Other than properly screening your tenants before they move in, charging a late rent fee is one of the best defenses against late payers. However, it can be tough to know how much to charge and what the law says. Therefore, below we’ve detailed the best practices you should follow when creating and implementing late rent fees.
Setting your price
When it comes time to determine the cost of your late rent fee, you should not choose an excessive number because your case may get thrown out of court should you take your tenants to court for non-payments. We recommend charging a certain percentage of the rent: anywhere between three to ten percent. You can also charge a flat fee, such as $150-200, but most experts recommend using a percentage amount. However, anything more than ten percent will most likely be seen by the courts as an excessive burden on your tenants. Despite this, many states will allow you to increase late rent fees as more time passes between when the rent was due and when the tenant actually pays it. For example, you can start charging five percent of the rent after the rent is 10 days late and then increase it one percent every ten days.
Never use late rent fees as a way to increase your revenue stream, but instead use it to motivate your tenants to pay on time and to stabilize your revenue. Hopefully, late rent fees will be the proper consequence for your tenants that will keep them from ever paying you late.
Forgiving late rent fees
Even the highest quality tenants will sometimes accidentally miss a late payment. Usually when you notify these tenants of the problem, they will quickly respond by telling you it was a one-time mistake. If it is the first time that they have missed the rent and they are apologetic, you can usually forgive the late rent fee in good faith. You should never write this into the rental agreement, but instead do this only as a favor to the tenant. For example, if you have had other problems with a tenant before they forget to pay their rent, you may not want to give them leniency on the late rent fee.
However, keep in mind that forgiving a late rent fee will strengthen your relationship with the tenant and hopefully increase your retention rates; if your tenants feel like you have their back, they will be more likely to want to stay.
Although it is a good idea to forgive a late rent fee for the first violation, don’t fall into the trap of repeatedly forgiving the same tenants. After the first late payment, you should always charge your tenants the specified late rent fee. If the tenant feels they can pay their rent late and not face any consequences, they will be more likely to continue paying late. Once the tenant has been late one time, they need the late rent fee as a gentle reminder that late payments will hurt them financially.
Always include your late rent fee policy in every rental agreement and make sure new tenants know that it is a consequence of paying late. Include the amount that will be charged, the grace period after the rent is due before the fee is implemented, and after how much time the late rent fee will increase. Including all of this information in the rental agreement will make it legally binding and be important evidence that your tenant is aware of the fees.
Never allow tenants to continually get away with paying late. As mentioned above, doing so will only encourage your tenants to continue to pay you late. Only forgive late rent fees once and make it clear that you are not afraid to implement consequences if they pay their rent late again. Inform them that it seriously affects you as a landlord when they don’t pay their rent on time. If you do notice that a tenant is repeatedly late on their rent and paying late rent fees, you should try to communicate with them and figure out why they might be repeatedly paying late. It’s in the best interest for both you and your tenant to figure out a compromise where they can pay their rent on time; you’ll have a stable income stream and the tenant will avoid late rent fees. If you agree to an alternative payment schedule, such as changing the day the rent is due or receiving payments bi-monthly, make sure that you document this agreement in writing with the tenant’s signature attached as authorization.
What does the law say?
You cannot legally charge late rent fees if you did not write this term into the rental agreement. If it is a part of the rental agreement and the tenant refuses to pay it along with their late rent, you can file an eviction notice (Cure or Quit Notice) to get them to pay the fee or move out.
Although it is legally acceptable for you to charge a late fee, the courts only allow you to charge your tenants a “reasonable” fee; the amount will depend on the amount rent costs each month. For example, tenants who pay less each month will need to pay a higher percentage for their late rent fees in order to make sure the amount is enough to actually motivate them. However, to protect yourself, you should not exceed ten percent of the rent. Even if a tenant agrees to pay for an excessive late fee, such as fifteen or twenty percent of the rent, they can refuse to pay it later and take you to court. The court will likely rule that the fees must be waived because the cost is excessive. Not only will you lose out on the late fee, but you will also have to pay the fees associated with a lawsuit. Tenants can also pay excessive late rent fees and then later take you to small claims court to get this money back. Therefore, you should simply avoid charging an excessive amount for late rent fees in the first place so that you avoid a lawsuit altogether.
Only 20 states have specific laws regarding late rent fees, but none are exactly the same. We’ve paraphrased the policies for each state below, but you should do additional research to make sure you are complying with all applicable state laws.
- Arizona: Late rent fees must be specified in the rental agreement
- California: Late rent fees will only be enforced if the fee is a reasonable amount and the fees are specified in the rental agreement
- Connecticut: Late rent fees may be charged but only until the rent is more than nine days late
- Delaware: Late rent fees cannot exceed five percent of the monthly rent and cannot be imposed until the rent is more than five days late
- Washington D.C.: Late rent fees cannot exceed five percent of the monthly rent and cannot be imposed until the rent is more than five days late; the late fee must also be included in the rental agreement.
- Hawaii: Late rent fees cannot exceed eight percent of the monthly rent
- Iowa: For rents $700 or less, late rent fees cannot exceed $12 per day with a maximum of $60 per month; For rents more than $700 a month, late rent fees cannot exceed $20 per day with a maximum of $100 per month
- Maine: Late rent fees cannot exceed four percent of the rent and cannot be imposed until the rent is more than fifteen days late; the late fee must also be included in the rental agreement
- Maryland: Late rent fees cannot exceed five percent of the monthly rent
- Massachusetts: Late rent fees cannot be imposed until the rent is at least 30 days late
- Minnesota: Late rent fees cannot exceed eight percent of the monthly rent and the rental agreement must specify when the fees will be imposed
- Nevada: The late fee must be included in the rental agreement
- New Jersey: Landlords must wait at least five days before imposing a late fee if the dwelling is occupied by a senior citizen receiving specified government benefits
- New Mexico: Late rent fees cannot exceed ten percent of the monthly rent
- New York: Landlords can immediately begin charging a late fee
- North Carolina: Late rent fees cannot exceed $15 or five percent of the rental payment (whichever amount is greater) and cannot be imposed until the rent is at least five days late; late rent fees can also only be imposed once for each late rental payment
- Oklahoma: Late rent fees are permitted, but cannot be preset
- Oregon: Daily fees cannot exceed six percent of a reasonable flat fee, and the total cannot exceed more than five percent of the rental payment; late rent fees can also only be imposed until the rent is at least four days late
- Tennessee: Fees cannot exceed ten percent of the rental payment and cannot be imposed until the rent is at least five days late; Sundays and legal holidays cannot be counted as “day five”
- Texas: Late rent fees must be included in the rental agreement and can be imposed after the rent is at least one day late; fees must be a “reasonable estimate” of the damage caused to the landlord; tenants are also allowed to charge an initial fee and a daily fee for each day the rent is late