Many businesses in California are struggling to pay April 2020 rent as a result of the impact of COVID-19.  Under the AIR CRE Leases, is Lessor entitled to late charges and interest if Rent is not paid on time?

Short Answer: Yes.  A late charge of 10% (or $100, whichever is greater) is due if Lessor does not receive Rent within the 5-day “grace period.”  Interest at 10% begins to accrue on the 31st day after the Rent was due.

5-Day “Grace Period” Before 10% Late Charge: Under Paragraph 13.4 of the AIR CRE Leases, if Lessee does not pay Rent on time, a late charge is not immediately incurred.  Rather, a late charge is incurred only if Rent is not “received by Lessor within 5 days after such amount shall be due.”  In a typical situation where Rent is due on the 1st of the month, if the Rent is received by Lessor by the 6th of the month, no late charge is incurred.  It is not enough for Lessee to send a check for Rent on the 6th; rather, it must be received by Lessor by the 6th. The amount of the late charge under the AIR CRE Lease is 10% (or $100, whichever is greater), which is a typical late charge even in custom leases.

10% Interest Begins 31 Days After Rent Due Date: In addition to possible late charges, Lessee is also liable for interest at 10% per annum pursuant to Paragraph 13.5.  The interest does not begin to accrue immediately.  Rather, the interest begins to accrue on the 31st day after the Rent was due.  Therefore, if Rent was due on April 1, interest due not begin to accrue until May 2.

Late Charges And Interest Often Not Enforced: Although the AIR CRE Leases provide for late charges and interest under the circumstances described above, many Lessors do not strictly enforce late charges and interest.  Some Lessors have a 10-day policy before late charges are issued.  Others do not enforce late charges unless Lessee has repeatedly paid late.  In general, Lessors enforce the 10% interest remedy less frequently than the late charge remedy.

Remedies For Non-Payment of Rent: In the event of non-payment of rent, under the AIR CRE Leases, Lessor has a number of remedies.  If Lessor provides written notice of failure to pay Rent, and Lessee does not cure it, Lessor’s remedies are described in Lessor’s Rights When Lessee Breaches the AIR CRE Lease.

Excerpt from AIR CRE Leases

13.4    Late Charges.  Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall immediately pay to Lessor a one-time late charge equal to 10% of each such overdue amount or $100, whichever is greater. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder.  In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and payable quarterly in advance. [Publisher’s Note: This final sentence of Paragraph 13.4 does not appear in the Multi-Tenant Month To Month Gross lease.]

13.5    Interest.  Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due shall bear interest from the 31st day after it was due. The interest (“Interest”) charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.