In California, rents keep rising, and some tenants find themselves unable to pay on time. Late fees may come as an unwelcome expense for tenants, but a necessary one for landlords who depend on the monthly rent they collect to pay mortgages or other expenses.
Although rent is normally due on the first of the month, the day a late fee takes effect depends on whether or not the landlord has set up a grace period.
The number of days in a grace period varies, although three to five days is usually standard. However, there is no law in California requiring a grace period; it is up to the landlord’s discretion. Tenants should read their contracts to make sure they understand the deadlines and expectations.
A common point of confusion is whether the grace period legally allows for rent to be paid later. Technically, if rent is due on the first, it is considered late on the second. The grace period only allows for a certain number of days before a late fee takes effect.
For example, if rent is due on the first and the grace period is 3 days, then a late fee is applied on the 5th. If rent is due on the first and the grace period is 5 days, then a late fee is applied on the 7th.
Studies have shown that payment problems are a top concern for independent landlords across the United States. A landlord could incur damages resulting from late payment such as financial hardship or the inability to pay mortgages and other monthly expenses on time.
While many landlords charge a 5% late fee, some may go even higher. However, landlords should think twice before charging exorbitant late fees in California, lest it be considered a penalty. In the landmark court case of Orozco v. Casimiro, a landlord took his tenant to court when the tenant did not pay rent on time and was not willing to pay the $50 late fee (almost 10% in 2003). Although the courts originally ruled in favor of the landlord, the ruling was appealed and eventually reversed in favor of the tenant.
The appeal courts found that the landlord was not compliant with California Civil Code 1671. Although this section of the law does not go into specific amounts for late fees, the courts view late fees as “liquidated damages.” Essentially, landlords need to prove they have an agreement with the tenant that the amount charged represents the cost of the damages sustained, and that it would be “impractical or extremely difficult to fix the actual damages” (CA Civil Code 1671).
Some takeaways for landlords
For landlords planning on charging a late fee in California, there must be a section in the rental agreement determining the following:
1. The amount charged and when the charge takes effect
2. A clause stating the tenant agrees that this amount will represent the damages
3. A clause stating the damages are “impractical or extremely difficult to fix”
(CA Civil Code 1671)
4. A clause stating the amount represents a “reasonable endeavor…to estimate fair
average compensation” for the damages (Orozco v. Casimiro)
Some takeaways for tenants
Tenants should make sure they have checked their lease agreements for when rent is due, if there is a grace period, and if there will be any applicable late fees. To avoid late payments, tenants can set reminders on their phones, initiate automatic bank transfers, or use a free AutoPay service like Tellus.
Late fees are legal in California. Although state law does not give a fixed amount, most lease agreements have a clause stating the late fee represents the amount of damage a landlord would sustain from late rent. 5% is usually standard.
For both landlords and tenants, it is important to remember that renting involves a relationship. Good communication is key to ensure success.