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Spotlight on: Using Late Fees to Get Timely Payments from Homeowners

New York City

Spotlight on: Late Fees
Oct. 28, 2014

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. Managers note that late fees don't when boards charge so nominal a fee that it fails to be a deterrent, or else tie it to a confusing formula that is consistently challenged by homeowners.

See Paragraph 12

Most proprietary leases have a Paragraph 12 that says the lessee will pay the rent to the lessor upon the terms and at the time provided, meaning the shareholder will pay maintenance at the same time every month. It also often 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 maintenance has been paid. (Condominium governing documents may have similar language.)

To prevent confusion, consider scrapping 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.

Write a Clear Provision

The proprietary lease should include a provision giving the board authority to set the late charge, and define what the late charge includes. For example, one law 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."

Boards should 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; boards should err on the side of caution.

 

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Adapted from "Living with Late Charges" by Ruth Ford (Habitat, May 2005)

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