Tenant Fees: How Much Is Too Much?

by Chris on August 24, 2020

Some landlords view tenant fees as a viable profit center, and the temptation to make up losses from the pandemic may lead them to consider changing their fee structures.

It may seem like the sky is the limit when it comes to tenant fees but charging excessive fees can backfire. Before you start charging tenants more, consider how much is too much.

There are three factors landlords must weigh when charging tenant fees:

Is the type or amount of fee charged illegal?
Is the fee unenforceable?
Does the fee negatively impact marketability?

Application Fees

Take the example of application fees. A handful of states and cities prohibit application fees altogether, while others limit the charge to either the specific cost of a tenant background check or a statutory amount, typically $50 or less.

In other states, there are no specific limits on what a landlord can charge. However, once a tenant advocate gets wind of an excessive fee, a dispute will arise. Ultimately, a judge may decide if the application fee provision is enforceable.

Judges tend to look at fees as reimbursement, and not as a profit center for landlords. If most landlords charge $35-$50 dollars or have the tenant pay for the tenant screening reports, a landlord who charges $500 will have difficulty proving that the fee charged represents a legitimate out-of-pocket expense.

It may not seem like a big deal to squabble with one tenant over an excessive fee, but keep in mind that former tenants and applicants who have been rejected all can join in a lawsuit. For landlords with multiple tenants, that adds up quickly.  Some landlords are targeted by a state’s attorney general and wind up paying fines and legal fees.

As difficult as it is to justify a high application fee, it is nearly impossible for a landlord to justify keeping the application fee when no tenant background check was conducted.

Finally, a landlord must consider the impact a hefty application fee will have on marketability, especially now, in the face of a pandemic. Good tenants go with the best deals. Bad tenants pick up what is left over. It only takes one or two bad tenants over the course of a leasing cycle to injure the landlord’s reputation and eventually lower the overall value of the property. Extended vacancies and damaged units go the landlord’s bottom line.

Late Fees

Late fees are another example of how landlords can get into trouble by charging too much. As with application fees, late fees are regulated by state and local governments. The fee may be prohibited altogether, or more commonly, limited to a specific amount. Typically, late fees are capped at around $20-$35. Sometimes the fee is tied to the overall rent charged and may be higher in high-end properties.

Landlords cannot skirt these rules by calling a late fee something else, like using the language “rent incentive” when charging excessive late fees. A landlord may promise to give the tenant a “discount” of $200 if rent is paid on time. Of course, the rent was inflated by $200. It is unlikely a judge would enforce a $200 late fee on an average rental, especially where the fee is charged in the first few days of the month, and where the landlord cannot show any out-of-pocket losses.

“Rent incentives” also are problematic in that minority tenants tend to make less money and may never receive the discount. Charging higher rent to minority tenants in illegal.

Judges often throw out provisions in lease agreements that allow the landlord to stack or roll the late fee into the next month or refuse to enforce an eviction over late fees alone.

When considering late fees, a judge also may look at other fees that are included in the lease, such as an excessive application fee, and determine that the lease agreement in its entirety is unfair — and unenforceable.

A reputation for illegal or excessive late fees will be apparent in social media, ratings, and reviews. That scares away the best tenants, leaving the property to founder on bad tenants — an opportunity for investors seeking underperforming properties so they can drive down the price.

Amenity and Management Fees

Some state and local governments limit the specific types of fees a landlord can charge. For instance, a state may allow an application fee and late fees only. More commonly, the local rental regulations leave it open. That incentivizes some landlords to get creative with fees. This is where landlords tend to get into the most trouble.

For instance, renaming an application fee an “amenity” fee and burying it in the lease agreement does not shortcut the statutes limiting application fees. Charging twice as much for an application fee because application fees are allowed the other fees are not won’t work, either. Landlords need to look at the overall intent of the rental regulations — to keep housing affordable for tenants.

Advertising a property’s amenities and tying that to rent, then going in and charging à la carte for those amenities can lead to lawsuits for discrimination, false advertising, and even fraud.

Landlords also must understand that, as private citizens, they do not have the right to charge a penalty for violations of the lease agreement. A common example is an exorbitant early termination fee. Penalties are by their very nature excessive fees because they are designed to punish the tenant, not compensate the landlord for an out-of-pocket expense. Some landlords go so far as to call a fee a penalty in the lease agreement, but any fee that is so high as to serve as punishment can be deemed a penalty.

Likewise, landlords generally cannot increase or add fees unilaterally or mid-lease.

When these cases come to court, judges look at the overall cost of the lease agreement to determine the relative fairness. Of course, there may be judges here and there who might allow a landlord to charge fees higher than industry standards, but those cases are rare. Most judges are not going to allow landlords to profit via fees. Instead, fees will be tied to the out-of-pocket expenses of the landlord.

These have been hard lessons for some landlords to learn. A landlord who charged a 15% “administrative” fee for handling security deposits paid $30,000 in a settlement with his state’s attorney general. A major property management firm paid $2 million for attempting to bury prohibited upfront fees throughout the lease, including charges for advertised amenities, a “move-in” fee, and a “community” fee. A smaller landlord business paid $11,000 to a tenant after attempting to enforce a no-pets policy by assessing a $600 penalty after the tenant’s daughter visited the apartment with her dog.

Landlords who charge “creative” fees tend to find themselves at odds with tenants, who quickly are turned off by the nickel and dime scenario. Good ones go to greener pastures. Those who stay quickly become disgruntled. Either way, the short-term gain gives way to the injury to reputation, the loss of prestige of the property, and ultimately, the loss of property value.

Profits from a rental come not only from monthly rent, but also from the appreciation of the property and the goodwill of the business. Buyers won’t pay premium prices for underperforming properties or risk liability by taking on illegal leases. Instead, investors will look to drive down the price. The short-term gain from fees may be overshadowed when it comes time to sell or refinance the property.

Landlords make money by earning market rent, keeping their costs low, and keeping the property value high. That requires attracting the best tenants and fostering tenant retention. Excessive fees only get in the way of that.

This post is provided by Tenant Verification Service, Inc., helping landlords reduce the risks of renting with fraud prevention tools that include Tenant Screening, Tenant Background Checks, (U.S. and Canada), as well as Criminal Background Checks, and Eviction Reports (U.S. only).

Click Here to Receive Landlord Credit Reports.

Disclaimer: The information provided in this post is not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.

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