Landlords and property managers have a profitable mechanism to deal with tenants who pay their rents way past the due date: imposing a late fee penalty.
It’s permissible and common for landlords to charge late fee penalties for rent payments, and these penalties are quite reasonable. Typically, they account for 5-10% of the monthly rental payment. However, in order to charge a late fee penalty, the landlord must ensure these terms are enshrined within the rental contract. If such a clause does not exist in the contract, the landlord cannot demand a penalty out of the blue.
Charging a Late Fee Penalty
It’s wise to seek guidance from state and local legislation. Rental laws and legislation's dictate the percentage of the late fee penalty a landlord is allowed to charge within a state or locality. In some cases, landlords can charge a percentage of the total amount and in others, they can charge late fee based on each day the rent is delayed. Usually, there’s a maximum amount of penalty that a landlord is permissible to charge each month.
Legal experts believe that the late fee percentage or daily rent penalty should be “reasonable” and within the boundaries of around 10% of the monthly rental rate. Our research from courtroom debacles over late fee penalties reveals that generally, courts believe that a late of 5% or less is a reasonable sum. However, it’s not necessary that the same logic will apply in courtrooms across your state or region.
Experts also believe that landlords should maintain an ethically correct response to late payments, in case the tenant is embroiled in financial constraints. Allowing a comfortable grace period of at least five days is required in most states before late fee penalties are applicable. Charging more than 10% as a late fee is not acceptable and is considered exploitative.
Legal regulations often dictate when the late fee penalties are applicable. In some states, a landlord is allowed to charge late fee penalties on the very first day when rent is delayed. In other states, landlords must allow their tenants a grace period of five dates before implementing penalties.
However, establishing a grace period doesn’t change the due date for the rental payment. A late fee doesn’t is not accrued if the tenant deposits the rent before the grace period ends, but it is still regarded as legally delinquent.
Adding Penalties to the Lease Agreement
It’s crucial to enclose all late penalty clauses within the rental agreement. All rent-related stipulations and clauses must be added with great care and consideration to all potential problems that may arise later, including delays in rent payments.
A strong lease agreement includes the following clauses:
- The exact amount of rent
- The exact due date for the rent
- The alternative due date should the actual due date fall on the weekend or during holidays
- The rent payment method (online, in-person or mail)
- The exact duration of the grace period
- The penalties to be charged when rent is late
- Termination of tenancy clauses when rent is unpaid
It’s essential to refer to the local and state legislation's while designing the clauses of your lease agreement, especially rent payment and late fee penalty terms. You will need the assistance of an attorney who specializes in landlord-tenant laws.
Dealing with Problematic Tenants
Suppose you offered your tenant a lengthy grace period and decided to waive off the late penalty out of concern for their financial well-being. After this leniency, your tenant has started demanding a lengthy grace period with regular delays in rent payment. How should you deal with this situation?
Such scenarios are common, which is why, we cannot stress enough on the significance of enforcing the terms of your lease agreement with strictness. It’s crucial to collect late fee penalty the first time your tenant delays the payment. When tenants are not scared by the threat of penalties and consequences, they are less likely to adhere to deadlines and payment schedules.
However, once you charge the late fee penalty, the tenant is less likely to repeat problematic behaviors. How should you deal with the situation if you have already committed the error of waiving the late fee penalty?
Start being strict now. As soon as you alter your behavior, you will notice a shift in your tenant’s behavior as well. Sit down with your tenant for a detailed discussion on how you will be enforcing the late fee penalties outlined in the contract. You can also dispatch an official letter to the tenant, reminding them of the clauses in the agreement.
Communication is Key
It’s vital to maintain an open communication to avoid any confusions and problems that may strain the landlord-tenant relationships. Are you notice a consistent pattern of late payments? If yes, then sit down with your tenant and tell them that such behavior is unacceptable.
However, if your tenant has genuine constraints, it’s wise to accommodate them. For instance, if your renter’s payday falls after the due date, you must accommodate them by changing the lease terms. Many landlords refuse to change the lease terms and continue collecting late fee penalties. Inconveniencing your client beyond their means will only encourage them to vacate your property, giving rise to other costs, such advertising the vacancy and screening new tenants.
Both landlords and tenants should be considerate of their obligations and responsibilities. A landlord must ensure that there’s ample clarity on the payment schedule, late fee penalties and other stipulations of the contract. A tenant must be upfront about the payment schedule and any difficulties they are likely to encounter before signing the agreement.
If the difficulties arise after the lease is signed, it’s crucial to sit down with the landlord and work out an arrangement that is mutually beneficial. Open and active communication helps both the landlord and the tenant in avoiding expenses and issues that create burdens. Problematic behaviors will create hurdles for both parties.