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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.
Click here for a PDF of the Court’s decision.
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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