A late fee of 5% *per month* corresponds to an annualized rate of 60%. This is flagrantly usurious and illegal. Not only is this unenforceable, but it may even be criminal. Check with your attorney immediately.

I think someone on your board needs to take a little remedial math if they really confused 5% per month with 5% per year. Are you sure that they actually plan to collect $600 interest per year on a $1000 debt?!

thanks. to clarify, they argue it is under the 16% per annum to charge a total of $600 if you are 12 months late. (of course you might have evicted you by then....) stating well they are not compounding ..

S wrote:
>they argue it is under the 16% per annum to charge a total
>of $600 [on $1000] if you are 12 months late.

Sorry, but they're mathematically incompetent if they believe that. A year of 16% simple interest on $1000 is $160, not $600. 5% per month is equal to an annual rate of 60%; that's a simple fact and no amount of sophistry can get around it. (The time actually taken to repay the debt has nothing to do with the interest rate.)

One other thought. If you simply went to a reasonable flat fee as a late penalty -- regardless of balance -- then you'd be okay if you amended the lease to provide for it. You could also charge a lawful rate of interest on top of that, if allowed by the lease.

They can't make changes to the PL without a "super majority" vote of "yes" from the shareholders ... making that fee totally illegal.

We have a similar late interest clause in our Proprietary Lease. Before I came on the Board, a prior Board changed the late interest to a late fee of $75 by Board fiat. We had then decided to move to a more punitive posture as the Board felt that we were losing ground to the credit card companies who charge very punitive late fees – we wanted to be competitive: $175 if not paid by the 17th and an additional $100 if not paid by the last day of the month. This cleared up arrearage quickly, as you can imagine for those who could pay.

We then had a unit move to court and the lawyer challenged the late fee as we only had late interest in the mentioned in the lease. But the before the Judge could rule, the bank paid the full amount due including the late fees. We were lucky.

We have since moved back to a late interest of 1.24% per month. We are also asking the shareholders to approve a late interest / fee scenario that incorporate both late fees for the first six months (on a per share basis) and then switches to late interest after month seven including compounding. The measure is very likely to pass as our shareholders do not take kindly to late payers and having to fund for their arrearage.

The moral of the story for us is: charge what your Proprietary Lease states: it is safe from a legal perspective; builds integrity between the Board and the shareholders; and you would be surprised what the shareholders will approve given full opportunity to hear you out.

Appeals Court Invalidates 4% Per Month Late Fee Provision
Many leases of real property provide for “late fees” in the event the tenant is late in paying the rent or other money due under the lease. Although the term “late fees” is used rather than “interest,” the amount of such fees can still be limited by law. For example, the recent case of Cleo Realty Assoc., L.P. v. Papagiannakis, 2017 N.Y. App. Div. LEXIS 4286, 2017 N.Y. Slip Op. 04368 (1st Dep’t June 1, 2017), involved late fees under a lease guaranty in the amount of 4% per month or 48% per year. The court held that “[i]n view of the public policy underlying” New York’s usury statute, “which makes an interest charge of more than 25% per year a criminal offense, these late fees are unenforceable.”

HabitatReporter here, with a response from Eric Goidel, Esq., of Borah Goldstein Altschuler Nahins, & Goidel, P.C.:

"The question is not whether the late charges being imposed by the apartment corporation is usurious, but whether those late charges can be imposed at all. Where a proprietary lease has a specific formula for a late charge, the only way that an apartment corporation can legally change the formula is by way of an amendment to the proprietary lease. Virtually all proprietary leases require the affirmative vote of some super majority of shareholders-lessees (typically seventy-five (75%) percent) and do not give boards of directors the unilateral power to amend the proprietary lease. A late charge in derogation of a clear proprietary lease provision would be uncollectible."

HabitatReporter, thanks for the response from attorney Eric Goidel. While Mr. Goidel is certainly correct that the authority for any late charges must be in the Proprietary Lease -- or an amendment to the lease approved by the required percentage of shareholders -- the original poster said from the start that his lease *did* have such a clause: "Our late fee is outlined in the prop lease as being based on a maximum legal rate of interest (16% or 1.5% a month)."

The poster then went on to explain his board's twisted *interpretation* of this clause: namely, that 5% per month was somehow equivalent to (or less than!) 16% per year, and was therefore permitted by the current lease without amending it. That's just crazy, and provably false.

Also, even if that coop managed to get a super-majority to approve a lease amendment stating that interest on overdue balances was 60% per year, I can't imagine that it would be enforceable in any state with laws against usury. As far as I know, laws invariably trump the lease in case of a conflict. For example, the portions of the standard "Use of Premises" clause (Paragraph 14 in many leases) that conflict with the Roommate Law are not enforceable. You *can* have a roommate, regardless of what the lease says.