regarding the late fee and should also reference the time period for which the late fee is owed along with the total of those fees in the event we are collecting for multiple months of late fees.
Things to Consider
You cannot put late rent fees on a Three Day Notice to Pay Rent or Quit. That notice should only be used for rent owed. If you add late fees on this type of notice, it voids the notice and makes your eviction case invalid. So please don’t do that! Even if your rental agreement states that all past due balances become rent, you should not put late fees on a Three Day Notice to Pay Rent or Quit for residential dwellings. It can completely destroy your court case.
The Three Day Curable Breech of Covenant is the same notice that you use for a violation of the written rental agreement such as unauthorized occupants, unauthorized modifications to the property, unauthorized pets etc.
In the event that the tenant doesn’t comply with the notice after the three days are up, then contact your legal counsel to figure out which path your specific case should take. Your attorney may say to start an eviction or advise you to serve a second notice to show the court you even asked twice. It’s important to seek advice from your legal counsel before you take any further action.