Are 5% Daily Penalties in City Ordinances Legal?

Usury, Local Tax Powers, and Due Process in the Philippines

Bottom line (in plain language)

A city ordinance that slaps a 5% penalty per day for late payment of a local fee or tax is almost certainly invalid. It will usually (1) exceed the penalty caps the Local Government Code allows for local taxes and charges, (2) be confiscatory and unreasonable under substantive due process, and (3) be reducible by courts as an unconscionable penalty. While “usury” as statutory ceilings on interest on loans has long been suspended, that does not license local governments to impose sky-high penalties. Different legal regimes apply.

Below is a full walk-through you can use to analyze, draft, or challenge such ordinances.

I. The legal puzzle: interest vs. penalty vs. local power

Interest vs. Penalty (Civil Code concepts).
- Interest compensates for the use or forbearance of money.
- A penalty clause is a pre-agreed punitive sum for breach or delay, distinct from compensatory interest.
- Courts can reduce penalties and liquidated damages if they are iniquitous or unconscionable (Civil Code, e.g., Arts. 1229 and 2227 principles).
“Usury” today.
- The Usury Law was not repealed, but statutory ceilings were suspended decades ago by monetary authorities.
- Result: No fixed legal ceiling on interest in private loans, but courts routinely strike down or reduce excessive interest and penalties as unconscionable. Numerous cases cut back rates like 5% per month and similar steep penalty charges.
- Key point: Usury rules address loans/forbearance between private parties. Local taxes and regulatory charges are governed primarily by public law, not by the Usury Law.
Local Government power is not limitless.
- LGUs may levy taxes, fees, and charges and provide surcharges and interest for late payment only as authorized by the Local Government Code (LGC) and consistent with due process.
- Cities can prescribe fines/penalties for ordinance violations, but the LGC caps those penal sanctions (fines and imprisonment) and separately limits surcharges and interest for late payment of local taxes/fees.

II. The statutory guardrails that usually kill “5% per day”

For late payment of LGU taxes, fees, or charges.
- The LGC authorizes:
  - a surcharge of up to 25% of the amount due; and
  - interest of up to 2% per month on the unpaid amount, capped at a maximum of 36 months (i.e., no endless compounding).
- A “5% per day” provision blows past both the rate (2% per month vs 5% per day) and the duration cap. It’s therefore ultra vires (beyond LGU authority) and void as to that feature.
For general ordinance violations (penal provisions).
- The LGC also limits penal fines and imprisonment cities may impose for ordinance violations. While wording varies by unit (city vs. municipality), cities generally top out at a fine not exceeding ₱5,000 and/or imprisonment not exceeding one (1) year, unless a special law authorizes more.
- A “5% per day” monetary penalty formula can’t be used to evade those caps (e.g., by re-labeling a running penalty as a “fine”). If the practical effect is to exact an amount beyond LGC limits, courts treat it as invalid.

III. Constitutional due process & equal protection

Even apart from the LGC’s numeric caps, a 5% per day penalty is ripe for a constitutional hit:

Substantive due process (reasonableness test).
- Police-power measures must be reasonable, not oppressive, and not confiscatory.
- A compounding ~150% per month (≈ 1,825% per year) regime for a late local fee is facially excessive relative to the regulatory objective (timely compliance) and will likely be struck as arbitrary or confiscatory.
Equal protection.
- If the penalty disproportionately burdens a class (e.g., small vendors) without a fair and substantial relation to the ordinance goal, it risks invalidation. Tiered or escalating penalties must rest on real differences relevant to legitimate aims.
Overbreadth/vagueness.
- Penalties must be clear. Vague triggers (“non-compliant behavior” without definitions) or mechanical multipliers untethered to harm/risks invite void-for-vagueness challenges.

IV. Administrative law defects that also sink the ship

Ultra vires: An LGU cannot do indirectly (via “administrative penalty” labels) what the LGC does not allow directly for late taxes/fees. When the Code supplies specific surcharges and interest, local deviations are invalid.
Publication & effectivity.
- Ordinances must satisfy LGC publication/posting rules and take effect only after those requirements. Noncompliance is a common, fatal defect.
Procedural due process in enforcement.
- Before distraint/levy or closure, the LGU must give proper notice and observe statutory collection procedures. A draconian daily penalty often comes bundled with shortcut remedies that also fail procedural standards.

V. Why “usury” arguments still help—indirectly

Even though usury ceilings on loans are suspended, courts use unconscionability doctrine to trim sky-high interest and penalties. Litigants frequently analogize: if private parties can’t enforce 5%-per-month interest as unconscionable, why should an LGU extract 5%-per-day for a mere late fee? Courts tend to agree that public exactions cannot be more punitive than what contract law tolerates from private creditors—especially where the LGC already codifies lower caps.

VI. Litigation playbook (for challengers)

Identify the bucket
- Is the 5%/day clause attached to late payment of a tax/fee, or is it a penal fine for violating a regulatory rule? The LGC provides different caps for each.
Attack on multiple fronts
- Statutory: Cite the 25% surcharge + 2% per month (max 36 months) framework for late local dues; highlight conflict.
- Constitutional: Argue substantive due process (oppressive/confiscatory), equal protection, and vagueness if drafting is sloppy.
- Civil Code: Invoke reduction of unconscionable penalties (Arts. 1229/2227 principles).
- Administrative: Check publication, effectivity dates, and notice/collection procedure compliance.
Evidence & framing
- Compute the annualized bite (1,825%+ p.a.).
- Compare to LGC caps and to judicially reduced private-law rates.
- Show real-world impact: small businesses, cumulative accrual, inability to purge default, etc.
Remedies
- Seek declaratory relief and injunction against enforcement.
- Ask courts to nullify the offending clauses; for amounts already collected, seek refund or recomputation within legal caps.

VII. Drafting checklist (for LGUs who want to be safe)

Use the LGC template for late local dues:
- Surcharge: not more than 25% of the basic amount due.
- Interest: not more than 2% per month, capped at 36 months total.
Avoid daily multipliers. If you must escalate, use monthly or quarterly steps within the caps.
Distinguish:
- Administrative surcharge/interest (for late payment) vs.
- Penal fines (for ordinance violations) within ₱5,000 / up to 1 year limits for cities (and lower caps for municipalities), unless a special law authorizes more.
State clear triggers and cure periods; add notice provisions.
Include a severability clause and a proportionality statement explaining the regulatory objectives.
Ensure proper publication/posting and keep a proof file.

VIII. Worked example: why 5% per day is indefensible

Assume ₱10,000 regulatory fee paid 20 days late; ordinance says “5% penalty per day.”
Accrual = ₱10,000 × 5% × 20 = ₱10,000 (100% of principal) in less than three weeks—before any LGC surcharge/interest would have reached even a small fraction of that.
If allowed to run a year, that’s >1,800% per annum, dwarfing any legitimate deterrence rationale.
Conclusion: Ultra vires under the LGC and unreasonable under due process. Court should enjoin and, at most, recompute using ≤25% surcharge + ≤2%/month (max 36 months).

IX. Practical Q&A

Q1: Can a city call it a “service charge” to escape the caps? No. Substance over form applies. If it punishes lateness, it functions as a surcharge/interest and must follow LGC limits.

Q2: What if the penalty is tied to a license (e.g., sanitation permit) not a “tax”? If it’s a fee/charge under the LGC, the same late-payment caps generally apply. If it’s framed as a penal fine for non-compliance, the ₱5,000/1-year (city) penal cap controls.

Q3: Could “5% per day” ever survive? Only if a special national law expressly authorizes that specific penalty scheme for that specific subject—and even then it must pass due process proportionality. In practice, that authorization doesn’t exist for typical local taxes/fees.

Q4: If I already paid under a 5%/day ordinance, can I recover? Potentially. Seek refund/recomputation according to the LGC limits, subject to prescriptive periods for tax actions and local refund claims.

X. Takeaways

Usury ceilings are suspended for private loans, but LGUs are strictly bounded by the LGC and the Constitution.
A 5% per day late-payment penalty is textbook ultra vires and constitutionally suspect.
Safe harbor for LGUs: ≤25% surcharge and ≤2% per month interest, max 36 months; penal fines within LGC caps.
Litigation should plead statutory conflict + constitutional unreasonableness + Civil Code unconscionability—and demand injunctive and restitutive relief.

This article provides general legal analysis in the Philippine context and is not a substitute for tailored legal advice on a specific ordinance or dispute.