Late fees - Can they be charged in California? Are they good idea?
March 20, 2013
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Question
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Hello Ken,
Thank you for your daily e-mails.
We are a small company based out of the Southern part of California. If any of our subscribers fail to pay their monthly monitoring fee after the grace period we normally add a $5 late fee. We currently are deciding if we should implement clause “C” of the Monitoring and Lease agreements which reads as:
All payments are due and will be invoiced to you in advance at the beginning of each month. We may charge you a late fee equal to 10% of the payment (with a minimum of $5.00) for each payment received more than 10 day after the due date (or the maximum rate allowed by law if less).
What is the maximum amount we can charge to our subscribers? And for current customers that have the $5 late fee charge from the previous month can we include the existing late fee and charge 10% of it as well?
Your response is greatly appreciated.
Thank you in advance.
Julie Pineda
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Answer
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None of the Standard Form Contracts have late charges. Some may provide for interest computed at 1.5% per month. Late charges sound too much like penalties, which the law disfavors. I also don't favor late charges for two reasons. First, if you're having trouble getting paid, adding to the expense probably isn't going to help customer relations; second, the contracts give you the right to accelerate the contract and recover on the future RMR. On the other hand, some alarm companies like the late charge because a good percentage of their subscribers pay late and routinely add on the late charge.
I had one of my associate attorneys do research to respond to the inquiry. Here is his findings:
Under the California Constitution parties that contract for interest on a loan primarily for personal, a family or household purposes may do so at a rate not exceeding 10% per year.
The California usury law, however does not apply to "time-payment contracts" (e.g. retail installment contracts and revolving accounts) because they are not generally regarded as loans. There are currently no limits on finance charges for the purchase of personal family and household goods or services.
Under California law, the amount of services charges charged by a creditor must be reasonably related to the actual damages suffered by the creditor. California courts recognize certain costs as actual damages, includingcollection and accounting expenses suffered by a creditor when a customer
does not timely pay its invoice. Garrett v. Coast and Southern Federal Savings and Loan, 108 Cal. Rptr. 845 (July 18, 1973) (discussing a situation involving a credit card debt: "the borrower "remains liable for the actual damages resulting from his default. The lender's charges could be fairly measured by the period of time the money was wrongfully withheld plus the
administrative costs reasonably related to collecting and accounting for a late payment.") Because of the rule outline in Garrett, California courts have held that finance charges, or late fees as high as 18% per annum (or 1.5% per month) when the creditor could show that non-payment by the customer created administrative costs for the creditor were valid. See O'Connor v. Televideo System, Inc 267 Cal. Rptr. 237, 241-42.
There is no mention of the word "USURY" in the California Penal Code.
Kirschenbaum & Kirschenbaum, P.C.
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