How Vulnerable Are Your Assets as a Landlord?
The owner of a Pittsburgh apartment complex is being sued by a woman who claims that when she toured a rental unit, she was so startled by a dog's sudden barking that she fell down a flight of steps. Ten months later, she has filed suit in Pennsylvania Supreme Court, saying that the stairway at the complex was poorly-maintained and that her injuries have required extensive and ongoing treatment.
She is seeking monetary and punitive damages, meaning that she hopes for a judgement that will cover her costs along with a payment that could be as much as double her actual costs. Depending on the seriousness of her injuries, the cost of her medical treatment and loss of wages, a favorable ruling could cost the complex owner hundreds of thousands of dollars. If the suit had been filed in a state that has a higher cap on punitive damages, a ruling in her favor could result in a greater award.
The lesson here is that if you own rental property, you own assets that are at risk. Just as large corporations protect their assets, landlords must be sure their investments are protected, even if they have just one rental property.
Rental property liability encompasses far more than falls and other accidents. For instance, it's easy to violate Fair Housing laws without the intention to discriminate, thus leaving landlords open to lawsuits, and alleged Fair Housing law violations can take years to resolve.
People can be sue-happy and real estate is a prime target for lawsuits. Too few landlords consider these risks or take the proper steps to protect their assets.
How is the landlord at risk?
The Pittsburgh case seems easy enough to understand. A judge will have to decide whether the apartment complex landlord took adequate measures to safeguard tenants and visitors who used the stairway. But there are hundreds of other, less clear, cases where courts must decide if landlords are liable.
Suits stemming from the presence of toxic mold in homes have exploded over the last decade. Along with mold, environmental hazards such as lead paint and improperly contained asbestos also are on litigators' radar. In every case, courts must tease out where the responsibility for damages lies, how much the landlord is on the hook for, and more.
Then, there is the very real risk of being sued by tenants fighting eviction. Evictions commonly take months to carry out, and savvy tenants who want to milk the landlord know all the delay tactics.
Cases can drag on, leading to months or years of lost rental income not to mention eventual awards or settlements. And even landlords who prevail are unlikely to be able to recoup all their losses.
What can I do to cut my liability?
Real estate management attorneys have long urged rental property owners to set up Limited Liability Corporations – LLCs – to hold and manage property separately from the landlord's personal assets. That way, losing a lawsuit involving rental property doesn't jeopardize the landlord's own home and other assets. Property managers who use LLCs run all rental transactions through the corporate checking account.
Landlord insurance policies should cover rental units as well as property managers who oversee units. Policies should include provisions to cover rental income losses that occur if a property burns down floods or otherwise becomes uninhabitable.
Keep in mind that insurance plans typically do not cover vacant rentals, so landlords must thoroughly read their policies and make immediate changes if a property will be empty for an extended period of time.
Finally, lease agreement terms must clearly specify liability, for both residential and commercial rentals. An Ontario landlord escaped potentially crippling damages when he was sued by a furniture vendor who leased the commercial premises in a building outside Toronto. The lease required the tenant to have a flood insurance policy which named the landlord as the insured. The policy was also to protect the landlord from being held responsible for flooding, and be equal to the full replacement value of the furniture business. The tenant failed to meet this obligation, the court found. So, although flooding was caused by a leak in the rental property roof, the Court of Appeal for Ontario ruled, the tenant had accepted full responsibility for insurance coverage and could not shift the responsibility to the landlord.
Protecting rental property investments requires forethought and proactive management. Your units are your stake in a stable and rewarding financial future. Don't risk their success on the whims of tenants, the impulses of a judge or jury, or the latest litigation scheme. Take steps now to build a strong lease, insure your property and create the legal business structure that will safeguard the future you're working so hard to secure.