To give a tenant an incentive to pay its rent on time, you'll probably include a late fee clause in your lease that requires the tenant to pay a fee if its rent is paid after the due date. But if your clause uses the words “late payment” to describe the tenant's unpaid rent, you may be unintentionally limiting its effectiveness.

New Jersey Owner Denied Late Payment Fee

For example, a New Jersey owner's lease said that “in the event that payment of any of the rents … is more than 11 days late,” the tenant would owe a late fee equal to 5 percent of the amount due. The tenant moved out nearly one year before the lease was due to expire. The tenant continued to pay rent for a few months but then stopped. The owner sued the tenant for unpaid rent and the late fee.

A New Jersey appeals court ruled that the owner wasn't entitled to the late fee. The court noted that by adding the late fee to the lease, the owner intended to give the tenant an incentive to make “timely” rent payments. But here, the tenant hadn't paid rent late—it simply never paid it [Fanarjian v. Moskowitz].

In effect, this New Jersey court said that rent that's never paid couldn't be considered rent paid “late,” and a late fee applied only if the rent was paid after its due date.

Call It ‘Overdue’ Rent

To avoid being the victim of a similar court interpretation of your late fee clause, do one of the following two things, says New Jersey attorney Marc L. Ripp:

• Refer to “overdue” rent—not a “late payment” of rent—in your lease, says Ripp. Overdue rent means simply that the rent is past due, he says; or

• Modify your lease to read the “late payment or nonpayment” of rent so that you're protected in either instance, says Ripp.

In addition, call a fee for overdue rent a “service fee,” rather than a late fee, Ripp says. This way, if the fee is challenged, you're in a better position to argue that it isn't limited to rent paid late but also applies to rent never paid, he explains.

CLLI Source

Marc L. Ripp, Esq.: Counsel, The Gale Co., LLC, 100 Campus Dr., Ste. 200, Florham Park, NJ 07932-1007; (973) 301-8057; mripp@thegalecompany.com.