The “Once Per Year” Exception

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Commercial leases are full of “dos” and “don’ts” along with penalties for doing any of the “don’ts”” and/or not doing any of the “dos.” The good news is that there are also typically grace periods before the associated fees, interest, etc. apply. These penalties can range from nominal fees to the landlord terminating the tenant’s right to possession of the premises and accelerating the remaining rental payments. Grace periods can also range from a couple days to a relatively indefinite amount of time under the condition that the tenant is diligently pursuing a cure to the default in question.

While most numbers are relatively arbitrary there are generally accepted/reasonable standards that limit grace periods and penalties. For example, some landlords may provide a tenant up to 5 business days after written notice for nonpayment of rent before it is considered an event of default while others may only provide 3 days with no written notice. Both could be considered “reasonable” but most would agree that 30 days is not. Another example, and the focus of this article, is the interest and/or late fees incurred for the nonpayment of base rent or additional rent. While the interest is generally capped at the highest non-usurious rate allowed by law, the additional rate above the Prime Rate and fee amounts can vary based on the tenant’s negotiating leverage, market conditions, etc.

When it comes to penalties, tenants can try and extend the grace period and/or limit the fee/interest charged, but this could raise some red flags in the landlord’s eyes. Grace periods are already a concession on the part of the landlord and the penalties are in place to compel the tenant to abide by the terms of the lease. If a tenant is pushing back on what could already be considered “reasonable” terms and/or “nibbling” at relatively arbitrary numbers it can give the impression that they intend to pay late or are concerned with their ability to pay rent on time and are trying to mitigate their damages.

The solution I recommend is to accept the existing fee/interest amount but request an exception once per calendar year. This shows that the tenant understands the burden their violation will/can have on the landlord and acknowledges their fault by means of compensating the landlord based on the landlord’s own calculation of their damages. It also allows for honest mistakes/oversights that could arise because the tenant is on vacation, overlooks a notice/invoice from the landlord, etc. without having to incur costly penalties. Default provisions for nonpayment of rent would still apply, but the “once per calendar year” exception can be an effective, efficient, and mutually acceptable solution for both parties.

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