Rentals: Lawful or unlawful? Late payment penalties vs late payment interest

One of the biggest fears of any landlord in South Africa is that their tenant will stop paying their rental timeously or at all. The reason for this fear is that legal action must be taken against the tenant for the recovery of the arrear rental, and legal action can be very costly.

There are a number of lawful methods for a landlord to enforce their rights in terms of the lease agreement and use these rights to increase the probability of receiving rental timeously. Some of these include letters of demand, acknowledgement of debts, settlement negotiations, negative also known as adverse listing, and finally legal action. 

Another of the best methods at the disposal of landlords and property practitioners is the charging of late payment interest and late payment penalties. However, there is a big difference between these two terms and whilst one of them is regarded as a legal charge, the other is not.

It is unlawful to charge late payment penalties on unpaid rent

It is important to distinguish between these two debt recovery methods as one of them is a lawful charge whereas the other is not. Regulation 3(3)(a) of the Rental Housing Act Unfair Practice Regulations states that a lease agreement must exclude any provision which imposes a penalty for late payment of rent, whether or not the penalty takes the form of an administrative charge or any other form other than interest. Therefore, any late payment penalty that is included in your lease agreement would be an unlawful and unenforceable clause within your agreement.

Late payment interest explained

However, you are entitled to charge late payment interest. In terms of Regulation 42 of the National Credit Act, the maximum prescribed interest rate that can be charged on a lease agreement is 2% per month to a maximum of 24% per annum. This means that should your tenant fail to pay their rental by the first of the month (or a specific payment date set out in your lease agreement), then the first day after the payment date, the 2% interest on the total arrears can be charged immediately.

As the 2% is for the entire month, there is no need to calculate the pro-rata interest for each day if the rental remains unpaid where the tenant pays the full rental later in the month. The entire 2% remains payable by the tenant for any late payment after the payment date set out in your lease. This interest rate is also compounded monthly, therefore if the tenant has not paid their rental for January AND February then the 2% interest will be charged to the total arrears (January rental plus February rental).

This interest can be used as a deterrent for tenants to ensure that their rental is paid timeously in order to avoid exorbitant interest charges being levied on their account. However, this is the only late payment 'penalty' that can be charged in terms of the lease agreement, and no other penalties can be charged to the tenant for any late payment. An example of this would be a lease clause that states the tenant will be charged R150.00 a day for every day that the rental is not paid - this clause would be regarded as unlawful and unenforceable by virtue of Regulation 42 of the National Credit Act.

The TPN Lease Agreement sets this out clearly to ensure that the chargeable interest is included in your written agreement, and accordingly, landlords and property practitioners can use this collection method to ensure timeous rental payments. 

By Rowan Terry, Legal Counsel at TPN from MRI Software

https://www.tpn.co.za/group