Legal Question in Landlord & Tenant Law in California

Greetings! Thank you for letting me answer your question: Late fees are tricky!

SHORT ANSWER: If the tenant knows what they are doing, they might be able to get out of the late fees.

LONG ANSWER:

The law regarding residential late fees is almost 30 years old. In 1978, Civil Code 1671 was amended to outlaw virtually all late fees in residential rental agreements. The problem is that it didn't use the word "late fees," but instead used the technical legal generic term "liquidated damages," which would functionally include a late fee by its meaning. Here's the actual statute (read it with a grain of salt�lots of legal mumbo jumbo):

�1671. Validity of Liquidated Damages Provisions
(a) This section does not apply in any case where another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the breach of the contract.
(b) Except as provided in subdivision (c), a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.
(c) The validity of a liquidated damages provision shall be determined under subdivision (d) and not under subdivision (b) where the liquidated damages are sought to be recovered from either:
(1) A party to a contract for the retail purchase, or rental, by such party of personal property or services, primarily for the party's personal, family, or household purposes; or
(2) A party to a lease of real property for use as a dwelling by the party or those dependent upon the party for support.
(d) In the cases described in subdivision (c), a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.

If you looked up "late fees," this statute didn't show up, until recently, when the case of Orozco v. Casimiro [(2004) 121 Cal.App.4th Supp. 7] was decided. There, for the first time, an appellate court identified late fees as "liquidated damages" within the meaning of Civil Code 1671, and declared them to be illegal and void, absent extraordinary circumstances.

A "liquidated damages" provision is a statement in a contract that sets a particular penalty for breaching a particular part of the contract, in an arbitrary amount of money. Liquid refers to cash. Damages refers to loss suffered from the breach.

Late fee provisions (as liquidated damages in rental agreements and leases) are governed by CC �1671. See CC �1951.5. For the supreme court's analysis of legislative intent concerning CC �1671, see Ridgley v Topa Thrift & Loan Ass'n (1998) 17 C4th 970, 73 CR2d 378, discussed extensively in California Mortgages, Deeds of Trust, and Foreclosure Litigation, chap 8 (4th ed Cal CEB 2009).

Attorneys for landlords argue that a charge to compensate landlords for costs occasioned by the late payment of rent by a residential tenant may be added to a rental agreement as liquidated damages provided the precise provisions of CC �1671(d) are met and the parties agree that the amount in fact bears a reasonable relationship to the actual costs and damages incurred by the landlord because of the late payment. (In commercial tenancies, the presumptive validity of the late charge is arguably established by CC �1671(b).) See ��8.39-8.40. Tenant attorneys assert in either situation, however, that such fees (at least in actions for possession) are governed entirely by the unlawful detainer statutes and are, therefore, nonrecoverable. See CC �1671(a); Jack v Sinsheimer (1899) 125 C 563, 566, 58 P 130.

The contention that late fees are always void was rejected by the appellate department of the Los Angeles Superior Court in Orozco v Casimiro (2004) 121 CA4th Supp 7, 17 CR3d 175. However, in that case the court overturned the trial court's judgment for possession and statutory damages in favor of the landlord because the landlord had sought a $50 late fee on a $601 per month rent and had failed to plead and prove that damages on account of the late payment of rent were impracticable or extremely difficult to prove. The court did not state that the written agreement between the parties contained the standard language of CC �1671 although it seems likely that it did not and there is no indication whether the pleading and proof requirement would have been required had the lease contained the necessary agreement of the parties. See form clause in �1.41. The opinion is instructive in that at least this court believed that landlords wishing to collect a late fee in an unlawful detainer action must plead and prove that actual damages were impracticable or extremely difficult to prove and that the amount was reasonable.

NOTE: The issue of late fees is one that continues to surface in landlord-tenant matters. Several tenants' attorneys have successfully argued that if a landlord has consistently charged "excessive" late fees that were paid by the tenant, then those "excessive" sums must be credited to rent payments, thus invalidating a 3-day notice to pay rent or quit.

BOTTOM LINE: If the tenant knows what they are doing, they might be able to get out of the late fees.