Duringer-Legal Corner

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.

Credit Reporting, Deposits, Payments

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Q: I recently read an article about some changes to credit reporting and that the credit reports I receive to screen my prospective residents might not be telling me the whole story. What’s up with that?

A:
Yes, that is correct. As of July 1, 2017, Equifax, Experian and TransUnion, the big three credit reporting agencies, stopped including tax liens, most civil debts and judgments when providing credit reports. Civil debts, court judgments and tax liens will not be reported unless those obligations include the consumers’ names and addresses, as well as Social Security Numbers and/or dates of birth. The trouble is, the courts will not allow Social Security Numbers or other “unique personal identifying information” to be placed on any court document. Actually, the court will sanction (penalize) a party who inadvertently includes a Social Security Number on a filed document. Damned if you do, damned if you don’t.

The change is part of the National Consumer Assistance Plan, and is intended by the reporting agencies to “ensure the data they maintain on their consumer files is accurate and current, to best serve consumers and the needs of their business and government customers.” Not surprisingly, credit scores have risen. The impact to housing providers is obvious: it will be even more difficult to properly screen a prospective applicant. It is almost impossible to make good business decisions without good data. Remember, credit reports are merely tools, as are eviction reports. They certainly are not perfect, and getting less so now; however, they are still tools to be used. Just be aware of the glaring weaknesses inherent in these reports.

Q: Just closed escrow on a ten-unit building in Southern California. Nice area, nice tenants, everybody is current, no rent control—life’s good. Going through the tenancy documents, I noticed that all the tenants are month-to-month tenancies, close to market rents but the security deposit on file is only $300 per unit. I’m thinking of serving a Change In Terms of Tenancy bringing all of the security deposits up to the equivalent of one month’s rent. What do you think? Can I do that? Is that a good policy?

A:
The short answer is yes you can do that; you can change the terms of tenancy and require that each tenant pay the equivalent of one month’s rent as the security deposit. The better answer is rather than raising the security deposits, it is better to implement a small rent increase of say $50 or so per month. Security deposits are simply held by you for the benefit of the tenant, they are not yours to keep. The increased rent is yours to keep. Many tenants would prefer to pay an additional $50 or so in increased rent rather than having to come up with an additional $900 or so in additional security deposit. Many tenants might simply move when asked to pay an additional $900 or so within a month’s time.

Remember, rent and security deposits held are inversely proportionate. If your rents are below market, tenants are generally willing to pay a bit more than market as a security deposit to secure the rental. The converse is true as well, if your security deposits are lower than market, tenants are generally willing to pay a bit more than market rent to maintain the rental.

Q: Most of my residents pay on time and their checks are honored by their banks. Lately, it seems that I’ve been getting many checks from small banks, even some internet banks with no real offices, many I’ve never even heard of. I recently had one returned insufficient funds over three weeks after the check was deposited! Do I have to accept these types of checks? Should I require that all my tenants pay by cash or cashier’s check? What about direct deposit?

A:
You can control the method of payment and the types of payment instruments that you will accept. If your tenancies are month-to-month, you may change the terms of the tenancy agreement to establish different payment methods or to require payment by certified funds. Service of a 30-day Notice of Change of Terms will suffice. It is generally not a good business practice to accept cash as payment for rent due to the increased risk of robbery, theft or other criminal conduct. Many owners allow residents to make direct deposits or transfers to the owner’s bank account. There are many benefits to this arrangement, but many drawbacks as well. If you do allow the resident to make direct deposits, then establish an account separate from your personal general account and establish clear guidelines instructing the resident when and how to make deposits.

Suggested guidelines would state that you will not accept a partial payment without prior consent; that the resident is not authorized to make a direct deposit after service of a three-day notice to pay rent or quit or a notice of breach of a covenant of the lease, or for any period of time after expiration of a notice of termination of tenancy. Once your payment terms are established, stick to them and require the residents do the same.

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.

Missing SSN, Crime, Repair and Deduct, Pushy Apps

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Q: A prospective resident recently applied for one of my rentals. He seems nice and all, but when he filled out the application, he left a blank where his Social Security Number should go; he said he didn’t have one. He had a California Driver’s License and something called a Matricular Consular card. He seemed a bit combative when we discussed this issue, said that his attorney said I had to rent to him, that I couldn’t discriminate against him, as long as he could afford the rent. Must I rent to him? How do I verify any of his information?

A:
Proper tenant screening results from the proper use of a variety of tools. Credit reports and eviction reports are two of the best tools available to predict the ability of the prospective tenant to perform his obligations. Qualification of a resident goes far beyond ensuring that “he makes enough money” to pay the rent. Verification of past rental history, tenant stability and verification of his ability to honor his credit obligations, as well as determining the likelihood of his continued employment, are all fair game in evaluating a prospect.

Like it or not, our country’s system of storing information on each of its citizens uses one’s Social Security or Taxpayer Identification Number as the primary identifier. A Matricular Consular card is merely an identification card issued by a foreign country and is not valid for identification in the United States. In order to work in the United States legally, one must have a Social Security Number or a Taxpayer Identification Number. It is illegal for an employer to hire an individual without a valid Social Security or Tax Identification number. Identity theft is rampant in California, and it is incumbent upon all credit providers, including landlords, to ensure that the person that fills out the credit application truly is who he says he is. Many tenant’s rights advocates, and that is exactly what they are, advocates, advancing the rights of tenants at the expense of landlords, insist that it is discriminatory to require a Social Security or Taxpayer Identification Number when evaluating a prospect.

You, as a housing provider, have a legitimate business purpose in determining the credit worthiness of a proposed resident, and not only to predict his ability to timely meet his rental obligations, but you must determine his ability to continue to meet those in the future. Further, in the event you had to pursue this individual in the future due to a breach of the agreement, you must assess the risk in searching for and locating this individual should you need to collect a past due amount. A consistently enforced policy of requiring a Social Security or a Taxpayer Identification number in order to screen your prospective residents does not violate Fair Housing laws and does not constitute illegal discrimination.

Q: I own a 40-unit building in a high crime neighborhood. I have done extensive work on the building to reduce the risk of crime to my tenants. We installed fencing with locked gates, increased the common area lighting and cut back on the shrubbery and vegetation that blocked views in the interior walkways. Last week we started implementing a neighborhood watch program. I was thinking of attracting new residents by advertising my building as a “security” building. Any problem with this?

A:
Yes. The improvements that you have made to your building are commendable and will help in the battle against gang-related activity and other criminal conduct. You must be cautious in how you represent your building and the surrounding community to new or existing tenants, however. California courts are quick to saddle landlords with liability for representing to their current or prospective residents that their complex is “secure” or “crime free”. Courts have held that by advertising or informing residents that they live in a “security” building that the landlord is held to a higher standard of care in that he is essentially warranting that the tenant will not suffer the effects of crime. It is important that in all your rental advertising, brochures and rental agreement that the landlord does not create an implied warranty of security.

Q: I’ve heard of the repair and deduct remedy. What is it?

A:
The repair and deduct remedy allows a tenant to deduct the cost of certain repairs, up to the amount of one month’s rent, from their rent payment. This remedy may only be used in very limited circumstances. The defect must be serious and directly related to health and safety. The repairs cannot exceed one month’s rent. The remedy cannot be used more than twice in any 12-month period. The tenant or his guests can’t cause the defect. The tenant must notify the landlord either orally or in writing, and the landlord must have a reasonable period of time to make the needed repairs. Thirty days is a reasonable time but a shorter repair time may be required: for example, a plumbing stoppage or broken heater in winter. If the landlord fails to make the needed repairs, the tenant can make the repairs or hire someone to do them and the tenant can then deduct the cost of the repairs from the rent when it is due.

Q: I expect a vacancy to be coming up at the end of the month. I started advertising the unit and I put a sign in the window. Luckily, I’ve already received quite a few applicants. There are a few that sort of qualify and I guess I could rent to one if I had to, but I’d like to continue with the ad and get a few more prospects to choose from. The thing is this one applicant is getting pushy. She calls me several times a day, says that she knows she is qualified, that I have to rent to her because the unit is still available and she was the first to apply. Truth is, she does qualify, but I’m just not sure. I haven’t actually denied her nor have I accepted her; I just need more time. Do I have to rent to her because she was first to qualify?

A:
No, there is no requirement to rent to the first person who meets your criteria. You are free to continue and accept additional applications from other candidates. From the pool of applicants, you may select the best and most qualified applicant, without regard to timing of receipt of the application. Often an owner will have a single vacancy and have many qualified applicants to choose from. A thoughtful review of all applicants and their qualifications will allow you to select the most qualified tenant. Don’t let the pushy prospect bully you into making a premature decision.

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.

Crime, Retail and Skipping Out

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Q: I own a small apartment building in a “rough” area. Seems like a day doesn’t go by without some sort of violent crime in the neighborhood. I have a vacancy now, and I don’t know if I have to tell them about all the stuff going on. If I did no one would rent, what do I do?

A:
In many areas throughout Southern California, crime is a fact of life. When asked by the prospective resident about crime in the area, refer them to the local sheriff or police department for statistics. Be careful not to portray your building as a “security” building or advertise it in any way that may create a false sense of security or safety. If your property presents an increased risk of harm, or has had a recent rash of criminal conduct, you may have a duty to disclose this fact to the prospective resident, even if not asked.

Q: Most of my rental properties are residential multifamily, but I have one small retail strip center in Los Angeles that I own as well. I’ve never had a problem with my commercial ten ants, but I have one who hasn’t paid rent this month. Can I use the same three-day notice to pay rent or quit that I use for my residential properties?

A:
Commercial and residential landlord tenant laws differ in many ways. One major difference between the two is the ability to accept partial rent payments after service of a notice to pay rent or quit for a commercial property, and not for a residential property.

Provided the necessary lan guage is included in the commercial notice, you may accept a partial payment without waiving your notice, and may proceed with an unlawful detainer action without having to re-serve a new notice. For that reason, all commercial notices to pay rent or quit should contain language stating that in the event a partial payment is made, it will not act as a waiver of your right to commence an unlawful detainer action. If you have served a notice that does not contain the proper language and your tenant tenders a partial payment, you may im me diately provide the tenant with a letter acknowledging the partial payment, but also stating that the partial payment will not act as a waiver of your right to proceed with an unlawful detainer action.

Other than that, review the cure periods stated in the default portion of your lease. Typically, the cure period for non-payment of rent or other monetary sums due is three days. Failure to provide proof of insurance is typically three days as well. Most commercial leases will allow ten or 30 days to cure a non-monetary breach. Ensure that the forms you intend to use are consistent with the terms you have negotiated in your lease agreement, as the terms of your lease will control.

Q: I’m in escrow to purchase a small regional shopping center and am in the middle of conducting my due diligence. I’ve gone through the leases and am having some difficulty verifying the terms of some of the tenants’ obligations. My agent, nice guy but a bit green, isn’t much help. He just wants escrow to close so that he can get paid. The seller appears to be disorganized, but not sure if he is giving me the full story. How can I be sure I’m getting the straight story?

A:
Thorough due diligence is absolutely critical to ensuring that the deal is one that makes sense to you. A good real estate agent and his broker will actively assist you in ensuring that your requests for information are properly responded to and will assist you in conducting your due diligence. Contact your broker and request that he assign a more seasoned commercial agent or broker to assist you in the transaction.

Depending on the size and complexity of the transaction, you may wish to retain the services of a real estate forensic accounting firm to verify the financials. Ensure that you have complete copies of all existing tenants’ leases as well as all addenda. Estoppel agreements signed by each of the tenants as well as the owner, affirming all of the terms of the tenancy including any options, are a must. A site visit and individual meetings with each of the tenants is advisable as well. It’s amazing what a five minute conversation with each of your soon-to-be tenants will reveal.

Q: I have a tenant who just skipped out last weekend. He’s been behind in his rent, but I was working with him and he was catching up. I got an email from him this morning confirming that he was out and that he left the keys in the unit. Guess I’m kind of glad he’s gone as I won’t have to go through the eviction process; but now what? He’s only six months into a one-year lease, and I don’t have any prospects. What is my next step?

A:
First thing is to confirm he’s out—pick up the keys and change the locks. Document the condition the unit was left in by taking several pictures of the premises. If there is damage, take detailed pictures of the damage. You will need to provide an accounting of his security deposit within 21 days if the property is residential, 30 days if it is commercial.

Now that you have possession of the premises, you have an obligation to mitigate your damages; that is, to attempt to re-let to minimize the loss that you are sure to incur. Ensure that you maintain a log and document your actions in attempting to re-let the premises. If you retain the services of a broker, ensure that he or she does the same. Your former tenant is responsible for the remaining term of the lease as well as any costs that you will incur in reletting the unit. These additional costs might include advertising fees, signage, broker’s commissions, tenant improvements for the replacement tenant, and the difference in rent for the remainder of the term in the event the replacement rent schedule is less than your existing rent schedule.

 

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.

ADA Requirements and Paying Tenants

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Q: One of my elderly residents recently fell and broke her hip, and it looks like she won’t be getting around very well ever again. She has been living in our building for many years and I would hate to see her move, everyone loves her. Her daughter asked if I would install grab bars in the shower and in the bathroom, and 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 I just cannot afford to spend the money; my husband and I are barely making it as it is. Do I have to allow my resident to install the grab bars and do I have to pay for the cost?

A:
A landlord 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 premises. The tenant, not the landlord, must pay for the modifications. As a condition of making the modifications, you may require the tenant to enter into an agreement to restore the premises to their original condition upon termination of the tenancy. You cannot require an additional security deposit in this situation, but you can require the tenant to pay a reasonable estimate of the restoration cost into an escrow account to ensure that the property is returned to its original condition.

Q: My tenants and I have had a very good relationship. They have been paying the rent on time and they don’t disturb any of their neighbors. In the past, I‘ve hired them to take care of various projects around the complex. The work done has been satisfactory. Until recently, I would either pay them in cash, or simply drop off a check in their mailbox. Now, the tenants are asking me to offset their payment from their rent. I told them I’d think about it and get back to them. If I accept their request to just offset the value of their repair work from the rent, am I asking for trouble?

A:
You should never mix your tenancy relationship with the work performed by your tenants. Keep the relationships separate and distinct. Not only is it good business practice, but it also prevents many legal issues from arising. If you mix the issues of services performed in exchange for payment of the rent, you have now expanded your tenant’s potential defenses as to why he or she should not pay the rent. If the rent is a separate transaction, the tenant will have no claim that he is entitled to a reduction or a credit for work performed but not paid. Also, if you have problems with the tenant’s work product, you can hash out those work-related issues while the tenant continues to pay rent. Be very cautious when allowing your tenants to perform work on your building. The benefits may seem great, but the pitfalls are many.

 

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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