Unenforceable Late Fees

Last June, in the context of a mortgage foreclosure case, the Appellate Division of the New Jersey Superior Court struck down a 5% late fee and an enhanced default interest rate (of more than 5% above the regular interest rate) as unenforceable penalties. Even though that case is now before the New Jersey Supreme Court for review, its ramifications are being felt in other areas. A recent unpublished case, Kuhn v. Hopkins, has confirmed the advice we have long been giving our clients. Rental late fees that are not reasonably related to a landlord's actual or anticipated expenses are not enforceable and constitute a penalty that the courts will not honor. In this case, the lease called for a $35 per day late charge, which, on a monthly basis, constituted effectively about 25% of a month's rent. One of the more notable aspects of this decision is that it arose in the context of a commercial tenancy where courts are often thought to be less tenant oriented.

While this leasing case did not suggest any guidelines for a late fee that would withstand challenge and there is no assurance that any particular provision would pass muster, we think that courts may be more disposed to uphold late charges which contain the following elements. First, the late fee should be denominated as an administrative late charge to cover the landlord's extra expenses in obtaining payment. Second, the fee should be graded in such a way as to bear some relationship to the lateness of the payments. Lastly, and most importantly, the late fee should be reasonable in amount. Courts refuse to enforce stiff late charges for the very reason that most landlords want them. If the purpose of the charge appears to be coercive, it just won't fly. Courts are willing to compensate landlords, but not to punish tenants.