The California Court of Appeals on September 29, 2022, ruled in HONCHARIW v MJB CAPITAL that late fees and default interest provisions in commercial real estate loan documents may not be enforceable in all instances.
In Honchariw, the lender, FJM Private Mortgage Fund, LLC, on a single late payment invoked provisions of the note imposing a one time 10% fee assessed against the overdue payment and a default interest charge of 9.99% per annum assessed against the total unpaid principal balance of the loan. In a lengthy analysis of California law relating to liquidated damages in non-consumer contracts, the court considered late fees in the context of liquidated damages. Liquidated damages in California are predicated upon law that provides there must be a reasonable relationship between the amount of liquidated damages (which in the case the court viewed late fees as a form of liquidated damages) and harm to the other contracting party (in this case the lender) – and not be punitive in nature.
The Court held that to charge late fees on a missed installment, plus default interest on the unpaid balance of a loan not matured, would be punitive in nature, and thus not permitted.
GERSONLAW encourages lenders to review off the shelf loan templates and carefully consider calculations of late fees and default interest on commercial real estate loans.
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GERSON LAW represents clients on all matters real estate and business related, both transactional and litigation. The firm is nationally recognized for its representation of some of the nation’s largest lenders on loan closings, special servicing, and enforcement proceedings throughout the united states. GERSON LAW’s practice includes representing lenders closing loans under Fannie Mae’s DUS lending program and Freddie Mac’s program plus for multifamily investments. The firm represents major national banks, life insurance companies, and private funds in all matters lending related, including originations and loss mitigation strategies, for hotels, office buildings, shopping centers, multifamily and construction.