Whether you are a landlord or tenant, it’s important to understand late fees for rent and how they are enforced. Most leases and rental agreements have a late fee clause. A late fee benefits both the landlord and the tenant by making sure that the rent is paid on time. Timely rent payments protect the landlord financially and encourages healthy financial habits for renters. There are a few different options for how to calculate late fees which are often addressed in state rental laws. The most important thing to remember about late fees is that they need to be clearly spelled out in the terms of the lease.
Late Fees for Rent and The Lease
Rent is legally due on the date specified in the lease or rental agreement, most commonly on the first day of the month. However the due date doesn’t have to be on the first. Rent can be due on the day of the month that the tenant moved in, or the due date can be negotiated between the landlord and the tenant prior to the move-in date. If a tenant doesn’t pay the rent when it’s due, the landlord may charge a late fee. If your lease agreement includes a late fee, the amount of the fee and any grace period should be clearly defined. The details should include where and how the rent should be paid and exactly which day the late fee will be imposed. Tenants and property owners strive for a harmonious relationship, habitual late rent payments will make that difficult. Occasionally a financial or personal situation arises that results in a late rent payment. The goal is to discourage late payments from becoming a habit.
If a lease or rental agreement doesn’t mention late fees then the landlord can’t impose one, no matter how reasonable or fair they think it might be. As an example, let’s say a tenant mails a rent check on the last day of the previous month and it arrives three days late. The landlord then sends a text or an email to notify the tenant that an extra $25 is owed because the check wasn’t received by the due date. Is the landlord within his or her rights to do so? The answer is no.
Late Fees for Rent by State
It’s best to check your state’s rental laws before including a late fee in a lease or rental agreement. Some states dictate exactly how much a landlord can charge, while other state laws don’t address the issue of late fees at all. Many state rental laws simply issue guidelines that include the terms ‘reasonable or fair’ when it comes to imposing late fees, including in California and Texas, other states are more specific. For instance, in the state of Iowa, late fees vary based on the total monthly rent. For monthly rents of $700 or less, the limit is $60 per month; for rents exceeding $700 per month, the late fee maximum is $20 per day or a total amount of $100 per month. Additionally, general legal principles prevent landlords from charging late fees that are unreasonably high such as 10% of the rent or more.
Calculating Late Fees for Rent
A typical late fee for rent is usually between $50 and $100 but the fee can also be influenced by how much the rent is (as in the Iowa example above) or sometimes it’s a percentage of the rent. Again, it’s best to start by checking local rental laws. If your late fee is a percentage of the rent, then somewhere between 3% and 5% is fairly common. As an example of how to calculate a late fee percentage, if the lease indicates that the late fee is 5%, and the monthly rent is $1,000 then the fee would be $50. Is it common for a late fee to begin the very first day after the rent is due? Not necessarily, as your lease may also have a grace period.
Grace Periods Explained
A grace period in the terms of a lease is an extra period of time that allows a few additional days for the rent payment to be received after the actual due date without incurring a penalty. Grace periods are very common in real estate and can also be found in other billing arrangements such as for credit card agreements or insurance contracts. They can even be found in auto loans.
Grace periods for rental properties are typically 3 to 5 days. For instance, a tenant whose lease agreement states that rent is due on the 1st of the month but has a 3-day grace period means that the rent is not officially late until the 4th day of the month. If the lease has a 5-day grace period, the late fee wouldn’t be imposed until the 6th day of the month. A common misperception by renters is that a lease with a grace period postpones the due date for the rent until the end of the grace period which is not true. It’s best for tenants to not make a habit out of paying the rent within the grace period instead of on the actual date that the rent is due.
Should Every Lease Include a Grace Period?
It’s important to note that a landlord doesn’t necessarily need to provide a tenant with a grace period unless state law requires it. However, there can be advantages to providing a few extra days for receiving the rent. For instance, if the due date for rent falls on a legal holiday or a Sunday, the tenant might benefit from an extra day or two for the bank to open or for the check to move through the mail. Of course, tenants should be mindful of postal and bank holidays and similar delays and should mail the rent check accordingly. Also, some tenants live paycheck to paycheck so it might be difficult to have the rent check clear on the same day that a paycheck is deposited. If a lease agreement requires or includes online payments as an option, those transactions are usually only processed on business days. Additional processing time for the bank should be a consideration in deciding whether a late fee should be imposed.
Some states have rental laws that address different aspects of grace periods so reviewing state rental law is the best place to start when deciding how long a grace period should be. There are states that provide mandatory grace periods. For instance, in Connecticut a late fee can’t be charged until nine days after the due date for rent. New Jersey landlords have to wait five business days before charging a late fee, but only when the tenants are elderly or low-income. Landlords in Texas can only charge reasonable fees (as defined by the statute) and can’t impose a late fee until the rent is two full days past due.
Enforcing Late Fees
A rental agreement or lease is a legally binding document and the majority of tenants pay their rent on time, however sometimes things come up that can impact the timing of a tenant’s rent payment. When trying to decide how to enforce late fees, a good place to start is communication. Sometimes special circumstances arise that can affect a tenant’s ability to pay rent on time, especially situations that are completely out of a tenant’s control like a pandemic. If a tenant is aware that they won’t be able to pay on time, they should be proactive in reaching out to the landlord to explain the situation whether it be by phone call, text or email. Similarly, if the landlord doesn’t receive the rent by the due date, then he or she should contact the tenant immediately to see if there is a problem or special circumstance. This is especially true if the tenant has proven reliable with rent payments in the past.
If the end date of the rental agreement’s grace period has passed, it’s best to start with a phone call to get more information. Share with the tenant that the rent has not been received, as it’s possible the check may have gotten lost somewhere in transit. If the lease agreement specifies that the rent is to be directly deposited into the landlord’s bank account, the problem may be with the bank. Notifying the other party of the situation will offset any possible tension that could arise from a misunderstanding about the late rent. Ultimately the decision to enforce a late fee is up to the landlord, but if they choose to do so, it’s best to impose the late fee immediately to discourage late payments in the future.
A lease with a stated late fee and reasonable grace period results in a better relationship between landlord and tenant. Much like late fees for any other credit agreement, a late fee for rent encourages tenants to pay on time. In most states, landlords can charge late fees as long as the terms and conditions of the fee are spelled out clearly in the lease or rental agreement and comply with local rental laws. If a tenant consistently makes late rent payments, it’s well within the rights of the landlord to find another tenant.