(Del Monte Properties & Investments, Inc. v. Dolan (2018) 26 Cal.App.5th Supp. 20 [236 Cal.Rptr.3d 923], ordered published, Aug. 8, 2018), 2018 Cal. LEXIS 5916.
Holding: A California court of appeals holds the landlord may not regain possession of the property or collect payment since they did not calculate the late fee based on losses caused by the late payment, rendering the three-day notice defective. [Del Monte Properties and Investments, Inc v. Dolan (May 11, 2018)_CA5th_]
The landlord leased residential premises to the tenant at a monthly rent of $600. When the tenant failed to pay rent on time, the landlord served the tenant with a 3-day notice to either pay rent or vacate the premises. The 3-day notice demanded rent in the amount of $600, as well as a late fee in the amount of $50 (approximately 8.33% of the monthly rent). The late fee was set forth in the lease by a commonly used liquidated damages provision as follows:
"Tenant acknowledges either late payment of Rent or issuance of a returned check may cause Landlord to incur costs and expenses, the exact amount of which are extremely difficult and impractical to determine. These costs may include, but are not limited to, processing, enforcement and accounting expenses, and late charges imposed on Landlord. If any installment of Rent due from Tenant is not received by Landlord within 5 calendar days after the date due, or if a check is returned, Tenant shall pay to Landlord, respectively, an additional sum of $50.00 as a Late Charge and $25.00 as a NSF fee for the first returned check and $35.00 as a NSF fee for each additional returned check, either or both of which shall be deemed additional Rent. Landlord and Tenant agree that these charges represent a fair and reasonable estimate of the costs Landlord may incur by reason of Tenant's late or NSF payment. Any Late Charge or NSF fee due shall be paid with the current installment of Rent..."
The Appellate Division reversed judgment for the landlord.:
(1) the late fee cannot be justified as liquidated damages under California Civil Code Section 1671 because the losses caused by the late payment of rent were not extremely difficult or impractical to determine, and
(2) the landlord failed to show that the liquidated damages charged were the result of a reasonable endeavor to approximate those losses.
Civil Code §1671 (d) states that "a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage" (emphasis added). Therefore a presumption of invalidity in a residential lease.
In this case, the Appellate Division held that the landlord failed to articulate specific facts showing why the circumstances of the case justified liquidated damages to compensate losses caused by a late rent payment. The court rejected the landlord's testimony about the types of losses that the landlord anticipated suffering such as those contained in the lease provision (e.g., processing, enforcement and accounting expenses, and late charges imposed on Landlord) as mere reference to the lease language.
Further, the Appellate Division relied on case law to conclude that the liquidated damages clause must also be the result of the landlord's reasonable endeavor to estimate the actual losses caused by the breach; merely setting the liquidated damages to a percentage of the contract price (as the landlord here admitted it did) is not sufficient. Instead, there must be some analysis of actual losses prior to setting the damage amount.
What do we take away? A liquidated damage clause in a lease may not be upheld if the landlord is unable to show that some prior analysis was done to try to estimate the amount of loss. This means a mini-trial, within the eviction trial itself, to determine the validity of a $25-50.00 (typically) late charge. This holding will likely come as a surprise to many residential (and non-residential) landlords who have come to rely on these late fee provisions for decades, if not longer.
Coercive incentives to pay on time, such as stepped up fees based on how late, or rent reduced if payment is received on time, or fees based on the amount of the rent, are all subject to being attacked with a resulting dismissal deeming the tenant to be a previaling party (for attorney's fees purposes). In a 3-60 situation, you have lost two months of rent. By the time you get to court, you will be behind by 5 months or more. Late charges will be attacked by the Del Monte deciison, which courts will be tempted to follow.
It is to be hoped that the legislature will bestow the right to provide a right to a reasonable late charge with the objective of avoiding more and quicker demands to pay or quit, higher rents to spread out and pro-rate the costs of dealing with late charges to all residents most who who pay on time, and provide a balanced and fair option to tenants to pay on time or pay late for a reasonable fee.