Late fees are illegal
Your lease says you have to pay late fees if your money is paid after the 5th of the month. You signed the lease, promising to pay them. Everybody charges late fees. Even the the California Department of Consumer Affairs says you have to pay late fees. You’ve already paid late fees. Your landlord threatens to evict you if you don’t pay the late fees he charges. Judges act like late fees are the landlord’s God-given right. Property management companies, the California Association of Realtors, and apartment association “official” forms all include late fees in the printed portion. You don’t even question it. Who would?
We went though the same scam with security deposits starting 30 years ago. Security Deposits were supposed to be returned, but landlords kept them. The Legislature said all deposits had to be refundable, so landlords started calling them nonrefundable “cleaning fees,” to which the Legislature responded that all money, including cleaning fees, were “deposits,” under the law. The courts backed the landlords, and the official forms endorsed the thefts, and the laws have continued to be stronger and more restrictive, so that landlords now have to pay up to 3 times the amount of a wrongfully withheld deposit, and the landlord has several procedures to follow, paperwork to present, and the burden to prove everything.
The law regarding residential late fees is almost 30 years old. In 1978, Civil Code 1671 was amended to outlaw virtually all late fees in residential rental agreements. The problem is that it didn’t use the word “late fees,” but instead used the technical legal generic term “liquidated damages,” which would functionally include a late fee by its meaning. Here’s the actual statute:
§1671. Validity of Liquidated Damages Provisions
(a) This section does not apply in any case where another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the breach of the contract.
(b) Except as provided in subdivision (c), a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.
(c) The validity of a liquidated damages provision shall be determined under subdivision (d) and not under subdivision (b) where the liquidated damages are sought to be recovered from either:
(1) A party to a contract for the retail purchase, or rental, by such party of personal property or services, primarily for the party’s personal, family, or household purposes; or
(2) A party to a lease of real property for use as a dwelling by the party or those dependent upon the party for support.
(d) In the cases described in subdivision (c), a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.
If you looked up “late fees,” this statute didn’t show up, until recently, when the case of Orozco v. Casimiro [(2004) 121 Cal.App.4th Supp. 7] was decided. There, for the first time, an appellate court identified late fees as “liquidated damages” within the meaning of Civil Code 1671, and declared them to be illegal and void, absent extraordinary circumstances.
A “liquidated damages” provision is a statement in a contract that sets a particular penalty for breaching a particular part of the contract, in an arbitrary amount of money. Liquid refers to cash. Damages refers to loss suffered from the breach. For example, if we agree to meet every morning at the park entrance to jog, we have a contract. If we agree that whoever comes more than 5 minutes late owes the other one a beer, we then have a “liquidated damages provision” in our agreement. Why a beer? Who knows? What is it worth to have to wait more than 5 minutes in the cold morning air? We agree that a beer is a satisfactory punishment for coming late, having no other standard to go by. The beer is a “late fee,” but it is valid under Section 1671(b) because it is reasonable, and does not concern a residential lease.
Sifting through Section 1671, you see that subsection (c) says that the validity of a liquidated damages clause determined under subsection (d) if it is in a residential rental agreement [“lease” refers generally to all rental agreements]. Unlike subsection (b) where the late fee is valid unless it is unreasonable, subsection (d) makes the late fee void unless: (1) the parties agree to it [meaning it’s in the rental agreement] and (2) “from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.” The Orosco case says that the landlord must both plead [in the complaint] and prove [by evidence at trial] that the late fee provision is not void.
Looking at the application of this language, what is “impracticable or extremely difficult” to show as a loss by the landlord for your paying late? Civil Code 3302 takes all the mystery out of it:
§3302. Money Payable With Interest
The 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.
That interest is the “legal rate” of 10% per year, without compounding, or 1/3650 th of the monthly rent per day. On a $1000 monthly rent, that’s 27 cents per day, or $1.92 per week. The word “deemed” in this statute is significant. It means that even if the landlord claimed personal injury by furrowing his brow and gnashing his teeth over your late payment, pain and suffering over his deep grief that he would have to cover the mortgage out of his savings, paper and processing costs from having to write you a 3-day notice to pay or quit, the LAW says he’s only suffered and is only due the unpaid amount and the few paltry cents of interest. A $50 late fee for being 5 days late is NOT 10% interest, but 370% interest. Because the landlord’s loss is “deemed” to be the unpaid rent plus the daily interest, it is neither impracticable nor extremely difficult to assess his actual losses. The defines his losses for him. Therefore, in light of Section 3302, it can never be impracticable nor extremely difficult to assess the landlord’s losses, and his late fee will always be illegal, and void.
Even with Section 3302, which resolves the conflict by itself, what kind of losses would a landlord suffer from your late payment, anyway? Since the mortgage payment is typically not due until the 15th of the month, if you paid by the 15th, he could pay his mortgage without having to dip into his personal savings at the rate of 27 cents per day [in the above example], and he would suffer absolutely no losses. Since the current savings interest rate is and has been for 20 years far below 10% rate, the landlord’s actual loss starting the 15th would be his actual interest loss on the $1,000, of about 3 cents per day. The bank could tell him how much that is, if he can’t use a calculator, so that amount is not difficult to assess.
Landlords like to wail and grieve over the extra time their property management company had to spend, pacing and gnashing its teeth over your late payment, including making special accounting reports, extra telephone calls, and sending late payment notices, none of which are timed or separately billed, so that such extra efforts are “impracticable nor extremely difficult to assess.” Nice try, but no cigar. Property management companies are paid on a flat percentage of gross rents, usually 5%, so that they get the same amount of money and the landlord gets the same amount of money, whether you pay late or not. That is, if you paid a month late, the property management company would get their 5% of your late rent a month later, and your landlord would get is 95% of your late rent a month later. If the landlord uses a property management company, whatever extra work your late fee might cause them is already factored in, just like your actual utility costs when your utilities are included in your rent.
But it’s in the Lease…
People will sometimes take unfair advantage of others because they have a superior position, and the law has to intervene to protect against those abuses. Labor law arose because employers took advantage of workers’ desperation to find work, and paid low wages and exposed the workers to dangerous and unhealthy conditions, all by contract -the workers agreed to whatever, in order to have some money to bring home for food, rent, utilities and clothing. The law intervened to require decent wages and safe working conditions, and made it illegal to pay less than minimum wage or have dangerous conditions. The law would not allow the workers to agree to less, and punished the employers for even trying to get away with it.
Landlord-tenant law has followed a similar path, as the housing shortage [less than 1% vacancy now] has permitted landlord to exploit their superior position. If you want a place to live, you pay whatever and put up with whatever, and they can steal whatever, and you agree in the contract to shut up and let it happen. This is bad for society, and our Legislature has passed laws to protect you, as it did with labor laws. Rent control, just cause eviction, building inspections, repair and deduct remedies, withholding rent, security deposit protections, and now late fees, have become established in the law, to state that landlords cannot hold you to certain contract provisions, even if you agreed, signed the contract, and wanted them.
The landlord can’t make a security deposit nonrefundable, but many still have that in their lease form. When challenged, the landlord has to face the judge, who says that it is illegal to even try to keep that deposit, and it is “stricken” from the contract, as though it never existed. So it now is with late fees. If the landlord puts them in, your signing the agreement does not waive your rights to not pay them, get them back if you did, or sue the landlord for trying to get them.
This is not to say that the landlord can’t make you pay rent on time. He still has the 3-day notice to pay rent or quit, followed by eviction if you don’t pay. If rent is due on the first, and there is no grace period, then he can give you a 3-day notice on the second, which expires on the fifth of the month [subject to weekends, holidays, manner of service, etc.]. He may not want to bother giving you a notice for being a few days late, because it’s not worth his time. However, once he gives you that notice, you are held to the timeline.
So where does that put me?
If you have already paid late fees in the past and want to avoid a hassle for now, you should at least compile your evidence of that payment, like checks, receipts, late payment notices, etc., and treat the late fees as part of your security deposit, to recover when you leave. This applies even if you paid them to a prior landlord. A security deposit includes amounts charged as “compensation of a landlord for a tenant’s default in the payment of rent”, and late payment is technically a default.
If you have paid late fees in the past which have not been credited back, and now you are short of money and facing eviction, you can use the prior late fees as credits, which make the current eviction notice invalid as excessive. For example, you have previously paid two $50 late fees a year ago, and now you have a 3-day notice demanding only the current rent of $1,000. Although you do owe the $1000 for this month, the landlord owes you $100 refund of the late fees, so that the notice SHOULD only be for $900, the difference with the late fee refund credit. Since the 3-day notice demands $1000, and not $900, the notice is wrong, and you should win the eviction lawsuit. This is something you can stretch out to the last minute, to buy more time to move, and negotiate a nice settlement, because the landlord doesn’t want to have to start the eviction all over again with a new notice.
If you are already late, and the 3-day notice has expired, the landlord has the option to let you stay by accepting your payment, or continuing to evict you, anyway. If you offer the full rent plus the illegal late fee after that eviction notice has expired, he probably can’t both accept your money and legally continue with the eviction. If you are going to work out a deal where you pay and stay, and he’s going to dismiss the lawsuit or not file it, you want to put that in writing and both sign it. Otherwise, you can be tricked into paying in good faith and still be evicted.
If the 3-day notice includes the late fee, the notice is invalid for two reasons: (1) it includes other than rent, and (2) the late fee makes the entire total excessive. Sometimes the notice will identify the late fee separately as a late fee, which makes it easier to attack, and other times, it is buried in a total amount claimed to be due, without showing that the amount is the rent plus late fee. As with the prior payment of late fee example, above, the landlord loses the eviction case, because the late fee makes the amount demanded excessive.
Sometimes the landlord demands a late fee on a separate piece of paper, or orally, because he knows it’s illegal. When you pay the proper rent, he then applies the rent FIRST to the Late Fee, and claims that you didn’t pay all the rent, and tries to evict you for nonpayment of rent. Your payment records should show the amounts paid, in a ledger, so that his failure to credit the full amount you paid to rent stands out as a dishonest practice, and he loses the case for not crediting full payment.