Late Fees
Before late fees can be enforced, they must be agreed to by the tenant and they must be reasonable. Defining a reasonable late fee for every rental agreement in Colorado can be challenging due to the wide variety in each agreement, delinquent balance, and level of lateness. It is also challenging because the late fee is not interest on the past due balance, but compensation for the administrative costs of a delinquent account. When considering the large variety of agreements, a better and more “reasonable” solution would be to implement an initial late fee of the greater of 15% of the balance due or $50 and a daily late fee and of the greater of 2% of the balance due or $20.
Elements of Reasonable Late Fees
Late fees include some interest, but primarily the fee is to compensate for the administrative expense of processing the late payment.
The administrative expense is the same, regardless of the balance of the late payment, and generally starts at $50.
In addition to the administrative expense, there is also an interest component, which increases depending on both the size of the past due rent balance and the underlying mortgage.
A cap of 15% captures the interest component in most transactions.
The interest component of the late fee increases over time as the lateness continues.
The state of Colorado requires a tolerance of 10 days of late payment (with the required 10-day demand for payment) and an additional 30 to 45 days of late payment (through the eviction process).
A daily late fee is necessary to discourage continued lateness after the assessment of the initial fee.
Unreasonably low late fees will reduce housing made available to rent, as those without sufficient cash reserves will be unable to rent a property.
Unreasonably low late fees will lead to tighter leasing standards thereby making it harder for people with poor credit to rent.
Unreasonably low late fees will lead to higher rents for people that do pay their rent on time, as the cost of delinquency is spread from the delinquent to the entire portfolio.
Unreasonably low late fees will lead to fewer arrangements that are settled out of court