Co-ops Authorized to Charge 8% Late Fee Proprietary Lease Must Allow for Fees, Says Gov

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On December 22, 2021, Governor Hochul finally signed into law the amendment which exempts cooperatives from many of the onerous provisions of the Housing Stability and Tenant Protection Act (HSTPA) of 2019.  Under the HSTPA, late fees imposed by landlords, including co-ops, were limited to $50 or 5% of the monthly rent, whichever was lower.  The law that went into effect last week (Real Property Law Section 238-A) allows a cooperative (with the exception of Mitchell-Lamas and HDFCs which are still subject to the 5% or $50 limitation) to impose “a fee of up to 8% of the monthly maintenance fee for the late payment of the monthly maintenance fee if the proprietary lease or occupancy agreement provides for such fee.” 

While at first blush this seems like reasonably good news, there are substantial problems with the amendment, and co-ops are urged to update their proprietary lease to address issues the amendment creates. 

First, most proprietary leases do not provide for the imposition of  a late fee.  The common provision in proprietary leases provides that in the event a shareholder fails to pay maintenance promptly, the shareholder shall be liable for interest at the maximum legal rate allowed by law.  Interest and a late fee are not the same things. (Indeed, think about your credit card bill if you have ever been late). Since the new legislation specifically requires the proprietary lease to authorize a late fee, there is a good chance that imposing the 8% fee will not be considered an authorized charge under the common lease provision. 

If your lease has language that allows for the imposition of a late fee (or has already been amended), late fees in excess of 8% need to be reduced immediately. Alternatively, to avoid having to calculate the maximum legal late fee on a per-apartment basis, you can impose a fixed sum - so long as that sum is not greater than 8% of the lowest charged maintenance to any shareholder. It is our opinion that in the event a late charge exceeds the authorized amount, the court will likely strike the fee completely and not reduce it to the legal limit.

Further, although the statute authorizes the imposition of an 8% charge, it is authorizing it as a fee, and not as a legal interest rate. The standard proprietary lease allows interest to be charged  to a shareholder at the highest legal rate allowed by law. For an individual, that is 16% which accrues over the course of the entire year (i.e., 1.33% per month).  Here, a one time 8% charge imposed after expiration of the grace period, is likely to be considered usurious and unenforceable, especially if the shareholder defaults for numerous months and 8% is added each month.

Previously, arguments about the enforceability of late fees included an argument that the cooperative had the inherent authority to impose fines for violation of the rules. Now, the statute requires the proprietary lease to expressly authorize the charge.

Accordingly, we are strongly recommending that any co-op that wants to be able to impose the 8% fee undertake a proprietary lease amendment immediately. While many co-ops might seek to amend their house rules to provide for a late fee since (unlike an amendment to a proprietary lease), boards may generally revise house rules without a shareholder vote, boards should note that courts may view this strategy as an improper lease amendment and find it an unacceptable “end run” around the statute.

We would suggest that the language allow imposition of a late fee at the discretion of the board up to the highest rate allowed by law. This way, even if the law is further amended, the proprietary lease need not be. If a cooperative chooses to impose a late fee without amending the lease, we strongly urge you to bring it down to the 8% maximum so that there is at least an argument that you comply with the statute. Alternately, you can live with the standard proprietary lease provision and charge the 16% per year interest charge authorized by the lease.

Stewart Wurtzel is a partner with the law firm of Tane Waterman & Wurtzel PC in New York City.

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