Are Late Fee Provisions Enforceable in a California Rental Agreement?

This article discusses the enforceability of a late fee provision in a California rental contract.  The short answer is that such a clause is disfavored – but enforceable – provided the landlord meets his burden of establishing proper disclosure of the fee in the rental agreement, and that the fee is limited to a reasonable estimate of damages actually incurred because of the late payment of rent. 

Civil Code Section 1671 Requirements

The starting point for the analysis is Civil Code section 1671, which states in relevant part:

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(d)  … 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.

Liquidated damages are pre-agreed penalties for breaking a contract. Late fees are considered “liquidated damages” in California.    While liquidated damages can be valid in certain contracts, California law disfavors them in residential lease agreements.  Liquidated damages in residential lease agreements are presumed to be invalid until the landlord proves “it would be impracticable or extremely difficult to fix the actual damages.  Cal. Civil Code section 1671(d). 

The appellate court case of Orozco v. Casimiro,121 Cal.App.4th Supp. 7, is instructive.  There, the landlord (Orozco) sued his tenant (Casimiro) for failing to timely pay a late fee of $50.  The rental agreement stated that the rent was due on the tenth day of each month with a three-day grace period, and that a late fee of $50.00 would be charged if the rent was paid late. The tenant paid his rent on the twenty-first of the month. He did not, however, pay the late fee.

The landlord then served  a “3-day notice to perform covenants or quit” on the tenant. When the tenant declined to comply with the notice, the landlord sued for unlawful detainer.  The trial court issued judgment in favor of the landlord and ordered that the property be returned to the landlord.

The appellate court reversed. The court said that late fees can be collected if two conditions are met. First, the lease must state that late fees may be imposed. The landlord must also establish that its damages from the late payment are “impracticable or extremely difficult to fix.” In this case, the landlord could not meet that second condition and lost the case. 

Disclosure of Late Fee Charge

Thus, for landlords planning on charging a late fee in California, the rental agreement should include the following:

1. The amount charged and when the charge takes effect
2. A clause stating the tenant agrees that this amount will represent actual 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)

Amount of Late Fee

In California, there is no exact amount that is considered reasonable for a late fee but it should not exceed more than 5% of monthly rent.  Tenants can challenge the late fee in court, especially if it is above 5% of total rent.

According to California Civil Code Section 1671, late rent fees must be reasonable and reflect the actual costs incurred by the landlord as a result of the late payment. This means that landlords cannot charge excessive late fees that are disproportionate to the actual costs incurred.

The landlord also has the burden to show the damages flowing from the late payment are “impractical or extremely difficult” to determine.   To do this, the landlord must show an attempt to calculate how much harm was caused by the late rent and that the late fee represents an estimation of this harm.  The landlord must show he or she conducted this analysis before the tenant signed the lease.  The landlord’s estimation must approximate the actual harm suffered, and when estimating this harm, the landlord can only account for lost interest and administrative costs reasonably connected to accounting for and collecting late rent. 

For example, in Del Monte Props. & Invs., the landlord did not do an actual investigation into the harms suffered from late rent.  The court held that since the landlord did not engage in a “reasonable endeavor” to calculate the harm of late rent, and instead set the late fee based on a percentage of the total rent, the late fee was unenforceable.  The Court held that “[i]f no effort was made to estimate the actual losses then the resulting fee cannot approximate the losses.” Del Monte Props. & Invs., 26 Cal. App. 5th Supp. 20 at 927. For example, 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.

Charging too much for late rent in California can result in legal consequences for the landlord. If a landlord charges too much, the tenant can take legal action against the landlord.

Please contact Lynx Legal with any questions regarding the above, or if you are ready to start your case.  We can be reached at 888-441-2355 or info@lynxlegal.com.  Our experienced staff is standing by ready to answer any questions you may have or start your case.