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Late Fees

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Late Fees

Postby TenantNet » Thu Dec 11, 2008 2:57 pm

As originally posted by Aubertine:

A frequently-cited Court of Appeals decision regarding the enforceability of contract provisions such as this is Truck Rent-A-Center, Inc. v Puritan Farms 2nd, Inc., 41 NY2d 420 (1977):
The primary issue before us is whether the "liquidated damages" provision is enforceable. Liquidated damages constitute the compensation which, the parties have agreed, should *424 be paid in order to satisfy any loss or injury flowing from a breach of their contract. (Wirth & Hamid Fair Booking v Wirth, 265 NY 214, 223.) In effect, a liquidated damage provision is an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement. (5 Williston, Contracts [3d ed], § 776, p 668.) Parties to a contract have the right to agree to such clauses, provided that the clause is neither unconscionable nor contrary to public policy. (Mosler Safe Co. v Maiden Lane Safe Deposit Co., 199 NY 479, 485.) Provisions for liquidated damage have value in those situations where it would be difficult, if not actually impossible, to calculate the amount of actual damage. In such cases, the contracting parties may agree between themselves as to the amount of damages to be paid upon breach rather than leaving that amount to the calculation of a court or jury. (14 NY Jur, Damages, § 155, pp 4-5.)

On the other hand, liquidated damage provisions will not be enforced if it is against public policy to do so and public policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority. (City of Rye v Public Serv. Mut. Ins. Co., 34 NY2d 470, 472-473.) It is plain that a provision which requires, in the event of contractual breach, the payment of a sum of money grossly disproportionate to the amount of actual damages provides for penalty and is unenforceable. (E.g., Equitable Lbr. Corp. v IPA Land Dev. Corp., 38 NY2d 516, 521-522; Wirth & Hamid Fair Booking v Wirth, 265 NY 214, 223, supra.; Mosler Safe Co. v Maiden Lane Safe Deposit Co., 199 NY 479, 485, supra.;.) A liquidated damage provision has its basis in the principle of just compensation for loss. (Cf. Restatement, Contracts, § 339, and Comment thereon.) A clause which provides for an amount plainly disproportionate to real damage is not intended to provide fair compensation but to secure performance by the compulsion of the very disproportion. A promisor would be compelled, out of fear of economic devastation, to continue performance and his promisee, in the event of default, would reap a windfall well above actual harm sustained. (Ward v Hudson Riv. Bldg. Co., 125 NY 230, 234-235; 5 Williston, Contracts [3d ed], § 776, p 668.) As was stated eloquently long ago, to permit parties, in their unbridled discretion, to utilize penalties as damages, "would lead to the most terrible oppression in pecuniary dealings". (Hoag v McGinnis, 22 Wend 163, 166; see, also, *425 Matter of Associated Gen. Contrs., N. Y. State Ch. [Savin Bros.], 36 NY2d 957, 961-962 [dissenting opn].)

The rule is now well established. A contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. (City of Rye v Public Serv. Mut. Ins. Co., 34 NY2d 470, 473, supra.;; Wirth & Hamid Fair Booking v Wirth, 265 NY 214, 223, supra.;; Curtis v Van Bergh, 161 NY 47; Ward v Hudson Riv. Bldg. Co., 125 NY 230, supra.;; Restatement, Contracts, § 339.) If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced. (Equitable Lbr. Co. v IPA Land Dev. Corp., 38 NY2d 516, 521-522, supra.; ; Seidlitz v Auerbach, 230 NY 167, 172-173; 14 NY Jur, Damages, § 155.) In interpreting a provision fixing damages, it is not material whether the parties themselves have chosen to call the provision one for "liquidated damages", as in this case, or have styled it as a penalty. (E.g., Wirth & Hamid Fair Booking v Wirth, 265 NY 214, 225, supra.;; Ward v Hudson Riv. Bldg. Co., 125 NY 230, 234, supra.;.) Such an approach would put too much faith in form and too little in substance. Similarly, the agreement should be interpreted as of the date of its making and not as of the date of its breach. (E.g., Seidlitz v Auerbach, 230 NY 167, 172, supra.;.)

In applying these principles to the case before us, we conclude that the amount stipulated by the parties as damages bears a reasonable relation to the amount of probable actual harm and is not a penalty. Hence, the provision is enforceable and the order of the Appellate Division should be affirmed.
Id., 41 NY2d at 423-425.

Scherer, Residential Landlord-Tenant Law in New York § 9:8 (2006) discusses case law relevant to lease provisions for late fees:
A late charge may be sought [in a summary eviction proceeding]. However, the amount of a late charge, when awarded, must be reasonable and nonpunitive and must bear some reasonable relationship to the amount of rent involved. 67-25 Dartmouth St Corp v. Silbermann II, NYLJ 8/11/93 24:5 (App. Term 2d and 11th Jud. Dists.). Moreover, the agreement between the parties must provide for the payment of late charges 330 3rd Ave Corp v. Valli, NYLJ 5/27/97 31:5 (App. Term 1st Dep't), and the agreement must specifically provide that the late charges are collectible as "additional rent." Park Towers Tenants Corp v. Gashi, NYLJ 9/21/94 21:1 (App. Term 1st Dep't). See generally Parkchester Apartments v. Lewis, NYLJ 4/22/98 27:3 (Civ. Ct. Bronx Co.).
Scherer cites cases in which courts held late fees of 5% of the monthly rental to be unenforceable because they were not reasonably related to the harm caused to the landlord by the late payment: Parkchester Apartments v Lewis, NYLJ, Apr. 22, 1998, at 27, col 3 (Civ Ct, Bronx County); 67-25 Dartmouth St. Corp. v Silbermann II, NYLJ, Aug. 11, 1993, at 24, col 5 (App Term, 2d & 11th Jud Dists); 943 Lexington Ave., Inc. v Niarchos, 83 Misc 2d 803 (App Term, 1st Dept 1975). A $50 late fee for a monthly rental of $405 was held to be and unconscionable and void provision of a one-sided "contract of adhesion" in Spring Valley Gardens Associates v Earle, 112 Misc 2d 786 (Rockland County Ct 1982). In Maplewood Mgmt. v Jackson, 113 Misc 2d 142 (Nassau Dist Ct 1982), a flat $20 late fee for payment after the 10th of the month was found not to be excessive. But a late fee that amounted to 49% of the rent was "clearly a penalty disproportionate to any probable loss" and therefore unenforceable, the court held in Raanana Realty v Louis J. Rotundi Restaurant Corp., NYLJ, Jan 9, 1991, at 23, col 3 (Civ Ct, NY County). And a lease provision that awarded a 365% per annum late charge penalty was found to be "unreasonable and confiscatory in nature" and unenforceable. Sandra's Jewel Box Inc. v 401 Hotel, L.P., 273 AD2d 1 (1st Dept 2000).

New York's criminal usury statute, Penal Law § 190.40, provides that a person is guilty of criminal usury if "he knowingly charges . . . any money . . . at a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period."

A recent Watertown City Court decision flatly held (departing from authorities mentioned here) that a late fee could not be demanded in a summary proceeding as "rent":
"The rent demanded in a 711(2) summary proceeding can only be the base rent due for the space leased and cannot include any other contract debts converted to 'rent' by the contract terms based upon non-payment within a specific time frame."
Neighbors of Watertown, Inc. v Pearson, __ Misc 3d __, 2005 NY Slip Op 25527 (Watertown City Ct, Dec. 13, 2005), http://www.courts.state.ny.us/reporter/3dseries/2005/2005_25527.htm

In another recent decision, a Plattsburgh City Court judge discussed the case law regarding late fee clauses, and concluded that a $5 a day late fee on a rent of $475 a month was "unreasonable, excessive and unconscionable as a matter of law." Dashnaw v Shiflett,
2005 NY Slip Op 51874(U), *3 (Plattsburgh City Ct 2005), published online at
http://www.nycourts.gov/reporter/3dseries/2005/2005_51874.htm .

However, see Jackson v Wells, 2003 NY Slip Op 51547(U) (App Term, 2d & 11th Jud Dists 2003), published online at
http://www.nycourts.gov/reporter/3dseries/2003/2003_51547.htm (reducing tenant's recovery of $600 security deposit by $50 pursuant to lease providing for $50 late fee if tenant was three days late in paying rent).
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Postby TenantNet » Fri Jan 02, 2009 5:01 pm

As originally posted by Aubertine:

Late fees have to be provided for in the lease. Even then, they can be sought in a nonpayment proceeding only if they are designated by the lease as "additional rent" or if other rent arrears are outstanding. If the LRR is being charged, "late fees" cannot be designated as additional rent, as this constitutes a rent overcharge. And if the late fee are in an amount that bears no reasonable relationship to the LL's damages (e.g., $25 if payment is one day late, or a rate above the interest rate defined in usury statutes), the late fees clause should not be enforced at all.

See Scherer, Residential Landlord-Tenant Law in New York, § 9:8 (2005).

§ 9:8. ----LATE CHARGES

A late charge may be sought. However, the amount of a late charge, when awarded, must be reasonable and nonpunitive and must bear some reasonable relationship to the amount of rent involved. 67-25 Dartmouth St Corp v. Silbermann II, NYLJ 8/11/93 24:5 (App. Term 2d and 11th Jud. Dists.). Moreover, the agreement between the parties must provide for the payment of late charges, 330 3rd Ave Corp v. Valli, NYLJ 5/27/97 31:5 (App. Term 1st Dep’t), and the agreement must specifically provide that the late charges are collectible as “additional rent.” Park Towers Tenants Corp v. Gashi, NYLJ 9/21/94 21:1 (App. Term 1st Dep’t). See generally Parkchester Apartments v. Lewis, NYLJ 4/22/98 27:3 (Civ. Ct. Bronx Co.). Courts examine late fees carefully:

• courts have struck down late fees of 5% of the monthly rental as unenforceable because they are not reasonably related to the harm caused to the landlord due to the late payment
Parkchester Apartments v. Lewis, NYLJ 4/22/98 27:3 (Civ. Ct. Bronx Co.); 67-25 Dartmouth St Corp v. Silbermann II, NYLJ 8/11/93 24:5 (App. Term 2d and 11th Jud. Dists.); 943 Lexington Ave., Inc. v. Niarchos, 83 Misc. 2d 803, 373 N.Y.S.2d 787 (App. Term 1975).

• $20 late fee was found to be not excessive
Maplewood Mgmt. v. Jackson, 113 Misc. 2d 142, 448 N.Y.S.2d 966 (Dist. Ct. 1982).

• $50 late fee for a monthly rental of $405 was unconscionable and void
Spring Valley Gardens Associates v. Earle, 112 Misc. 2d 786, 447 N.Y.S.2d 629 (Co. Ct. 1982).

• late fee that amounted to 49% of the rent was “clearly a penalty disproportionate to any probable loss” and unenforceable
Raanana Realty v. Louis J Rotundi Restaurant Corp, NYLJ 1/9/91 23:3 (Civ. Ct. N.Y. Co.).

• late charge provision in a lease which awarded 365% per annum penalty was found to be “unreasonable and confiscatory in nature” and thus unenforceable. Sandra’s Jewel Box Inc. v. 401 Hotel, L.P., 273 A.D.2d 1, 708 N.Y.S.2d 113 (1st Dep’t 2000).
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