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

The threat of a late fee helps insure that boards get their maintenance payments in on time every month. "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."

Given that so many buildings run on such tight budgets, it behooves co-op 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 monthly fee a top priority.

Proprietary Priority

With co-ops, "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 attorney James Samson, a partner at Samson Fink & Dubow. That means, he says, that the shareholder will pay the co-op the agreed-upon maintenance at the same time every month. The same paragraph also often contains language saying 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 discretion to establish a 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.

Should the board include a provision that sets a specific amount? No, says attorney Joseph G. Colbert, a partner at Kagan Lubic Lepper Lewis Gold & Colbert, and an adjunct professor at St. John's University School of Law. "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 66 2/3 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.

His firm, for example, instructs its clients to include the following language 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."

Attorney Bruce Cholst, a partner at Rosen & Livingston. , 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 of the monthly 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.

Adapted from Habitat May 2005. For the complete article and more, join our Archive >>