Mail, Drains, Being Sued & New Purchases

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Q: What happens when a tenant’s rent check gets lost in the mail? Common sense tells me that the tenant has to replace it, right? I can’t be held responsible for lost mail, can I?

A:
The answer is not as simple as you may think. Generally, the tenant bears the risk of loss if he elects to mail the rent and it fails to arrive. As a general rule, payment by check is not effective unless and until the check clears the financial institution. A lost check not received by the landlord is generally not deemed paid unless and until the landlord cashes the check. But, there are circumstances where the landlord will bear the risk of loss, however. A landlord who dictates specific payment procedures may cause the risk of loss to be shifted to him. For example, a landlord who refuses to provide a physical address for rent delivery, instead only providing a post office box, thereby preventing personal delivery of the rent may effectively shift the risk of loss to himself unknowingly. Likewise, a landlord who requires all rent to be deposited into a drop box rather than delivered to a specific address, may bear the risk of loss if that drop box gets broken into. The issue gets even more complicated if the resident pays by third party money order. Replacement of a money order can sometimes take two to three months. The simple solution to the dilemma is to use a rental agreement that clearly requires that the resident “deliver” his rent to the landlord at a specific address on or before the due date. An agreement purporting to require the resident to “mail” the rent by the due date may be found to require the resident to “mail” the rent, thereby shifting the risk of loss to the landlord. Of course, allowing your resident to pay by mail is the most common and the most convenient, however ensure that you do not create a requirement that the resident pay by mail, merely allow the convenience.

Q: Seems like I’m always clearing out a clogged drain, or fixing some other minor problem generally caused by my tenant. Trouble is, I don’t live near the units, and calling a plumber out for such routine repairs is way too expensive. Is there a way to pass this responsibility on to the resident?

A:
Yes, the responsibility for minor maintenance and repair items can be negotiated as part of the rental agreement. You cannot require your tenant to waive his right to live in a habitable unit, but you can require the resident to take responsibility for minor repairs and maintenance that may be required during the course of the tenancy. A provision requiring the resident to maintain the drainage lines, the toilets and the garbage disposal will require the resident to either perform the repairs and maintenance, or hire a professional to do it for him. Stoppages in the main line caused by roots or other causes will typically be an obligation reserved to the owner, while clogged drains, toilets and garbage disposals may be delegated to the resident to repair.

Q: Seems like every time I read the paper, some landlord is being sued for something. I think I manage my properties well, but I’m 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?

A:
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 who 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 claim that simply by forming a Nevada Cor poration, 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.

Q: I’m about to open escrow on the purchase of a fourplex. I’ve bought property before, but not in a few years. My agent seems a bit inexperienced, not sure if he’s ever really done a multifamily transaction before. Are there any new things to watch out for?

A:
Your purchase and sale agreement is the controlling contract, coupled with the escrow instructions. Make sure that the escrow instructions properly reflect your agreement. There most likely is a provision for conducting your “due diligence,” usually 20 to 30 days after the contract is fully executed. This period is critical. This is the best opportunity you will have to learn everything about the units that you care to learn. Make sure you conduct a thorough inspection of both the interior and exterior of the units, and the surrounding grounds. Review the rental agreements and the tenants’ history. Review the maintenance records, and inspect some of the more recent repairs. Talk to the tenants directly, confirm that the records are correct. Make sure that all residents sign tenant estoppel certificates confirming the terms of the tenancy agreement, especially important in a rent or eviction controlled unit. Check with your insurance broker to ensure that insurance coverage is available, and what the cost will be. You can also learn the insurance claim history of the building. This will give you insight to any undisclosed water issues or any other particular issues the property has experienced. The local police department can provide you with a call, or an incident log for the specific property, and the immediate neighborhood. If any issue concerns you, make sure you get answers. Extend the due diligence period in writing if necessary to get further answers. Involve other professionals in the process, but be personally involved; no one else will guard your interests better than you will yourself.

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, and has collected over $155,000,000.00 in debt since 1988. The firm may be reached at 714.279.1100, toll free at 800.829.6994 or 877.387.4643. Please visit www.DuringerLaw.com for more information and to sign up for our periodic newsletter.

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