Late Fees in Commercial Leases

In a dispute over a commercial lease, landlords typically insist on recovering all late fees stipulated in the lease when tenants default on rent and additional rent payments. On the flip side, tenants often resist paying these fees, arguing that they are unreasonably high and disproportionate to what they owe, despite what the lease states.

When such disputes arise, the court has to assess what constitutes an excessive late fee. Under New York law, if a commercial lease allows it, a landlord can indeed charge late fees in addition to rent. However, the court must determine whether these late fees amount to an unenforceable penalty.

Commercial Tenants Considered Sophisticated Parties

The burden of proving that the late fees are disproportionate and unconscionable falls on the party opposing payment. To establish unconscionability, it must be shown that the lease was both procedurally and substantively unconscionable at the time it was made, indicating a significant power disparity during negotiations.

For instance, if a commercial lease imposes late interest, such as 1.5% per month (equivalent to 18% annually) or the maximum legal rate in New York State, and these terms align with the lease provisions, the fees are likely to be considered enforceable. As long as there’s no evidence of unfair contractual terms or an imbalance in bargaining power, the court won’t find them unconscionable.

Do Usary Laws Apply?

Given the challenges of proving unconscionability, tenants often turn to a more objective claim – that the late fees violate usury laws. However, it’s important to note that New York’s interest rate statutes generally don’t apply to defaulted obligations in leases. This means that excessive fees typically won’t violate usury laws in the state.

Nonetheless, New York has a strong public policy against usurious rates exceeding 25%, and this applies to commercial lease late fees. If such a provision in a lease is deemed “unreasonable and confiscatory in nature,” it can be rendered unenforceable by the court.

In conclusion, while landlords understandably seek to enforce late fees as specified in commercial leases, it’s essential to be aware of New York’s public policy against unconscionable terms and exceeding usury limits, even in negotiations involving “sophisticated” parties with legal representation.