LPA LEASE CLAUSE # 3, Late Fees - Make 'em pay on time

[John@TheLPA]

:SM020:
One of the most important elements of modern residential leases today is the Late Fee clause. In order to encourage timely rent and discourage late payments, I highly recommend you have a solid late charge clause. Having the clause in your lease is only part of protecting yourself against late rent.

The first step is to explain and warn the tenant about the late fee when going over the lease before signing it. I'll even ask the tenant not to sign the lease if they think that late payments are in their future. I also inform the tenants that I belong to a national tenant reporting bureau and have the power to adversely affect the tenant's credit, so.. "Don't mess up with your rent. It's not worth it." If the tenant values his credit and plans on buying a home someday, I remind them that it is very important to prioritize the rent payment and keep their credit clean.

How much should the late fee be? I feel late charges should hurt. I don't want to make it so high that a struggling good tenant will fall even further behind, but it should be a painful enough fee that the tenant will not want to pay again. Ever.

Many tenants who incur a late fee don't really mind paying it in their own good time. That's why it is important to also charge a Daily Late Charge in addition to the initial late fee. It gives the tenant an incentive to hurry up and pay the initial late fee before it grows into an even more painful hit.

Another item we include in our Late Charge clause is a Bounced Check Penalty. I usually make the bounced check charge the same as the inital late fee. I also prepare the tenant that if the rent check bounces, it will cause the rent to be late and they will be responsible for a late charge too.

I want to stress to you that the landlord protection clauses in our lease or any other lease are there to protect you, but sometimes you will have to enforce the lease. Many landlords are afraid to lose their friendly relationship with the tenants when it comes to enforcing the lease. Remember that this is your money we are talking about. This is your property they are occupying and you deserve to have a tenant who lives up to his or her agreement with you. Send the late fee notices and make the tenants pay the penalties. You have your own bills and you want your rent to be on time. That's why you rented to them. - John Nuzzolese

[Aldo]

DISCLAIMER: Late fees are a hot-button for me and I'll try to control myself.

Late fees are an absolute must and I don't question that for a second. My problem with them is a result of landlord greed. If a daily late fee exceeds $3/day, it is either greed or punishment, neither of which is acceptable, especially if there is a base late fee, plus a daily late fee. The original intent of late fees was to compensate landlords for the actual costs realized as a result of receiving a late payment.

There are a lot of variables on this issue which can be covered in future threads. The basis for my thinking is being firm, but fair. I refuse to use a credit card that carries the common $29 late fee, yet many Landlords charge, say, a $25 flat late fee plus $5/day. One day late and the tenant pays more than that $29 and it doubles in a week.

Okay. I'm off of my soapbox (for now). I'd just add that late fees are illegal in some states and are limited in others. Offering early rent discounts have been ruled in many courts to be reverse late fees and, therefore, are disallowed. In states allowing late fees, the fees are governed by the local courts. In every case, those courts will either disallow late fees altogether or limit them to a reasonable amount.

Geez, now I really have a problem. I'm not only off of my soapbox, but I found it empty. Tomorrow is Shower-Day and this is Soap-Month. What's a person to do?

[Dan Auito]

I guess you could go jump in the lake if it wasn't frozen Aldo, :xxrotflma Couldn't resist that one! Ah great points by two great men! :praise: I'm the discount rent guy for paying on time. That has always worked well for me. They hate seeing me at their door on the fourth day so they usually pay right up. If not they get the notice. I have never charged a daily penalty rate but may just institute that in the future. Great post John, Keep'em coming! Dan

[REIaddicted]

I happen to know of a landlord that will discount the rent $20 if you pay early. On the otherhand, if you are 1 day late, you have a fee of $25 and added on top of that is $2.00 a day.

If said renter is late 3 months in a row, She adds $10 to the rent. ( late on $600 a month, after 3 months your rent is now $610 ) if you are late on the $610 you incure the late fees above.

I don't know if it is greed, but it is an attempt to make sure she has her rent on time. She pays of a house then takes another loan out on them. Her houses are never free and clear!

Just a 2 cents here.
Lisa

[John@TheLPA]

I totally agree with discounting rent Dan, in exchange for an early payment or even an ontime rent payment, but I still believe that the late fee should be a painful slap across the fingers. Just so paying late doesn't become a comfortable habit. I also agree with Aldo in the respect of not being greedy, because late fees are not about making money. They are about keeping your tenant's payment behavior in compliance with the lease agreement.

I thought I'd share a little of my material on early rent payment discounts.

Here is my early payment discount clause in The LPA Lease:

4. DISCOUNT CLAUSE A discount is offered to the tenant as an incentive to pay rent before it's due date. If rent is received by 5:00 P.M. ___5____ days before it's due date or sooner, the tenant may deduct $__10.00__ making the payment $____________. Payment shall only be deemed made as of the date received by the Owner or his agent, and not by the postmark on the envelope.


This is the description page about a little form I call the
Early Payment Discount Voucher (http://www.thelpa.com/lpa/forms/ef-earlydiscount.html)

I don't use the form because the lease already covers it, but if your lease doesn't cover early payment discounts, you can always add it in any time!

See ya later gang.
John
www.thelpa.com (http://www.thelpa.com/lpa/index.html)

[Aldo]

The early rent discount can work for those that choose to use it as long as they understand that courts may very well disallow the charge in states that do not permit late fees or otherwise regulate them.

My problem with the concept is that huge numbers of tenants are on Social Security or SSI and don't get their checks until the 3rd of the month. By virtue of their source of income, they can never qualify for the discount. With today's litiguous mentality, I can see a discrimination lawsuit out there somewhere.

[John@TheLPA]

One thing I found out by going to court: The court will do what it wants.
I've seen late fees enforced.
I've seen late fees wiped out completely.
I've seen late fees reduced.
It sure helps to have a good lease, but the judge sometimes wants to re-write your lease in court because he might side with the tenant.

I'd say if you are going to have a late fee in the lease, it sure is a good idea to have a discount clause as well. At least you offer the tenant a break.

Overall, we don't evict a high percentage of our tenant (if we choose them carefully) and we don't wind up in court over late fees (unless we are evicting someone), so I never considered the possibility a lawsuit over having a late fee in the lease.
Of course, my late fee's not due till after the 5th which I feel is reasonabe. The 3rd is a little too strict in my opinion.

I think you guys will agree with my saying:
"The best way to avoid tenant problems is to avoid problem tenants."
-John Nuzzolese
www.theLPA.com (http://www.thelpa.com/lpa/)

[chitchat]

In my state late fees cannot be more than 10% of the rent for the month. I too give a small ($10.00 off) incentive to pay early, and that seems to be incentive enough for the majority of my tenants to take me up on it. If I didn't charge late fees until the 5th, some of my tenants wouldn't pay until the 4th. For me, it would be encouraging them to pay late. Of course I have ghetto area apartments and young tenants, so I take seriously that I have to train them (and myself) right.

If I wanted to really hit them where it hurt I would disallow their MAC id address from the wifi network everytime they're late ;) I don't offer wifi as a part of their lease or even incentive to move in, but they love this feature above all else-and they don't pay anything for it.