More than a dozen states have laws addressing restrictions on late charges for rent payments. As the landlord, be sure to check with your local NAA affiliate before establishing a late fee policy, and read your state statutes for late fee guidelines and restrictions. Generally speaking, though, implementing and enforcing a late charge policy makes sense, as long as it’s reasonable and relates to your actual out-of-pocket costs or expenses.
Don’t allow residents to form the impression that your late charge policy approves of late rent payments as long as you collect the late charges. Your late charge should be high enough to discourage habitual lateness but not so high as to be unreasonable or illegal. Send written warnings to residents who regularly pay late, clearly indicating that their late payments are a legal violation of the terms.
You can assess late charges in one of several ways:
Daily late fee: Set a daily late charge with a reasonable cap or maximum fee. A late charge of $5 per day, with a maximum of $50, works very well. A resident who is only one day late pays a nominal $5 late fee. A resident who is eight days late pays a heftier $40.
The purpose of the cap is to keep the late charge reasonable and within legal limits. By the time you get to the cap (at ten days late), you’ll have already sent the proper legal rent-demand notices.
Flat fee: The most common late charge is a flat fee, which can be any set amount (within legal limits), due immediately after the grace period. Typical flat fees range from $30 to $100 and are usually set at 4 to 6 percent of the monthly rental rate. One problem is that many residents are only one or two days late, making the flat late charge unreasonable.
Property owners in this situation often end up waiving the flat fee, especially if it’s at the higher end of the range. If the matter ever goes to court, the resident usually challenges the fee, and the court may throw it out.
Percentage late fee: A percentage late fee is calculated as a percentage of the rent payment and ranges from 4 to 8 percent of the monthly rental rate. The customary late fee percentage for late rent payments is either 5 or 6 percent, but be aware that some states have legal limits on late charges expressed as a percentage of the rent.
Some courts may be more willing to accept and enforce this method because the percentage late fee is customarily the method used by lenders who receive an owner’s late mortgage payment.
The flat fee and the percentage late fee methods both fail to provide an incentive for the resident to pay rent promptly. After the late charge has been incurred, the resident often finds other financial obligations more important than your rent. Assessing a daily fee, on the other hand, offers the incentive some residents need to get their rent in sooner rather than later.
Waiving the late charge excuses late payment of rent and can send the wrong message to your residents. If you routinely accept late payments and waive the late charges, you can’t suddenly change your attitude and begin eviction proceedings the next time a resident pays late. Instead, you need to provide a written notice that you’re once again actively enforcing the strict rent collection terms of your rental contract.
You also need to be consistent in applying your late charge policy to all residents equally — or risk facing claims of discrimination. Making exceptions also causes issues in court. Judges often rule that if you break your own rules, they’re no longer rules that can be enforced against your residents. As difficult as it is to be firm at times, you must show consistency.
If you receive a late payment by mail, always keep the envelope with the postmark and the date received clearly indicated in writing just in case the resident wants to dispute the late charge.
Except where restricted by law, you need to evaluate your own increase in costs as a result of late rent payments to determine what a reasonable late charge should be for your property. Put this amount in writing and be prepared to explain your policy if challenged in court.
Additional costs may include phone calls and in-person meetings with the resident, the preparation and sending of warning letters and required legal rent-demand notices, time and costs spent preparing delinquency lists, and additional accounting and bank deposits when you receive the funds.