Default Interest

Default Interest

Many commercial leases state that if a tenant pays late or not at all, the outstanding amounts will be recovered with interest at a default interest rate. Default interest rates of more than 20% are common. Default simply refers to the tenant’s failure to pay the amount of rent due on time.  Interest is charged on the balance until paid.

Typically, default interest rates do not pose a problem if the tenant pays rent on time. If the tenant pays a little late, sometimes the landlord will make an exception and waive any default interest rate. But the landlord’s agreement to waive the default interest rate in one instance usually cannot be asserted to require the landlord to do so in another circumstance.

Unforeseen expenses can sometimes pose a problem for tenants. For example, if a landlord provides an unanticipated bill for utilities, property taxes, or common area maintenance charges, the lease may require such sums to be paid on short notice. The tenant, having not anticipated this, may not be able to pay this on time.  The default interest rate can soon put a financial strain on the tenant. There is no good cure for this other than vigilance or a lenient lease provision negotiated from the start.

The default interest rate plays a role in landlord-tenant litigation too. While the case is pending, the default interest meter is running. The accumulated interest will not matter if the tenant wins, but it will matter significantly if they lose.

Careful Analysis Can Reduce the Risk

In some cases, a careful analysis can reduce the risk. If the tenant knows that some unpaid rent is owed, even if other issues with the landlord are disputed, it may be wise to pay the amount of rent that is owed, either to the landlord or with permission of the court, into an escrow account to stop the risk of default interest. In one case, the tenant had to choose between paying their lawyer to stop a bogus lawsuit filed by the landlord and paying rent that they knew they owed. One can speculate that the legal system is at fault for requiring such a choice, but that does not change the necessity to recognize the issue, assess the risk, and then make an informed decision.

In all cases, the possibility of default interest requires the tenant’s lawyer to move the case to resolution fast.  It is not enough to poke along as if it were any other case. Delay has real, adverse consequences in these circumstances.

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