Should Lenders Agree to Requests to Remove Late Fees From Promissory Notes?
It is very common for a promissory note to provide that if a payment is not made within a certain number of days after the due date, the borrower will owe a late fee of 5 percent of the delinquent payment. That late fee can become very costly when the note is not self-amortizing and has a balloon payment at the maturity date.
It is not unusual for borrower’s counsel to request that the late fee not apply to the final payment due at maturity. Our experience is that most lenders will agree to this request because the lenders realize that collecting a 5 percent late fee on a large balloon payment bears little relationship to the damages the lender may incur by the late payment. In particular, when the promissory note provides for a default interest rate and provides that the lender may recover all costs of collections, including attorney’s fees, the late fee begins to appear to be a penalty rather than liquidated damages, which are required to have some semblance to the actual loss suffered by the lender.
If you read "Cautionary Tale: Late Fees in Loan Documents Might Not Hold Up in Court" by my colleague Matt DiMeglio, you know an appellate court in Arizona found that assessing a 5 percent late fee on a balloon payment was not enforceable as liquidated damages but rather was an unenforceable penalty due to the size of the late fee, the existence of a default interest rate, and typical provisions providing for recovery of costs of collection.
We are not aware of any appellate court decisions in the Washington, DC metropolitan area that consider a late fee incurred in connection with a balloon payment unenforceable as a penalty. However, we would advise our clients that if asked to modify loan documents to eliminate the late fee on a balloon payment, they agree to such a request as a reasonable accommodation to the borrower.
Larry Lerman is a commercial lending and real estate attorney who structures and documents complex commercial lending arrangements and represents parties who are buying, selling, leasing and financing commercial real estate. For more information about late fees in promissory notes, contact Larry at (301) 657-0163 or firstname.lastname@example.org.