Every experienced landlord knows that even the best tenants can forget to pay rent on time. That’s why specifying the penalty for paying late — and clarifying exactly when a payment is considered late — is critical to protect the landlord’s investment.
A lease agreement creates a tenancy that continues for a fixed period of time. In return for the use and possession of the premises, the tenant agrees pays the landlord rent until the natural expiration of the lease. Further, the tenant agrees to pay a late charge if the rent is not paid on the due date, or within the grace period established in the lease. [See RPI Form 550]
A grace period is the time period following the due date during which rent may be paid without incurring a late charge. When rent is past due and unpaid, it is not delinquent until the running of the grace period. The landlord may then deduct the late charge from the tenant’s security deposit. [Calif. Civil Code §§1950.5(b); 1950.7(c)]
California law dictates a late charge needs to be a reasonable amount related to the landlord’s administrative costs and loss of interest. However, it doesn’t specify what exactly these may add up to. [CC §1940.5(g)]
This ambiguity in law creates a grey area in practice. Is 5% of the monthly rent due reasonable? Is 20% reasonable (definitely not)?
Typically, late charges fall in the 10% or less range, but this custom is not definitively set in statute, and thus not uniformly applied. Some leases stipulate that the late fee amount will escalate the longer the rent goes unpaid.
California also fails to regulate grace periods. The grace period included in the lease may be phrased in a multitude of ways, and provide any number numerical time periods. In other words, it’s completely up to the landlord’s discretion. More troubling, the landlord may not even specify the existence or length of a grace period in the lease, leaving the door open for confusion for the tenant and landlord alike. By not setting an explicit grace period, the landlord leaves themselves open to headache and potential loss of money when the tenant ties up a demand for payment with legal difficulties.
One exception exists: depending on the county where the leased property is located, certain local standardized rules may apply to late charges and grace periods. For example, in Los Angeles County, the late charge may not exceed 5% of the monthly rent payment to be considered reasonable. However, like the rest of the state, Los Angeles County does not mandate a grace period.
California is typically considered a tenant-friendly state. However, in denying statutory grace periods and late charges, California is abandoning both landlords and tenants to the whims of individuals interpreting lease agreements, which are not always thorough, reasonable or fairly applied.
first tuesday suggests that California’s legislature adds rules specifying a minimum grace period for residential leases and requiring the landlord’s handling of a grace period to be transparent and agreed to in each lease. We also recommend defining what “reasonable” means in regards to late charges, standardizing the calculation of the amount charged and requiring that this be stated forthrightly in the lease.