Many commercial mortgage lenders are focusing intently on whether they have a right to recover late fees on borrowers’ unpaid balloon payments. The answer: yes, it is possible, provided that the circumstances of the payment comply with the loan documents and governing state’s law, which can vary.
Generally, late fees are recoverable on a balloon payment when (1) the contract clearly applies the fees to the payment; (2) the fees do not constitute interest for purposes of, or do not violate, the state’s usury prohibitions; and (3) the late fees are not determined to be an invalid liquidated-damages provision. Most often, the first issue is the most important. While the tests vary somewhat from state to state, here are a few state-specific issues that our clients frequently encounter.