To determine whether a particular contract term should be enforced as a liquidated damages clause or ignored as an unenforceable penalty, courts will look at the intent of the parties, drawn from the contract and its surroundings. In this examination, the court must consider the relation which the amount stipulated bears to the extent of an injury which may be caused by the several breaches provided against, and the ease or difficulty of measuring damages. Commonwealth v. Musser Forests, 394 Pa. 205, 146 A.2d 714, 717 (1958); March v. Allabough, 103 Pa. 335, 341 (1883); Finkle v. Gulf & Western Mfg. Co., 744 F.2d 1015, 1021 (3rd Cir. 1984). Under this analysis the validity of several common clauses in form leases must be called into question.

Late Fees

To be enforceable as a valid liquidated damages provision, late fees must bear a reasonable relation to the consequential damages that a landlord incurs in receiving rent late. The loss of use of the rentals for the period of lateness can be valued in monetary terms by reference to interest rates. The landlord’s damages would be measured by reference to interest rates if he/she were to sue to recover the unpaid rentals, 68 P.S. §250.301. The landlord should not be able to claim a higher rate of compensation by disguising a penalty charge under the “late fees” label.

In Pennsylvania the legal rate of interest is six per cent (6%) per annum. 41 Pa. C.S.A. §202 Ralph Myers Contracting Corp. v. Commonwealth of Pa., 496 Pa. 197, 436 A.2d 612 (1981). The legal rate of interest would amount to a compensation of .5% interest per month for each month that a payment is not made. Late fees of $10 or $20 chargeable automatically when rent has not been paid by a specific due date create charges many times higher than any rate based on reasonable compensation for actual damages would allow. These fees are clearly penalties. They should be challenged as such.