What Are Late Fees in California?
Under California law, a late fee is most commonly defined as a "charge imposed on a customer or payment recipient for delinquency in payment …." It’s a term that applies to a wide variety of commercial and consumer transactions. The most common example of a late fee is a charge levied by a credit card company on an overdue credit card bill. But it can also apply to other events such as the return of a check where there are insufficient funds to cover the amount of the check, an overdue loan payment, an overdue rental payment, or even a late toll charge or ticket for failure to pay a toll or fine in a timely fashion.
California Civil Code section 1671 expressly permits the collection of late fees in commercial transactions. In contrast to the explicit permission for commercial late fees, California law is murky at best on the availability of the late fee in consumer transactions. One indication of how consumer late fees are viewed has come from recent case law suggesting that California courts may treat consumer late fees in three different ways, as discussed below:
Under the open price contract theory, the late fee is orders or a liquidated damage provision which is permitted under certain circumstances by California Civil Code section 1671 . If properly drafted, the late fee must bear an approximate relation to the damages actually suffered from the particular delinquency in payment at issue.
The penalty provisions theory suggests that a consumer late fee is really a penalty, which is generally held as void under California Civil Code section 1667 as against public policy. Thus, a failure to pay any late fee assessed on a delinquent payment would not be enforceable in court.
The seepage theory (otherwise known as the seepage *or *inclined plane theory) suggests that the late fee is permissible, but only to the extent that it would have been permissible if levied as an interest charge (that is, a yearly rate of 10%) on the amount of the delinquent payment from the point that the payment was first due. As each day that passes adds more interest to the principle debt, the "late payment" that cannot be charged is simply the dunning for interest is a valid liquidated damage.
Late Fees: The Law Behind Them
Late fees are subject to California statutory and common law.
Civil Code Section 1566 provides a one-year statute of limitations for the collection of "an obligation or liability founded upon a statute." The guidelines for permissible contract liquidated damages in consumer cases are found in Civil Code Section 1671. Subsection (b) addresses late fees as follows: (b) (1) Except as provided in this subdivision, a provision in a contract that specifies as the amount of damages for an injured party upon a breach, an amount that is not reasonable in light of the circumstances, is void as the large sum of money to be paid is a penalty, and not a legitimate study of potential damages. (2) With respect to an obligation secured by an interest in real property or arising from the sale of goods or services to the owner or lessor of such property and the use of the property as the primary residence of an owner-occupant, or the lease of such property for a term of one year or greater, a provision of a lease, rental, or sale agreement made in accordance with this subdivision is presumed to be enforceable unless the party against whom enforcement is sought establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.
Any late fee must be deemed a liquidated damage and not a penalty. Individual tenants may not be able to challenge a late fee on their own but can join with other tenants to challenge the penalty as a class action.
Consumers Have Rights
Consumers in California have specific protections when it comes to late fees. These protections encompass various types of contracts and businesses, although there may be some differences in how they are enforced depending on the nature of the service or transaction. Knowing your rights is the first step in protecting yourself from unreasonably high fees.
In most cases, California law states that a late fee must actually be at least 10% of the minimum charge due. Additionally, the fee cannot exceed twice the minimum charge due. In order to be legally charged, the late fee must be specifically stated in the contract. If it is not, the business will not be able to collect it.
If you have a dispute with a business for the payment of a late fee, you can take action against them through Department of Consumer Affairs. While there will not always be a resolution to the dispute, you may be able to receive some compensation for late fee charges if your complaint is warranted.
If the business is experienced in charge late fees, this should be a pretty common occurrence for them. In many cases, the exact amount of the penalty should also be specified on the receipt, invoice, or in the contract. Charging you more than what is explicitly stated is not allowable by law.
While most late fees are collectible, this is not the case for all businesses. For example, by law, gym memberships cannot charge late fees over $10. This maximum does not include sales tax or any other additional fee. The only exception would be if you have a contract with the gym that outlines a higher fee. Under federal law, lenders and collections agencies must abide by the Fair Debt Collection Practices Act. This prohibits them from trying to collect any debt that they cannot show was actually due and owing at the time of the collection attempt.
Examples of Legal and Illegal Late Fees
A number of different scenarios have been adjudicated up and down the state, and provide useful examples of when a late fee is permissible and when it is not, particularly in the commercial context. Here are some examples of late fees that passed and failed muster in California.
One of the earliest treatments of a late charge clause in California was in Maxson v. County of Santa Barbara (1924) 66 Cal.App. 686. In Maxson, a road grading company entered into an oral contract with the County to improve a road. The contract called for payment as work was completed and as materials were delivered. The company sued the County for breach of contract after the County failed to pay for improvements to the road, and the trial court awarded the company prejudgment interest at an annual rate of 7 percent and "additional interest for delay of the performance of the work at the same rate." The appellate court reversed the award of additional interest on the basis the "statute does not authorize the payment of interest at the same time and at the same rate, for delay in the performance of the work."
The case of Galdamez v. Celkevich (2007) 142 Cal.App.4th 640, involved a written contract to purchase real property in which the parties agreed to a late charge of 5 percent per month to be assessed if the payment were past due "for 10 days . " The buyer failed to make timely payments and a late fee was assessed. The trial court found the late fee was unconscionable, because the buyer was charged $238 in interest if he were one minute late, and equal to $1,690 annually if extended over the anticipated 6-month term. The appellate court reversed, finding that the late fee allocation was not unconscionable, because $238 represented approximately 0.5429 percent of the total purchase price of the property of $43,800.
In ELAH Holdings v. City and County of San Francisco (2011) 193 Cal.App. 4th 1004, a developer brought suit against the City for breach of contract related to a development agreement to construct affordable housing units. The City had entered into the agreement in exchange for a waiver of certain development fees. ELAH filed its lawsuit seeking declaration that the late fee / interest provisions in the development agreement were unenforceable as they constituted a penalty. The developer lost at the trial court and on appeal as the appellate court reasoned that the late fees were not disproportionate to the loss that the City would suffer if the developer failed to live up to its obligations.
Implementing Late Fees, Best Practices
Businesses are businesses, even in California. Businesses can charge late fees just like everybody else, but California Courts have been busy for decades shaping how those late fees can work.
The basic premise is that a late fee in California must be reasonable and must be set forth in the contract itself or communication with the customer at the time payment is due. Put another way, you are not allowed to spring a surprise on your customers. To that end, business should consider putting any potential late fees in the contract itself and have the late fees highlighted in bold, all caps font. Fortunately, there are exactly the fonts for that on every word processing program or web design shop.
For example:
"ADDITIONAL CHARGES: If payment is not received within 30 days of the date of the invoice, a late fee of $10.00 per month shall accrue to the balance until paid. However, this $10 late fee shall be waived for each monthly billing cycle that the balance remains unpaid so long as the remaining balance is at least $100.00 and not more than $500.00."
More specific laws do apply in certain situations, like when a business finances the purchase of goods or services. A late fee may be assessed once the period to which a consumer agrees has expired (sometimes called a "grace period") but they must have a chance to review the contract and understand the late fees before agreeing to the financing. The consumer must also be aware of the late fees when they receive the offer of credit, billing statement, or explanation of benefits. Further, some types of businesses are required to provide at least 5 days written notice of the late fee being charged in the State of California.
Some businesses also require advance payments, which creates an interesting issue for late fees. Some businesses schedule repairs or construction that requires knowledge of the proper construction materials prior to the construction work. Sometimes this information cannot be provided until the end of a construction process to be sufficiently precise. In these situations, late fees can be charged when the customers delay in delivering the required information.
What to Do If Facing an Illegal Late Fee
When consumers receive a late fee assessment, they need to immediately analyze whether this assessment was fair. If consumers believe that they were charged an unfair late fee, there are several steps that can be taken to resolve this situation. First, consumers should write a letter to the company outlining why the late fee was unfair. After taking this step, consumers can make their formal complaint to their credit card company or bank and notify the state attorney general’s office.
Taking these steps has many benefits. First , it provides consumers with a road of communication with the credit card company, bank, or debtor. Second, it provides consumers with a paper trail for possible litigation. Additionally, most banks and debtors have written procedures for contesting fees that they are required to follow. If it is determined that the late fee was unfair, the creditor should provide a refund for the amount of the fee in question.