Coops & Condos Beware of Making Unreasonable Late Fee Provisions

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Many cooperative and condominiums act as commercial landlords of space located on the ground floor of their buildings. Depending on the nature of the business of the commercial tenant, leasing to a commercial tenant may be a convenient benefit to building residents and help defray the common expenses paid by the owners of the residential apartments. However, boards that act as landlords are cautioned to review their leases to ensure that the late fee provisions are reasonable to comply with the below recent decision.

At the close of 2018, the Appellate Division, Second Department, issued a decision effectively putting landlords on notice that their failure to adopt a reasonable late fee provision in their respective lease agreements, may all together bar their ability to recover the same.

In Ty Bldrs. II, Inc. v. 55 Day Spa, Inc., 167 A.D.3d 679 (2d Dep’t 2018), plaintiff landlord sued the defendant, a commercial tenant, to recover damages for breach of the lease, including unpaid rent, late fees, and attorney’s fees, when defendant vacated the premises 33 months prior to the expiration of the lease.

The rider to the lease charged the delinquent tenants a late fee of $50 per day, essentially providing for a 79% penalty for a 30-day month and an 82% penalty for a 31-day month where the defendant tenant failed to pay rent within three days after the first of the month.

"Unreasonable and Unenforceable"

The Supreme Court awarded the plaintiff the sum of $74,250 in late fees pursuant to the language of the lease rider. The Second Department, however, reversed the decision of the Supreme Court holding that the late fee provision of the lease was unreasonable and unenforceable. The Second Department reasoned: “[t]he charge, while not technically interest, is unreasonable and confiscatory in nature and therefore unenforceable when examined in the light of the public policy express in Penal Law § 190.40, which makes an interest charge of more than 25% per annum a criminal offense.”

In sum, landlords hoping to recover late fees for a tenant’s failure to satisfy their obligations should be diligent in adopting a reasonable late fee provision.

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