By: Terry R. Dowdall, Esq.

Are Late Charges ($50 or 5% Fair or Excessive?)

A class-action case in Northern California claims that a “5% or $50″ late charge is invalid. The suit covers tenants renting from Equity Residential, a large residential landlord. But for fortune go you or I.  This claim could apply to any community, park or trailer park owner. The damages, attorney’s fees, penalties, and costs in the Equity Residential case appear to exceed $38 million dollars at present. The possibility that such a claim could be made against your park(s) should be very alarming.

In Munguia-Brown v. Equity Residential, a pending suit for late charges, management allegedly charged late fees that tenants allege violate Civil Code §1671(d) (and unfair business practices provided in Business and Professions Code §§ 17200 et seq.). Under §1671(d), such late fees are “void” unless the landlord proves both:

  • (1) it is “impracticable or extremely difficult” to determine the actual damages caused by a late payment of rent; and
  • (2) the landlord arrived at the late fee amount by making a “reasonable endeavor . . . to estimate a fair average compensation for any loss that may be sustained” by the late payment of rent.

This determination requires a full trial and endless discovery at very high cost.  And experts to opine the nature of elements of the damages (what are they and how much) for late payments. If management fails either of these showings, the late fees paid are invalid and must be returned, with interest, and penalties for unfair business practices and attorney’s fees. The cost will be very high.

We recommend dispensing with all late charges at this time. Even the cost of defense and victory cannot be offset with any profit or reimbursement possibility we see. Insurance coverage even?  Such a claim may also be disputed by an insurer. For these reasons, the risk of loss and liability appears to be grossly disproportionate to any benefit tipping the scales in favor of using late charges–in any amount.

The Class Action: Generally, the “class action” procedure is a legal drone swarm. Class actions are spearheaded by one class “representative.” The damages awarded to the representative are then automatically awarded for each class member by mere multiplication of all members. Lengthy investigation occurs before a court approves or refuses class action treatment, at huge expense, just to see how the case will be tried.

The stakes are high due to the effect of class action treatment. It’s simple: 100 class member tenants means “100x” the damages awarded to the plaintiff representative. If the alle

ged wrongdoing applied to 10 properties, damages for the entire portfolio would be awarded, which is “1000x.” This changes the perspective of possible loss from “small claims nuisance” to potential major finanial casualty.

Class Action Targets. Parks with many tenants in the same situation, using the same residency documents, for example. Owners with multiple holdings are the most attractive targets because multiple parks enlarge the potential tenant class. Superficially, the class action seeks to remedy wrongs practiced on consumers, or for deceptive, or simply “unfair” practices. But it is all about the money. Attorneys are incentivized to bring class claims by the lure of attorney’s fees multiplied for the relative success of the results (“lodestar” approach).

Lawyers are more than happy to help.  E.g., the California Supreme Court validated a district attorney’s suit for management’s invalid guest fees (People v. McKale). McKale holds that owners are businesses for purposes of enforcing invalid or unfair contract, including residency documents–e.g., guest fees, late charges, that do not comply with law. As with any business, any unlawful, deceptive, unenforceable or unfair conduct violates California law, allowing claims for restitution, disgorgement of monies and profits, injunctive relief, attorney’s fees and costs.

A late fee that violates legal requirements also constitutes an unlawful business act or practice in violation of the California Unfair Competition Law. In Equity Residential, property management is alleged to have failed to show that their late was “the result of a reasonable endeavor to approximate actual losses caused by late payment of rent.”

A late fee is valid under law if the “liquidated damages [is] the result of a reasonable endeavor to approximate actual losses caused by the breach being compensated.” (Citing In re Cellphone Termination Fee Cases (2011)).

Picking any percentage amount is inherently suspect. Said one court: “Setting the liquidated damages to a percentage of the contract price demonstrates a purpose other than compensating losses.” The court suggests that a dialogue take place in order to discuss and analyze what the actual loss from late payment is:

“Some analysis of actual losses is required prior to setting the amount.” (Citing Util. Consumers’ Action Network, Inc. v. AT&T Broadband of So Cal. (2006)).

Trying to piece together the actual damage analysis after-the-fact will be rejected no matter how convincing the argument (“Post-hoc rationalization will be rejected.” (Citing In re Cellphone.)

If park management fails to properly, in advance, determine actual damages caused by the late payment of the rent in a dialogue with the tenant, the late fee will be void. In that case, the late fees paid by tenants must be returned to them. (Beasley v. Wells Fargo Bank(1991); see also Cal. Bus. & Prof. Code §17203.

See, (Munguia-Brown v. Equity Residential (N.D.Cal. Aug. 12, 2019).   There, a a motion for summary judgment by the tenants was successfully resisted on the grounds that the attorneys had told the property management that the $50 late charge was valid. The attorney advi

ce had come from in-house and outside counsel on several occasions.

Conclusion: Management Should Follow Attorney Advice. While attorney advice may be used as a defense against punitive damages to vitiate claims of intent or recklessness, management must follow the advice.  The advice is admissible. But attorney advice will not likely shield liability for invalid late fees.  At bottom, the defense cost for claims of invalid late charges is enormous, aggravating and a huge drain on operating income. This would mean reduced profitibility while questioning if there are any sufficiently counterveiling benefits.

– Terry R. Dowdall