Illegal Late Fees

Many landlords have an illegal late fee structure.  At the bottom of this post is a link to an Alabama Supreme Court case about this.

Late fees are supposed to be “liquidated damages.” A pre-agreed amount of money that will compensate the landlord for late payment because it is difficult to calculate damages exactly.  The landlord does not just lose the value of the money, which is a simple interest calculation. No, the landlord might also be late on his mortgage payment as a result, his credit score might suffer as a result, his insurance rates and credit card interest might increase as a result, and so on.

Most landlords think of the late fee as punishment for not paying the rent on time. If the punishment is large enough, it will deter the tenant from future late payments. That is the thinking.

Only government is allowed to punish adults.  Landlords are legally not able to punish people.  Excessive or unreasonable late fee structures will be treated by the courts as penalties, and declared void.

This issue has previously ripped through the self-storage industry, which had similar late fee policies to landlords. After the class action lawyers got finished with the self storage owners (large and small!) virtually all companies moved to a simple 5% late fee, plus simple interest on the rent if it remained unpaid for more than 30 days.

In other words:

  • No late fees that are 5% for the first month and 5% for each month it remains late
  • No late fees that are a certain percentage or dollar amount per day
  • No late fees that are 5% after the 5th and another 5% after the 10th of the month.

Please read the entire case, HERE and discuss with your attorney before you get into trouble!