Set the Right Tone with Late Fees
Understanding the laws around late fees and grace periods (and applying them!) will make you a more effective landlord.
Welcome to our series on the importance of a comprehensive lease! A comprehensive lease is a written agreement that covers all types of circumstances—foreseen and unforeseen—that you or your tenants may encounter. Unlike basic leases—such as the generalized ones you find online or in an office supply store—a detailed lease is a more robust document that ensures you are protected from damage or lawsuits.
In the first post we talked about security deposits and how a professional lease could make you money. In today’s post, we’re going to talk about late fees.
I once had a tenant I was on really good terms with—we were friends before we entered into the landlord-tenant relationship—but he didn’t always pay his rent on time. As a newbie landlord, I didn’t have a professional lease, nor did I charge late fees. After a while, it started to strain the relationship.
Finally, I had to tell him I would start charging late fees. It took one time before he realized I was serious about timely payments. Adopting a professional lease let me set the right tone with this tenant and redefine the terms of our relationship. I no longer felt taken advantage of, and he understood what I expected. I’ve since learned that a comprehensive lease is a landlord’s best friend. It makes the relationship between landlords and tenants much more professional and sets the right tone from the start. Also, having a clause about late fees in my lease continues to help motivate my tenants to pay on time.
Late fees and grace periods for Rental Payments
A late fee is charged when a tenant does not pay their rent on the due date. Depending on the state, it can be applied either as a flat rate or a daily fee for each day of unpaid rent. States vary in how much they allow landlords to charge and when the late fee applies. The period of time in between the due date for rent and when the late fee applies is known as the grace period.
A common misconception is that grace periods allow for rent to be paid late. This is not their function. A grace period only allows for a stretch of time before a tenant is hit with a late fee. For example, if rent is due on the 1st and the grace period is 3 days, then a late fee is applied on the 5th. If rent is due on the 1st and the grace period is 5 days, then a late fee is applied on the 7th.
State laws also vary when it comes to grace period. In some states, there is a lot of flexibility. Whatever you decide for your tenants, make sure the policy follows your state laws and is written into your lease.
Late fees by state
Some states, such as California and Texas, only require that late fees be reasonable and written into the lease. We’ll take a closer look at some of the legal precedents for late fees in California in a future post. The maximum allowed in Maine is 4%, while in Maryland it’s 5%. North Carolina allows for $15 or 5%, whichever is greater. Tennessee and New Mexico cap late fees at 10%. Other states, like New York, New Jersey, and Illinois, do not have laws concerning late fees.
Grace periods by state
Remember, the number of days starts counting after rent is due. So with rent due on the 1st and with a one day grace period in Texas, the late fee applies on the 3rd. Oregon allows for four days, while Arkansas, Tennessee, and North Carolina allow for five. Maine allows for 15, while Massachusetts has a 30 day grace period. California, Nevada, Washington, and many other states do not have laws concerning grace periods.
Learn More: Late Fees in California, Illinois, Texas, and Washington, D.C.
If a state has requirements for late fees, but not grace periods, it means the landlord can choose whether or not they would like to set up a grace period and how many days that will be. Similarly, if a state has a requirement for grace periods, but not late fees, landlords must respect the grace period according to the law, but may charge reasonable late fees. The most important part is ensuring that any policies are written into your comprehensive lease.
Having a professional lease is a guide to how you will handle these types of situations when they arise. Consistency is key. You do not want to be the type of landlord who changes their policies from month to month. Nor do you want to be Mr. Pushover and have to toughen up later if you have a tenant who tries to take advantage. If you don’t follow your own policies from the start, how will you expect your tenants to follow them? Enforcing things inconsistently makes you lose credibility as a professional landlord. Your comprehensive lease will help to keep you on track.
Tune in next week for more clauses to cover in a professional lease. If you’re ready to make the switch and want to adopt your own detailed lease, give the Tellus superapp a try. We make sure our protective lease covers all circumstances you may encounter.