THE LEGALITY OF LATE-PAYMENT CHARGES IN PHILIPPINE LEASES (Updated to 18 July 2025)
Executive summary
Late-payment fees are lawful in the Philippines only when they are:
- Expressly stipulated in a written lease;
- Reasonable and not unconscionable (Civil Code, Art. 1229); and
- Compatible with special rental statutes—principally the Rent Control Act (RA 9653 as extended by RA 11571) and its Implementing Rules and Regulations (IRR).
When any of those limits is breached a court, the Department of Human Settlements and Urban Development (DHSUD, formerly HLURB), or a local housing board may strike down or reduce the penalty.
1. Statutory framework
| Source | Key provisions on late fees |
|---|---|
| Civil Code of the Philippines (Arts. 1654-1688, 1306, 1159-1169, 1226-1230) | Freedom to stipulate (Art. 1306); lessee’s duty to pay rent (Art. 1654 (1)); lessor’s right to rescind after demand (Art. 1657); penalties treated as ‘civil indemnity’ that may be reduced if “iniquitous or unconscionable” (Art. 1229). |
| Bangko Sentral ng Pilipinas (BSP) Circular 799-2013 | Sets the legal interest rate at 6 % per annum (simple, not compounded) when courts award compensatory or monetary interest absent stipulation. |
| Usury Law (Act No. 2655) & CB Circular 905-1982 | Usury ceilings suspended, so parties may fix any interest, but courts can still invalidate rates that offend public policy. |
| B.P. Blg. 25 (1979) & B.P. Blg. 877 (1985) | Earlier rent-control laws; important historically because the Supreme Court still cites their policy against oppressive charges. |
| Rent Control Act of 2009 (RA 9653) as extended by RA 11571 (2021) | Covers units whose monthly rent does not exceed ₱ 15 000 in NCR and highly-urbanized cities, or ₱ 8 000 elsewhere, until 31 Dec 2027. • Caps annual rent increases (currently 4 % per year). • Section 7 & IRR Rule VI: prohibitions on deposits (max 1-month advance + 1-month deposit) and express cap on late penalties: not more than 1 % of unpaid rent per month and never more than one month’s rent in total. |
| Bayanihan to Heal as One Act (RA 11469, Mar–Jun 2020) & Bayanihan 2 (RA 11494, Sep 2020–Dec 2020) | Temporarily barred the imposition of interest, penalties, fees and other charges on residential and commercial rent falling due within the grace periods. No longer in force but shows legislative policy against harsh penalties during emergencies. |
| Local government ordinances | Some cities (e.g., Quezon City Ordinance SP-2965 S-2020) echo or tighten the 1 % rule; always check the city or municipal code where the property lies. |
2. Contractual freedom vs. mandatory limits
Freedom to stipulate (Art. 1306) – Landlords and tenants may agree on any penalty, flat or percentage.
But the stipulation must not be:
- Prohibited by statute – e.g., exceeding the 1 %/one-month ceiling for rent-controlled units.
- Contrary to morals, good customs, public order or public policy – the catch-all test.
Judicial power to moderate – Under Art. 1229, courts may reduce penalties they deem “iniquitous or unconscionable,” even if freely agreed. Philippine courts have voided or trimmed:
- 10 % per month penalties on unpaid rent;
- Flat surcharges of ₱500/day on hostel rooms;
- Compound interest that effectively exceeds 60 % per annum.
3. How courts classify late fees
| Classification | Legal treatment |
|---|---|
| Penalty clause (typical fixed ₱500 or 5 % per month) | Governed by Arts. 1226-1230. May be reduced under Art. 1229. |
| Conventional interest (e.g., 3 % per month “interest” on arrears) | Permitted if written (Art. 1956) but subject to unconscionability doctrine. |
| Liquidated damages (e.g., automatic forfeiture of deposit) | Also a penalty clause; same moderation test applies. |
| Compensatory / legal interest (awarded by court) | 6 % p.a. simple interest under BSP Circular 799, running from date of demand or filing, in lieu of contractual penalties struck down. |
4. Coverage of the Rent Control Act
Which units are covered (2021-2027)
- Residential units (including boarding houses, dorms, bedspaces) ≤ ₱15 000/month in NCR/HUCs or ≤ ₱8 000/month elsewhere.
Late-fee rules inside coverage
- Cap: maximum 1 % of the amount due per month; total penalties cannot exceed one month’s rent for any single delay.
- Method: simple interest; no compounding.
- No other surcharges (e.g., “processing fee,” “notice fee”).
Outside coverage
- No statutory ceiling, but the general Civil Code limits still apply.
- Courts often look to the Rent Control cap as a guide for what is reasonable, even for high-end leases.
5. Illustrative jurisprudence
| Case | Ratio decidendi on penalties |
|---|---|
| Spouses Abella v. Abella, G.R. 122734 (25 Nov 1998) | Struck down 10 % monthly interest on lease arrears as “shocking to the conscience.” Reduced to 1 % p.m. |
| Spouses Castro v. Tan, G.R. 150773 (23 Aug 2012) | “Automatic forfeiture of two-month deposit if rent is a day late” declared void; deposit applied to unpaid rent pro-rata. |
| Solidbank v. CA, G.R. 155132 (21 Jun 2005) | General rule: courts may reduce agreed penalties that exceed double the market rate of interest. |
| PSBank v. Courts of Appeals, G.R. 180138 (20 Jun 2018) | Reaffirmed that a 3 % per month penalty, though not usurious per se, may still be void if unexplained or oppressive. |
(No Supreme Court decision to date has upheld a residential rent late fee higher than 3 % per month without reduction.)
6. Remedies and procedure
Collection without eviction
- Demand letter → small-claims* suit (≤ ₱400 000 after A.M. 21-06-02-SC) or regular civil action to recover unpaid rent plus allowable late fees.
Eviction (unlawful detainer)
- Landlord must first make a written demand to pay within 15 days (or 3 days for commercial space) under Rule 70, then file ejectment if default continues.
- Courts often award either reasonable late fees or 6 % legal interest—not both.
Administrative complaint (covered units)
- File with the DHSUD Regional Adjudication Board; conciliation mandatory.
Alternative dispute resolution
- Barangay mediation (katarungang pambarangay) is a pre-condition for MTC filing if parties reside in the same city/municipality.
* Small claims courts cannot award attorneys’ fees, but they can award contractual penalties if proved valid.
7. Special situations
| Scenario | Effect on late fees |
|---|---|
| Pandemic grace periods (2020) | Late fees that accrued during Bayanihan 1-2 periods were illegal and uncollectible. |
| Rent paid by electronic transfer & clearing delayed | If the lease treats payment as perfected on date of transfer, late fee cannot be charged for bank-clearing delays. |
| Security deposit application | Landlord may apply deposit to unpaid rent only after lease expiry unless parties agree otherwise; doing so mid-lease does not erase late-fee liability unless expressly stipulated. |
| Local emergency ordinances | LGUs may freeze rent and fees (e.g., post-typhoon), temporarily suspending penalties. |
8. Drafting tips
For landlords
- State late fee clearly: amount, computation base, frequency (per month, not per day), maximum cap.
- Add example calculations to forestall ambiguity.
- Provide for grace period (commonly 3–5 banking days) to show good faith.
- Insert a moderation clause (“The parties agree to submit any dispute as to reasonableness of the penalty to DHSUD/Courts”).
For tenants
- Negotiate the rate: courts rarely uphold more than 2 % per month for residential tenancies.
- Avoid blanket forfeiture clauses.
- Keep proof of rent payment and of any emergency circumstances (illness, calamity) that may justify equity.
9. Compliance and enforcement checklist
| Item | Yes/No |
|---|---|
| Written lease exists and signed by both parties? | |
| Late-payment clause present, with rate or flat amount? | |
| Rate ≤ 1 % p.m. and total ≤ 1 month’s rent (if unit is rent-controlled)? | |
| Clause free from compounding or daily surcharges? | |
| Demand letter procedure specified (days to cure)? | |
| Venue and ADR clause consistent with Rule 70/DHSUD? |
Conclusion
Philippine law does not prohibit late-payment charges outright; it disciplines them through a web of civil-law principles, rent-control caps, and judicial oversight. The safe harbour for residential leases is ≤ 1 % of unpaid rent per month, never exceeding one month’s rent. Higher or compounded penalties invite reduction or nullity. For leases outside rent control, contractual freedom prevails, but the same “reasonableness” and “public policy” tests apply—so prudent landlords heed the rent-control benchmark anyway.
This article provides general information only and is not a substitute for individualized legal advice. When in doubt, consult Philippine counsel or the DHSUD regional office with jurisdiction over the property.