A security deposit provides you with funds to cover any damages caused by your tenant, as well as back rent if the tenant moves out early or is evicted. In most states, you can deduct late fees from your tenant's deposit if rent payments are late, as long as the fees are "reasonable" and are clearly outlined in your lease agreement.
Lease and Late Fees
You can charge your tenant late fees as long as these fees are clearly outlined in the lease agreement. If you don't have a lease, or no fees are listed, you generally can't charge fees unless your state sets a standard late fee amount. In most states, you can deduct any money owed from the security deposit, and this includes late fees.
Reasonability and Late Fees
Even if the contract allows late fees, landlords can't charge exorbitant or unfair late fees. Many states have laws establishing what constitutes a "reasonable" late fee. For example, in Texas, tenants must be allowed a one-day grace period before they can be charged a late fee, and the late fee must be reasonably tailored to cover some damage that occurs to the landlord. Most states don't establish a specific amount that is reasonable. Rather, this is up to a judge or jury to decide and may be based on the amount of rent the tenant was paying and how late the rent was. For example, most courts would probably find that $100 in late fees when rent is $200 is unreasonable. If the fees are unreasonable, you can't deduct them, and your tenant can always sue you to get the late fees back.
Interest and Late Fees
In addition to late fees, many states allow landlords to charge interest on back rent. Like late fees, interest must be reasonable. You can't, for example, charge 50 percent interest on back rent. Some states establish specific allowable interest amounts, while others use standard interest rates and the cost of rent as their guidance. You may be able to charge interest for the entire time that rent is left unpaid or only for the duration of the lease, depending on your state's laws.
Deducting Late Fees
When you deduct late fees from the deposit, you have to provide your tenant with a statement of the specific fees that were deducted, and you must refund any portion of the deposit that's left. Different states establish different guidelines for how long you have to do this. In California, for example, landlords have 21 days to either return the deposit or send the tenant an itemized list of deductions. If you don't itemize the deductions, you could forfeit your right to retain the deposit, and your tenant can sue you.
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