By: Stephen C. Duringer, Esq.
The Duringer Law Group, PLC
QUESTION: Seems like every time I read the paper, some landlord is being sued for something. I think I manage my properties well, not sure anymore; is there anything that I can do to reduce my chances of being involved in litigation, and if I am, what can I do to protect all that I’ve worked so hard for?
California is the most litigious state in the country. Deterioration of moral principles and values, lack of community, a pervasive entitlement mentality, lawyers with too much time on their hands and a runaway jury system have all played a role in the litigation explosion we all face. As landlords, we are targeted because of our perceived ‘deep pockets.’ Our increased risk, coupled with a growing trend of insurance carriers ‘carving out’ many potential threats from coverage, such as mold, asbestos, lead, discrimination claims, and employment practices, leave us woefully exposed. There are many things that you can, and should do to reduce both your exposure to lawsuits and minimize your risk of loss in the unfortunate event you are involved in one. First and foremost is to engage in good business practices. Keep informed of the changing laws by being involved in your apartment association. Update your forms regularly to keep abreast of changes in the law. Engage in thorough tenant screening; keep the bad guys out. Be aware of potential perils on your properties. Ensure that the lighting is adequate and working properly. Train your employees. Ensure that the relationship between your employees and residents is a professional one, and not personal. Ensure that your vendors are experienced, professional, and insured. Review your marketing materials and your leasing practices to ensure that they comply with Fair Housing rules. Respond to complaints quickly, and thoroughly. Water penetration issues should be dealt with immediately. Complaints about resident managers should not be dismissed immediately, but should be investigated. The vast majority of those being sued are those that ignored the many warning signs that preceded the lawsuit. Perform an insurance review at least once per year with your broker. Request a written analysis from your insurance broker identifying any uninsured risks, or underinsurance issues. Consider adding a commercial umbrella policy to your existing policy coverage. Consider a strategy of Asset Preservation Planning where ‘safe’ personal assets are segregated and separated from ‘risky’ business assets. By separating assets, in conjunction with other strategies, the risk of exposure can be drastically reduced. The best strategy for you may involve the use of Family Limited Partnerships, LLC’s, Corporations, trusts and other entities that assist you in protecting your assets. No one strategy is right for everyone. Watch out for the hucksters trying to sell you a particular plan or ‘system’ that works for everyone. Don’t fall for the ridiculous claim that simply by forming a Nevada Corporation, you can ‘pay no taxes,’ and ‘never be sued.’ Some owners can be reasonably protected from most risks of harm simply by adding a commercial umbrella. Most owners will benefit by a strategic combination of estate planning tools, i.e., a revocable trust, coupled with one or more asset preservation tools, i.e., an FLP, LLC or a Corporation. A few high risk individuals will benefit from the use of foreign trusts or foreign business entities as a part of their overall strategy. Other strategies involve certain tools that reduce or eliminate the equity in a target asset. The important thing to remember is that the time to formulate and implement an asset preservation strategy is before the need arises. Your plan must be properly documented, properly funded, and properly maintained in order to ensure your security. Owning rental properties is tremendously rewarding. But with the rewards come certain risks, and the risk of litigation is one of the greatest. By keeping informed, instituting proper management procedures and by structuring your holdings correctly, you can preserve and enhance your net worth.
QUESTION: A couple of weeks ago, one of my more senior residents fell and broke her hip. Her health has been deteriorating over the past several months, and this has really affected her mobility. She is now in a wheel chair most of the time. She’s lived in our community for many years and I’d hate to see her move, everyone loves her. Her son asked if I would take out the carpet, and install vinyl flooring throughout the unit so that her wheel chair could get around easier. He also requested that I install grab bars in the shower and in the bathroom. He kind of implied that I must do it at my expense because of the ADA requirements, whatever they are. Now this resident is very sweet, but my husband and I are barely making it as it is. Do I have to pay to install vinyl flooring and grab bars in the apartment?
ANSWER: No, you do not have to bear the cost, however you must allow a disabled tenant to make reasonable modifications to the rental unit to the extent necessary to allow the tenant full enjoyment of the apartment. The resident must pay for the modifications, and the modifications must be done in a workmanlike manner. You can require that the tenant signs an agreement obligating the resident to restore the premises to their original condition upon termination of the tenancy. Although you cannot require an additional security deposit in this situation, you can require that the tenant deposit sufficient money into an escrow account, to be held for the benefit of the landlord, in order to assure that the premises are returned to their original condition. The money that is deposited into escrow is not a security deposit, and is not limited by the two-month limitation.
QUESTION: Just had a very odd visitor. I have a single vacancy in one of my buildings, been running an ad for a couple of weeks, have listings on all the rental websites, Rent.com, Zillow, Westside Rentals, Craig’s List, you know, the normal drill. I’ve been pretty gun shy, been burned by a couple of bad tenants, so I’m being a bit more careful now. Anyway, this guy came by the rental office yesterday, he just moved to the United States last month. He has a tax ID number, but no social security number. He completed an application, said his “wife” will be living with him, but that she isn’t here yet. She apparently has neither a social security nor a tax ID, but she should be in the country next month. Nice enough fellow, but I’m not sure if I want them in my building. How do I handle this?
ANSWER: Proper tenant screening is key to a successfully run building. Consistent rental policies, applied to all prospective applicants will guide you. Your rental screening process should verify the identities of all proposed occupants. A U.S. government issued picture identification card such as a driver’s license or a California ID card is typical, but a passport may be used as well to verify identity. Verification of the applicant’s ability to pay the rent is critical. Verifiable work history and proof of the ability to work legally in the US are typically required. The absence of a United States social security number or Tax identification number will make it difficult, if not impossible to verify the prospect’s financial strength or his ability to pay. Depending on his country of origin, international databases are available to perform basic credit checks, but not nearly as complete or reliable as those here in the US. Since the “wife” is not in the country, and you have no application from her, and she apparently has no social or tax ID number, it will be virtually impossible to screen her. The bottom line is, you must accept an application from all who wish to apply. Upon receipt of the application, you must then apply your rental standards to properly screen the applicant. If your standards require a social security or other tax identification number in order to run credit and eviction checks, then this applicant will not meet your criteria. Further if your rental standards require verifiable work and tenancy history, then again this applicant will not qualify.
QUESTION: All of my tenants mail their rent checks to me. I’ve been thinking of installing a drop box somewhere on my property so that the residents can put their rent checks in it. Figure I’ll save them a stamp and get the rents sooner. Anything I should be concerned about?
ANSWER: Many landlords of smaller buildings without an onsite manager do exactly that, most with absolutely no problems whatsoever. But there are several things that you should be aware of. If you are considering the practice, it is very important to install a secure box that cannot be removed or broken into. Additionally, you should provide your residents with written procedures regarding the use of the drop box. Specifically, inform the residents that use of the box is optional; that they may use it for their convenience, but that there is always a risk of loss or theft, and that the resident shall bear the risk of loss until it is actually received by the owner or his agent. Rent will not be considered paid until you actually receive their check, and it clears the bank. And of course, instruct your residents to never deposit cash. Also provide the residents with a physical address where they can personally deliver the rent, not a PO Box, if they prefer not to deposit the rent into the drop box. By not requiring the use of the drop box, the resident will bear the risk of loss, until you actually receive the rent. If you mandate the use of a drop box, and fail to provide a physical address for payment, or require payment to be made to a PO Box, most courts will find that the risk of loss transfers to you upon their placement in the drop box, or in the mail.
This article is presented in a general nature to address typical landlord tenant legal issues. Specific inquiries regarding a particular situation should be addressed to your attorney. The Duringer Law Group, PLC, one of the largest and most experienced landlord tenant law firms, has successfully handled over 225,000 landlord tenant matters throughout California, and has collected over $130,000,000.00 in debt since 1988. The firm may be reached at 714.279.1100, toll free at 800.829.6994 or 877.387.4643. Visit www.DuringerLaw.com for more information.