Living with Late Charges

It's on the books, it gets little attention, and yet it is one of the most powerful tools a board has to make the co-op owners take responsibility for paying maintenance on time. Yet time and again, confusion over how the late fee works ends up costing boards more time in headaches and confusion than it does in solving the issue of making homeowners pay on time.

“The late charge works,” says Michael Berenson, president of AKAM Associates, a management firm. When it doesn't, he maintains, is when boards charge so nominal a fee that it fails to be a deterrent, or else it is tied to a confusing formula that is consistently challenged by shareholders.

Without the threat of a late fee, boards may not get the maintenance on time, every month, without fail. “These corporations need that cash flow,” notes Berenson. “They don't run a huge surplus. Most of these budgets are break even, or have small surpluses, and cash flow is really important to make payroll, pay the taxes, and pay utilities. We need the money to pay the bills.”

Given that so many buildings run on such tight budgets, it behooves co-op and condo boards to review the language of their late charges to make sure that not only is the provision written correctly, but that the board is charging enough to send a message to the owners so that they make paying the maintenance a top priority.

“Virtually every proprietary lease has a Paragraph 12 that says the lessee will pay the rent to the lessor upon the terms and at the time provided,” explains James Samson, a partner with the law firm of Bangser Klein Rocca & Blum. All that paragraph means, he says, is that the shareholder will pay the co-op the agreed-upon maintenance at the same time every month. In the same paragraph, there is often language that says that the shareholder will pay the rent or be subject to the maximum rate of interest in the form of a late fee, until the rent has been paid.

“People don't know what that means,” says Samson. His suggestion: scrap the part of Paragraph 12 that connects the late fee to either the number of shares an owner has, or any rate of maximum legal interest, and write a new paragraph in the proprietary lease giving the board the discretion to establish the late charge. The new language should specify “what day the late charge is due, and that the charge accrues each month” until the maintenance is paid, says Samson.

So should the board rewrite the proprietary lease to include a provision that sets a specific amount? No, says attorney Joseph Colbert, a partner with Rosen & Livingston. “Don't set a specific amount in the lease, because each time you want to change the late fee, then you have to amend the lease and you need sixty-six-and-two-thirds approval [from all the shareholders] to do that.”

Colbert instead recommends that the proprietary lease include a provision giving the board authority to set the late charge, and define what the late charge includes. For example, says Colbert, his firm offers the following language to its clients for inclusion in the proprietary lease: “The directors, in their sole discretion, may impose a 'late charge' consisting of a penalty and/or interest on late payments of rent, a fee to be paid upon transfers and /or subletting, storage room fees, or other service fees or fines in connection with lessee's violation of the provisions of this lease, lessor's bylaws or any house rules now in effect or hereafter adopted by the directors.”

Another Rosen & Livingston partner, Bruce Cholst, also urges boards to be careful in setting the late fee. While the temptation is to set a high fee to make people sit up and take notice, the standard is to charge between two and five percent a month of the maintenance. “There is very little case law on this, and what case law there is conflicts,” warns Cholst, who says that boards should err on the side of caution.