The Problem With Late Fees In Michigan’s Courtrooms

Recently I published an article about Why Landlord’s charge large late fees.  All states have different regulations on how much of a late fee can be charged and when.  In Michigan, it is effectively up to the judge, adding drama and uncertainty to eviction hearings.  Here is how I learned this and what steps I am taking to ensure timely rent collection in the future.

Michigan’s Law on Late Fees:

The thing is…Michigan does NOT have a specific regulation for late fees charged by landlords.  This is especially interesting because Michigan DOES have a specific regulation for late fees when it comes to storage units! Under MCL 570.523 it is stated:

“A monthly late fee of $20.00 or 20% of the monthly rental amount, whichever is greater, shall be considered reasonable and is not a penalty.”

A reasonable person would assume this same standard, up to 20% of the rental amount would be considered reasonable under Michigan law for rental houses and apartments since it is “reasonable and not a penalty” for storage operators.

A landlord and tenant may enter into any agreement they choose to, and late fees are generally described in the lease.  In Michigan if a landlord/tenant dispute over rent payment reaches a courtroom, a judge can decide whether a late fee is “reasonable” or not and choose to not enforce a late fee, even if agreed upon in a lease. This is the part that is really frustrating to me.  Adults should not be restricted in their ability to enter into consensual contracts with each other. The landlord and tenant agreed, in a written contract to the lease terms, yet a judge can effectively throw out the terms of the lease.

Our Visit To Court:

We have a tenant who has lived in one of our units for 5 months and has been late in payment for 4 of those months.  The degree of lateness has gotten more significant.  As a percentage of the rent, the late fee we charge is just under 12%, a flat fee of $100 if rent is not paid by the 4th.

Mrs. C. handles all of our court stuff and needed to go to court with this tenant who at this point was almost 2 months behind. In the first court hearing the original judge gave the tenant 2 more weeks to pay their rent in full.  The tenant stated they had the funds and would pay that day.

2 weeks later the rent had not been paid and Mrs. C. was back in the court room with a different judge.  This judge looked over the case, gave a possession order for 10 days out, stating that the tenant could either A. pay their rent within 10 days, or B. be moved out within 10 days.  The judge did however, have issue with our late fee.

The judge stated that in Michigan landlord’s may charge a late fee, but it must be reasonable and not a penalty.  She then stated that for it to be “reasonable” it must be based on the actual costs the landlord incurs with the rent being late. She went even further to compare the late fee to what interest we would earn if the money were put in a savings account.  Most savings accounts pay around 0.25% interest, so for $850, this would be 17 cents.   Does 17 cents sound like a reasonable late fee for an apartment?

In this judge’s eyes, landlords should provide credit to tenants at the rate banks pay interest on savings.  This is far, far from reasonable.  If we based it on actual costs, The money I receive from the tenant pays for the credit card I use to maintain the building. My AMEX card charges me 22% APR interest. This would still result in a late fee of only $15.58, which is not enough of a deterrent to drive tenants to pay their rent on time. With a $15 late fee on a rent of $850, tenants will always pay their rent last, because it is only costing them $15 to borrow $850 for the month. I inherited tenants in a building where the late fee had always been $20.  NOBODY paid on time, because it was cheap money to borrow. There was no consequence for paying late.

In my view, reasonable would be to compare it to unsecured credit that that tenant would be able to get elsewhere on the open market. In this instance, a pay day lender.  Check N Go charges $134 to borrow $1,000 for a month. My view does not matter though, it is the Judge’s view that matters, so now we have identified the problem, that a judge can throw out a landlord’s late fees, and we need to formulate a solution.

The Solution To Not Charging Late Fees:

If the only late fees that can be charged are inconsequential rounding errors, then they serve no point. Landlords in Michigan are therefore being told by the court system that late fees are not enforceable and do not matter. Here is now to get around this:

Option 1: Only rent to tenants with a credit score of 650 or above: The #1 way to not have to worry about a late fee is to screen out anyone with ANY history of not paying their bills on time. Don’t work with anyone with a history of non payment, no matter how small.  This would effectively close out the housing market to many people, but that is the consequence of these types of laws and activist judges.  It is completely legal to not rent to anyone who has any credit blemishes. The long term macro effect of a quarter of the US population not being able to get any housing is the fault of the law makers and judges.

Option 2: Only sign month to month leases.  Guess what? If a tenant wants to leave, they will leave regardless of the lease term.  But a month to month makes it easier to terminate for possession.  Rather than the late fee being the penalty for being late, being evicted will be the penalty. Only file for possession and then the tenant can not stay even if they come up with the money.

Option 3: A discount for paying on time: Rather than the rent being $850 a month, the rent is $950 a month and the tenant will receive a $100 rebate if their rent is paid on the 1st or earlier.  This seems like a work around, but it is expressly suggested in the Michigan Landlord Tenant handbook.

Option 4: Don’t Invest In Michigan. The next option, especially for people who live in southern counties of Michigan, is to consider investing in Indiana or Ohio instead.  Both states are much more landlord friendly.

The Goal Is Not To Evict or Collect Late Fees:

As I have said before, the goal is not to evict people or to collect late fees. I would be happy as can be if I never collected another late fee again.  I also don’t want to evict anyone. I see going to court at all as a loss.  The goal is to collect the money owed on time.  Landlords have to pay mortgages on the building, property taxes (which are much higher for landlords in MI), insurance, maintenance, and utilities on a monthly basis.  All of these payments come out. In no other service or industry and service providers expected to eat these costs routinely with no compensation.  Don’t pay your credit card on time? The interest rate explodes. Don’t pay the car note? It’s getting Repoed.   Going forward I will likely pivot to using all of options 1-3 in the future.

What have your experiences been with rental late fees and judges?