Penalty Payments

Penalty payments will often be provided for in respect of late rent payments, or for dealing with NSF cheques. In this regard the law distinguishes between what are legitimate, pre-estimated damages and what is in fact a penalty that bears no relation to the actual losses suffered as a result.

The general rule is that a genuine, pre-estimate of the losses a landlord might suffer are legitimate charges. However, charges that bear no relation to the amount a landlord might be out of pocket are a penalty and are illegal.

In one 2001 case, a landlord charged a late payment fee of $5.00 per day for 30 days on unpaid rent, with a premium of 25% being charged on amounts unpaid after 30 days. The judge found that the general legal principles included:

• A genuine pre-estimate of damage suffered by the landlord as a result of the non-payment was legal, but a threat designed to frighten the tenant was a penalty and not enforceable by law.
• A sum will be a penalty if is extravagant and a large amount, compared to the most the landlord could expect to lose.
• If the tenant agrees to pay a certain sum of money, and a larger sum if the first sum is not paid, the larger sum is a penalty.
• In deciding whether something is a penalty or a genuine pre-estimate of damages, you need to look at the whole agreement.

In the case it was decided that the $5.00 fee per day was a penalty as it was exorbitant compared to the rent of $325 per month and it applied whether the tenant was even $1 short in rent.

To avoid litigation at a point when you might need extra money to rent another place to live, it is better to read and understand your lease at the time you make it. If you see payments that are high and which you would have trouble meeting, you can make a decision at that point as to go ahead and rent, talk to the landlord about changing the terms, or renting elsewhere.

May 2005