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Grace Periods and Late Fees

August 8, 2022

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Should you allow your tenants a grace period to pay their rent after it’s due without incurring a late fee?

If so, when should late fees kick in if rent is behind? And how much should you charge for late fees?

There are no simple answers to these questions.

On the one hand, giving your renters a couple extra days to pay can improve their experience with you and make them more likely to renew their lease.

And many states require a grace period by law.

On the other hand, you’re not getting paid by the date stipulated in the lease agreement.

If you need guidelines for the length of your grace period and how much to charge in late fees, you’ve come to the right place.

Let’s take a closer look at grace periods and late fees, and examine all the options open to you.

What is a Grace Period?

A grace period is a period of time beyond the rent due date during which a tenant may submit their payment without incurring a late fee.

For example, if you require rent to be due on the first of the month and have a three-day grace period, then your tenants have until the end of the third day to deliver the full payment. If they pay on the fourth day or later, they must pay the late fee described in their lease.

Many states have grace period laws. States that require grace periods try to provide tenants with additional time to deliver the rent payment because transferring money is not always immediate. Texas, for instance, mandates a grace period of at least two days. Texan landlords can establish a longer grace period, but by law, they must give renters a minimum of two full days after the due date to pay rent before charging late fees.

If your state doesn’t have a grace period law, you can decide how lenient you want to be. Three to five days is typical in the rental business industry. All of this should be spelled out in your leases, regardless of whether or not there is a grace period.

Reasons to Allow a Grace Period

It makes sense to allow a grace period for a few reasons:

Landlords know that money might still be transferring. Rather than deal with a bounced check, most landlords opt to give tenants a few extra days to pay, so that tenants can ensure there are sufficient funds in their account prior to payment.

Likewise, a grace period helps cover unexpected or rare cases where the tenant cannot pay on time. For example, if the tenant is away on vacation or business that day, it’s a holiday, or the bank is closed, then the tenant may not be able to pay on time. The grace period provides tenants with some extra days to take care of any unexpected delays.

Lastly, some tenants live closer to a paycheck-to-paycheck lifestyle than others. It can be stressful for them if they’re paid on the first of the month and have to pay rent on the first of the month. Providing a grace period may help you keep a trusted tenant who might otherwise try to find a new place to live.

While there are good reasons to have a grace period, it shouldn’t become something tenants rely on. A strong tenant screening process, proactive communication, and charging late fees should prevent you from being in these situations very often.

The End of the Grace Period and Late Fees

Most states don’t put a specific cap on late fees. However, this doesn’t mean that you can charge whatever you want. Under general legal principles, you cannot set a gratuitous amount. And you should always make sure late fees are clearly stated in your lease terms.

Your late fee shouldn’t exceed 5% of the rent amount. For example, if rent is $750 per month, then a late fee shouldn’t be higher than $38.

However, there are exceptions (think eleven days or more) that make a steeper late fee, like 10% of the rent, quite reasonable.

Simply put, a tenant is outside the lease terms once they haven’t paid on time, and you’re well within your rights to collect a late fee. Furthermore, it’s a good idea to show that there are consequences to their actions and limitations to your goodwill.

The second option, eviction, should be the last resort. However, if the tenant has a history of missing payments, it may be time to consider evicting them. This is time-consuming and costly, though, so do your best to collect the rent and pursue the first option.

Be Consistent

An important part of grace periods and late fees is consistency. For example, you don’t want to be accused of unfair or discriminatory practices because you charged one tenant a late fee but not another.

If your state doesn’t have a required grace period by law, adding a blanket statement to your lease with specific reasons as to why you may allow a grace period is a good idea. After all, you don’t want to lose great tenants just because of a singular misfortune or one unforeseen circumstance. And being crystal clear about late fee amounts and stipulations is necessary for a successful rental business.

The specifics will be up to you but having a grace period supplies your tenants with a safety net in certain situations, and late fees add extra incentive to pay on time or during that grace period.

Conclusion

Grace periods allow tenants to pay rent after life throws them a curveball, but they are not an excuse to skip paying for rent on time every month.

Late fees help encourage payment on time and in full.

Together, grace periods and late fees can complement each other by giving tenants reasonable flexibility, but also adding consequences if tenants don’t abide by their lease agreement.

By ensuring your lease agreement has clear information about grace periods, rental due dates, and late fees, you set yourself and your tenants up for success and a healthy relationship.

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