Are late-fee clauses illegal in California residential lease agreements?
Many landlords place clauses in their lease agreements that require tenants to pay a set fee if their rent is late. Oftentimes these fees can be $50, $100, or even more! Landlords sometimes charge these fees even if rent is only one day late. Some landlords even charge late fees for paying late fees late. In California, many of these fees are likely illegal.
Late fees are “liquidated damages”. Liquidated damages are pre-agreed penalties for breaking a contract. 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 otherwise. Cal. Civ. Proc. Code § 1671(d).
In Del Monte Props. & Invs., Inc. v. Dolan, the court explained what landlords must do to prove their late fees are valid. Del Monte Props. & Invs., Inc. v. Dolan, 26 Cal. App. 5th Supp. 20 (2018). To begin, a landlord must demonstrate that it would be “impractical or extremely difficult” to determine how much harm they suffer from late rent. To do this, the landlord must show that they attempted to calculate how much harm they might suffer from late rent and that their late fee represents an estimation of this harm. The landlord must show that they conducted this analysis before the tenant signed the lease. The landlord’s estimation must approximate the actual harm suffered. When estimating this harm, the landlord can only account for lost interest and administrative costs reasonably connected to accounting for and collecting late rent.
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.
Some landlords attempt to evade the clear mandates of California Law by inserting dishonest language into their lease agreements. For example, some lease agreements indicate that the landlord’s late fee is an estimation of the true harms suffered from late rent. The Court in Del Monte Props. addressed these clauses: “[c]ourts look beyond the language of the contract to determine the actual circumstances of a liquidated damages clause. An agreement to an invalid liquidated damages clause does not insulate it from attack under Civil Code section 1671.” Del Monte Props. & Invs., Inc., 26 Cal. App. 5th Supp. at 23.
While Del Monte Props. & Invs. Inc. was published in 2018, the courts have disfavored liquidated damages in lease agreements for decades. In 1956, in McCarthy v. Tally, the Supreme Court of California nullified a liquidated damages provision in a lease agreement using the same logic as the court in Del Monte Props. McCarthy v. Tally, 46 Cal. 2d 577 (1956). In McCarthy, the court stated: “[o]rdinarily, provisions for liquidated damages will not lie for failure to pay rent as provided in the lease. This is so because in such a case there is no presumption that the amount of damages which may result from a tenant’s breach of a covenant to pay rent is impossible or extremely difficult to fix. McCarthy, 46 Cal. 2d at 583. Even in 1899, the Supreme Court of California stated, “when a tenant fails to pay rent as provided in the lease, the amount of damage is not extremely difficult to fix, and it certainly is not impracticable to fix the amount of such damage.” Jack v. Sinsheimer, 125 Cal. 563, 566 (1899).
Despite the law’s longstanding disfavor for liquidated damages in lease agreements, many landlords still demand and collect arbitrary late fees. Some landlords even utilize collection agencies or eviction lawsuits if tenants refuse to pay. These practices are often illegal as well.
If you believe your California residential lease has an illegal late fee, please contact our tenant lawyers today at 415-504-2165.
