Got a question about the law? Some issue been haunting you, and you really want to know the answer? Then you’ve found the right place. Here, real people ask questions and attorney Steven Shelton finds the answers.
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I would like to know if there is a maximum allowable late fee that landlords can charge. My rent is $800/month, but my apartment complex charges $50 in late fees if the rent is not paid by that time, and tacks on another $50 if it is not paid by the 15th. They also charge a $50 returned check fee if the check bounces. I believe this is double what they are allowed to charge for bounced check fees. Can they charge this much?
Steven Shelton responds:
The quick answer is “no”. Landlords in Michigan can not charge late fees. These types of fees are considered “penalties” and are unenforceable under almost any kind of contract. (There's a statutory exemption for some kinds of financing companies, but it doesn’t apply to the typical landlord-tenant situation.) The landlord is allowed (by statute) to charge for “actual damages” resulting from the late payment, but has to demonstrate how the late payment actually cost it the money, and/or interest of up to 6% per annum (that's 6% for the entire year; not 6% compounded monthly). Anything beyond that is an unenforceable charge.
If you’re curious (and I know you are), the definition of a “penalty” can be found in the Michigan Supreme Court case Davidow v Wadsworth Mfg Co, 211 Mich 90, 94-95; 178 NW 776 (1920): “A penalty . . . is a sum inserted in a contract, not as the measure of compensation for its breach, but rather as a punishment for default, or by way of security for actual damages which may be sustained by reason of nonperformance, and involves the idea of punishment.”
That these kinds of penalties cannot be enforced has been the case in English law (from whence the law in most American jurisdictions, including Michigan, is derived) for centuries, and was discussed in one of the first cases to be decided in the Michigan courts. In Jaquith v Hudson, 5 Mich 123, 133 (1858), the Michigan Supreme Court said this:
The law, following the dictates of equity and natural justice, in cases of this kind, adopts the principle of just compensation for the loss or injury actually sustained; considering it no greater violation of this principle to confine the injured party to the recovery of less, than to enable him, by the aid of the court to extort more. It is the application, in a court of law, of that principle long recognized in courts of equity, which, disregarding the penalty of the bond, gives only the damages actually sustained. This principle may be stated, in other words, to be, that courts of justice will not recognize or enforce a contract, or any stipulation of a contract, clearly unjust and unconscionable . . . .
In other words, the courts will only allow the parties to a contract to recover what they bargained for and nothing more. One party is not allowed to profit from the other party's breach. There is a great deal of caselaw on this very subject, all holding that penalties built into contracts can not be enforced. (There is something else called “liquidated damages” that court frequently do enforce, and landlords often try to justify their late fees as being “liquidated damages”. However, these kinds of late fees do not qualify as “liquidated damages” for many reasons. For example, liquidated damages must be calculated to provide a rough estimate of what damages will actually be caused by the breach. A landlord will be hard pressed, indeed, to explain how a check that is five days late caused anything close to $50.00 in damage.)
As for the return check fee, I believe that you are mostly correct. (You are just slightly off on the details.) The statute governing NSF checks is MCL 600.2952, and it not only sets the fees that may be charged when a check bounces, but also describes the process that the recipient of the bad check has to follow to obtain that fee. The first requirement is that the recipient (in this case, the landlord) send a letter to the person who wrote the check. The letter must contain specific wording (provided in the statute) and must be sent by first class mail. (Incidentally, there is caselaw that says when the statute says “first class mail”, it really means “first class mail” and not hand delivery, fax, email, or any other means.) If they don't send the letter in compliance with the statute, they can't collect the fee. (This is important because the mailing date starts the time periods that affect the damage amounts, as discussed below, and the postmark is evidence of the mailing date.)
Second, the amount of the fee they can charge depends on how long it takes for you to pay it. If you pay up within seven days of the letter being mailed, they can charge $25.00. If you pay within 30 days, they can charge $35.00. But they have absolutely no authority to simply charge $50.00 without taking you to court. At that point, the civil penalty (i.e., the “processing fee”) maxes out at $100.00.
An important caveat to all of this: if they get charged $50.00 by their financial institution for a bounced check, they can require you to pay that fee since such a fee would constitute “actual damages”.
Now, you’re probably wondering what you can do about this. These issues usually arise when a landlord tries to evict a tenant for nonpayment of rent and tries to tack these late fees on as additional damages or tries to evict a tenant who has refused to pay the late fees. Although the law is clear on this point, often the outcome depends on the judge. Unfortunately, in landlord-tenant cases, many judges just “go with their gut” and do what they want to do, regardless of what the law requires. In those situations, the question of whether or not to pay the fees depends on how confident you are in the judge who handles these cases in your district court, and whether you are willing to pay the costs of an appeal if the judge rules against you.
Another solution (and I really like this one, because it allows you be proactive and help protect your fellow tenants) is to have an attorney contact the landlord on your behalf to invoke your rights under the Truth in Renting Act (TIRA), MCL 554.636. This act prohibits a landlord from including a laundry list of provisions, including any “clause or provision that, not less than 90 days before the execution of the rental agreement, has been prohibited by statute or declared unenforceable by a published decision of the supreme court of this state or the United States supreme court relating to the law of this state.” MCL 554.633. Although there is no caselaw that I have been able find specifically on point, it seems clear that since late fees have been prohibited in contracts in Michigan for close to 200 years by virtue of Jaquith and any number of other Michigan Supreme Court cases, a clause or provision in a lease that invokes late fees is prohibited by TIRA. When a landlord includes a provision that is prohibited under TIRA, the tenant can file suit against the landlord. Before doing so, the tenant must provide the landlord with written notice as to why the lease violates TIRA. Once the letter has been sent, the landlord has 20 days to correct the problem by sending a notice to all current tenants that the provision is unenforceable and that the landlord will not seek to enforce it. If the landlord fails to do so, the tenant may sue to “void the rental agreement and terminate the tenancy”; “enjoin the lessor from including the provision in any rental agreement subsequently entered into and to require the lessor . . . cure the violation in all rental agreements . . . to which the lessor is currently a party”; and/or “recover damages in the amount of $250.00 per action, or actual damages, whichever is greater.” The tenant may also recover attorney fees associated with the case. Under some circumstances, the amounts the tenant may recover may be doubled to $500.00 (plus attorney fees).
So, as it turns out, your landlord may be doing you a favor by trying to charge illegal fees; that $50.00 late fee may turn into a $250.00 credit toward your next month’s rent!
Steven Shelton is a Michigan attorney in private practice. Got a question for “Ask a Lawyer”? Ask it here!