Owner Must Follow State Law’s Restriction on Late Fees

Facts: A Section 8 resident’s rent was $50 per month. The lease provided that a $25 late charge would be assessed each month that he didn’t pay his rent in full by the fifth of the month. The resident’s account became delinquent in July 2012 after he failed to pay in full a $95.50 charge for repair and maintenance services. As a result, his rent payment was late in July, August, and September 2012, and he was assessed three late charges totaling $75. On Sept. 26, 2012, the owner filed an eviction action for nonpayment of rent. The resident was $50 in arrears when the eviction action was commenced.

The parties agreed that the owner was entitled to evict the resident unless the court determined that the late fee was barred by a state law that placed a cap on late fees at 8 percent of the monthly rent. The district court ruled that the $25 late fee was “reasonable and valid.” The district court also concluded that there was a conflict between the federal and state regulations because federal regulations place no cap on the late fees that may be assessed by a PHA, other than that the amount must be reasonable, even though state law caps the late fee, which might be lower than what the owner deems to be a reasonable late fee. The district court concluded that, because the federal and state regulations conflict, the federal scheme supersedes the state law. The resident appealed.

Ruling: A Minnesota appeals court reversed the district court’s decision.

Reasoning: The court concluded that there was no actual conflict between HUD regulations and state law. An actual conflict exits if compliance with both federal and state law is impossible. Here, the court concluded that compliance with both the federal and state standards was achievable. The owner could comply with both the state and federal standards by imposing a late fee equal to 8 percent of a tenant’s monthly rent, up to $25. The court also stated that complying with both standards would not be difficult—any lease that complies with the federal standard can be amended by adding a clause capping the late fee at 8 percent of the late payment amount, or simply charging a dollar amount less than 8 percent of the monthly rent amount.

In addition, the court found that HUD’s reasonableness standard with respect to late fees wasn’t intended to preempt stricter state and local regulation of lease terms. In fact, the court pointed out that HUD’s guidebook repeatedly emphasizes that housing authorities must comply with all state and local laws governing lease terms.

• Housing and Redevelopment Authority of Duluth v. Lee, July 2013