Friday, March 18, 2011

Your late fees provision may not be enforceable.

It has come to my attention that several District Court judges in Madison County have been refusing to enforce certain late fees provisions in residential lease agreements, finding the late fees to be exorbitant and unconscionable, under the case Abb’s Moving Service, Inc. v. Sarah P. Wooldridge, et al, 612 So.2d 449 (Ala. 1993).

Under this Alabama Supreme Court case, judges can refuse to enforce late fees provisions that they find are designed only to “punish” tenants for nonperformance and not reasonably designed to compensate a landlord for an actual monetary damage suffered by the tenant’s default. On a personal note, I disagree with this particular case and believe that it wrongfully infringes on the ability of private parties to structure contractual agreements. I also think that it is distinguishable in the majority of situations in residential leases that present themselves to the district court.

Although the judges in Madison County are not applying a bright-line rule, in my practice I have found that as long as your late fees do not exceed 15 - 20% of the base rent the Court will enforce your late fees provision.

Please note that although this case is the law of the State of Alabama, currently Madison County is the only county of the twelve that I practice in that is citing this precedent and refusing to enforce contractually agreed upon late fees provisions. However, I do not see the judges changing their policy anytime soon. Therefore, I would recommend that you re-work your late fees provision so that it does not exceed 15% of the base rent in any given month if you want late fees to be awarded by the Court in the future. I further recommend that you contact your attorney and request language to insert into the late fees provision of your residential that may circumvent the impact of the Abb’s Moving Service, Inc. case.

1 comment:

  1. This is a common problem in the self storage industry. Plaintiffs' lawyers have made a really good living filing class action lawsuits against self storage operators for late fees that were considered excessive and not reasonably related to the costs and expenses associated with late payments. Generally speaking, at least in the self storage lawsuit opinions I've read, you can charge a late fee equivalent to an 18% interest rate, plus administrative overhead costs associated with reviewing past due reports, making collection calls, sending letters and emails, noting files, etc. Beware of the plaintiffs' lawyers, not just the District Judges, when establishing a late fee policy.