Beware of 'stacked' late fees

Rent it Right

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jan. 7, 2010

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Rent it Right

Janet Portman
Inman News

Q: My landlord and I are having a dispute over the timeliness of my rent payment several months ago. I gave it to the manager on time; the manager claims he got it a day later, and charged the fee. I refused to pay it, and then, in the next month, the landlord deducted the unpaid fee from my on-time rent payment, making that payment late -- and triggering another late fee! This has gone on for three months, so I now have three late fees. Is this legal? --Nancy C.

A: Your landlord has hit upon a creative way of making money -- and ensuring that annoyed tenants will leave at the first opportunity. Under settled principles of law, this scheme is probably illegal (and is unquestionably illegal in at least one state, North Carolina).

Late fees are supposed to compensate landlords for the damages they suffer when they get the rent late, such as the monetary value of the time they take to remind tenants to pay, and the interest they lose on the rent while it remains unpaid. Let's give your landlord the benefit of the doubt for the moment and assume that the first rent check was late and that the fee was reasonable in light of the rule. Let's further assume that your lease declares, in the late-fee clause, that any late fee will be considered "additional rent." This little bit of legal light-handedness allows the landlord to serve a notice to pay rent or quit if the tenant doesn't pay the fee -- after all, it's "rent."

But all the legal tricks in the books won't solve the next problem for your wily landlord: Stacking late fees, which you're experiencing, does not compensate the landlord for the lateness of your one and only truly late rent payment. Instead, the second and subsequent fees are penalties for your refusal to pay. And penalties, in a consumer transaction, are not legal. Your landlord's proper response would be to take the fee from your security deposit, then demand that you top off the deposit (if you refused, he could legally serve you with a pay-or-quit notice). Or, the landlord could serve a pay-or-quit notice, because, as noted, the unpaid late fee is rent.

North Carolina specifically disallows late-fee stacking like you're experiencing. But no matter where you live, you can defend yourself against any eviction based on nonpayment of rent (stacked fees) by explaining that the rent was "late" only once, if at all.

Q: You recently answered a question from a family whose lease predated the mortgage that became the subject of their landlord's foreclosure. You pointed out that, because they "came first," their lease survived the foreclosure. The president of my landlords' association tells me that this right is waived in our lease, written by our lawyer. Will that stand up? --Dave B.

A: It's not surprising that your lawyer has written a lease for you that includes a waiver of this important, tenant-friendly right. After all, the lawyer was hired to protect your interests -- among them the ability to tell a bank, when the owner wants to refinance, that any pre-existing tenants have already waived their rights to survival, in case the bank needs to foreclose. Many lenders examine an owner's leases before making a loan, and will not lend unless this clause is present in every lease.

An even-handed subordination clause, which you'll find in most commercial leases, where tenants are also represented by lawyers, provides some balance. The lawyers partner the subordination clause with a nondisturbance clause, which provides that as long as the tenant is not in breach of the lease, the new owner will not oust him. A third provision, called an "attornment" clause, completes the picture: It prevents a tenant who has signed a subordination clause from leaving a lease situation post-foreclosure when his lease is wiped out (this comes up when the market has softened and the tenant is only too happy to get out from under an over-market lease).

The three clauses, taken together, provide balance and fairness to all involved -- the lender (who can toss a tenant in breach), the tenant (who gets to stay as long as he's living up to the lease), and the new owner (who gets to keep an existing tenant who has the misfortune of paying above-market rents). Most landlord-drafted leases include only the subordination clause, naturally, and a few include an attornment clause, but none include the pro-tenant nondisturbance clause.

Few residential tenants even know what a subordination clause is, and fewer still have the knowledge or ability to press for some balance. For this reason, these clauses are frequently thrown out by judges, who see them as part of a "contract of adhesion," or a contract that a consumer is presented with in a take-it-or-leave-it manner, with no chance to negotiate. When the subject matter of the contract concerns a basic human need, such as housing, judges are even more likely to toss them.

I'd be interested to see what a judge might do with the clause in your form lease, in light of recent federal legislation and the public policy behind it: To protect lease-abiding tenants from the consequences of their owners' defaults. Judges do not hesitate to invalidate clauses that attempt end-runs around federal rights -- landlords' attempts to narrow a service members' right to cancel a lease upon deployment come to mind. Maybe a judge in your state would view your subordination clause in a similar light.

Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of "Every Landlord's Legal Guide" and "Every Tenant's Legal Guide." She can be reached at janet@inman.com.

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