Compounded Late Fee Is an Unenforceable Penalty

What Happened: A landlord took a cosmetology school tenant and its guarantors to court for failing to pay rent in 2020 while government COVID-19 shutdown orders were in effect. The defendants raised the usual affirmative defenses including force majeure and frustration of purpose. And, as usual, the court rejected the defenses and found the tenant liable for unpaid rent. It also ordered the tenant to pay a late fee of 5 percent of base rent for each month unpaid. Unhappy with the standard late fee, the landlord argued that the tenant should have to pay compounded late fees citing the following lease language:

All payments of rent and additional rent not received within five (5) days of the due date shall be subject to a five percent (5%) late payment charge and such charge shall be collected as additional rent.

Ruling: The Illinois appeals court ruled that the landlord wasn’t entitled to compounded late fees.

Reasoning: Late fees are permissible to the extent they compensate the landlord for losses actually suffered as a result of the late payment. However, the court continued, they’re neither reasonable nor enforceable when they’re structured as a penalty intended merely to secure timely payment. In this case, there was no evidence that the 5 percent late fees the lower court awarded were inadequate or that the landlord incurred any losses that would justify compound late fees to make it whole.

• Mufaddal Real Est. Fund, LLC v. Vara Sch. Pros., Inc., 2024 IL App (3d) 220499, 2024 Ill. App. LEXIS 1568