National trends show that the marketplace for landlords is strong and should be getting even stronger. What better time than now to address those difficult policy and procedure changes that you have wanted to make for some time, particularly those surrounding your rent collection and legal action policies?
First, let’s see if the trend data can persuade you …
According to Reis Inc., (a real estate analysis firm with 30+ years of experience providing rent and vacancy trends and forecasts) the national vacancy rate fell to 4.9{b3839be935df112798d4ec5997aa1a27aa9a9725854b075bcbd0000f0c7f06fc} in the 1st Quarter of 2012, placing it below 5{b3839be935df112798d4ec5997aa1a27aa9a9725854b075bcbd0000f0c7f06fc} for only the third time in the last 31 years (the last time being in 2001). This is great news for landlords as once vacancies fall below that 5{b3839be935df112798d4ec5997aa1a27aa9a9725854b075bcbd0000f0c7f06fc} threshold, historically, the range between asking rents (the amount sought) and effective rents (the asking rent minus any concessions) tends to compress. Why? It’s believed this anomaly occurs because landlords, as a result of the increasing demand for apartments, perceive they now possess a new “rent pricing power” – hence they have less incentive to offer, and ultimately give, concessions.
In the same first quarter, asking rents grew by 0.5{b3839be935df112798d4ec5997aa1a27aa9a9725854b075bcbd0000f0c7f06fc} while effective rents increased by 0.9{b3839be935df112798d4ec5997aa1a27aa9a9725854b075bcbd0000f0c7f06fc}. Reis believes that the vacancy rate will continue its downward trend, which should cause effective rents to continue growing. Indeed, Reis reported only 7,342 additional apartment units coming online in the first quarter, which is the lowest quarterly figure since 1999 when Reis began tracking this metric (of course, developers have not missed noticing this pricing power, as Reis expects about 70,000 total units to come online in 2012, and 150,000 to 200,000 units in 2013 in the 79 main markets that Reis tracks).
OK next, let’s examine how this data translates into your rent collection policies and procedures…
We have been advising landlords for over a decade to start rent collection efforts early – as early as the day after the rent is due. Although state law may prevent you from charging a late fee or starting an eviction action on that day (for example, Connecticut has a statutory nine (9) day grace period from the rent due date before either can occur), the rent is still late, and you can communicate with the resident accordingly. Remember, the number of available units is low. There is little or no reason to contemplate a loss of revenue due to late rent payments.
Eliminating leniency in the rent collection process is valuable, even more so when you realize that landlords have learned that delays in initiating the rent collection process costs a significant amount of money in lost rents. Usually, the lost rents heavily outweigh any associated legal expenses. Moreover, a resident who is only one (1) month behind and facing a court date is much more likely to be able to recover and regain the status of tenant “in good standing”, versus a resident who is two (2) or more months behind.
Even in Connecticut, a landlord enacting legal action on the 11th of the month can expect to get default judgment (if the tenant does not respond to the court case) or a court date (in the housing courts) before or around the 10th of the following month. In this situation, the tenant usually comes to court having already paid that month’s use and occupancy (the phrase we use for “rent” after the notice to quit is served) or is able to pay it immediately. Accordingly, the landlord and tenant can then engage in how the tenant will pay the one-month rental arrearage and legal fees and costs (assuming the landlord has the appropriate attorney’s fees clause in the lease).
In our experience, this situation rarely results in the tenant’s eviction. Rather, the tenant usually regains the status of “in good standing” and the landlord has moved closer to accomplishing its objective (that we share) of having full units with compliant tenants.
Nonetheless, we still find landlords resistant to tightening their rent collection process, while they routinely acknowledge the logic and long-term benefits associated with the effort. Usually, they are concerned over the effort involved to change both tenant and (sometimes, more importantly) management staff expectations and conduct. In these instances, we reinforce that it is usually much easier to change course when times are good, then when times are bad.
NOW is the time to take advantage of the good times and initiate the steps necessary to review and revamp your rent collection and legal action policies and procedures. The Reis reports highlight for us that the economic winds are blowing strongly in the landlords’ favor. Don’t pass up the opportunity.
Quick Tip:
The power of a simple read.
Take some time today – or in the immediate future – to sit and read. Close the door, find some quiet time and read. Read what? Read your lease. From cover-to-cover, including all addenda and amendments. Do it right now, if you have a free hour, or schedule time within the next week to do so. Have a pad of paper next to you for notes on things you like, things you do not like, things that are missing, and things that are there that will assist you in dealing with tenants.
I know; your days are hectic. Why should you give up precious time to read your lease? As we have said in the past, the lease is the central document between you and your commercial or residential tenant, and establishes what each of you must do to maintain the landlord-tenant relationship. If you take the time to sit and read closely, you may be amazed at what you find – and more importantly, what you don’t find – in the lease and subsequent addendums.
We make this recommendation at every seminar we provide, as it can be a very powerful experience for landlords. Like any other written document, details fade in our minds, and sometimes we forget changes that we made, or worse yet, changes we intended to make but never finalized. It is not unusual for landlords who sit down for a post-seminar reading of their lease, to later tell us about positive operational improvements they enacted simply from the knowledge and insight they gleaned during a lease review.
You may find that a change to the lease is not necessary. Perhaps you’re simply not enforcing a provision of the lease that could save you time, money, or aggravation in dealing with your tenants, or one that might help you protect and improve the capital value of the premises? By highlighting the oversight, you can now actively address the situation rather than wait for a “problem tenant” dynamic to develop.
But you must make the time. We recommend you read your lease every six (6) months and contact your landlord attorney if you have any questions about what your lease says or means, and whether you want to add (or subtract) any provisions from it.
Quick Tip:
Use your “litigation wall” when retaking possession.
Last month, we addressed a landlord’s need to have the appropriate legal foundation in place before retaking possession of a unit. In response, we received this question from a reader: “How do you structurally build a process that helps the landlord or property manager avoid the risks described last month, without just relying on staff training?
One simple strategy is to use the “litigation wall” concept that we introduced in a June 2011 newsletter article [“Establish a “litigation wall” to protect your rights.”]. With a litigation wall in place, the landlord restricts all communication with a problem tenant to a single individual who then coordinates the landlord’s response to the tenant. As we noted in the article, this is helpful because it takes advantage of the distributed environment in which landlords typically conduct business – one in which they have multiple staff members handling various tasks in support of the landlord’s business.
Without tweaking, it is not automatic that the “litigation wall” will work single-handedly in all situations, as it presupposes that the tenant has already been designated by the landlord as a problem tenant (due to violations of the lease, rules and regulations, and/or governing statutes). For instance, what of the tenant who had been a model tenant with the “problem” only arising after the landlord retook possession of the premises without all the legal pieces in place?
In this situation, landlords can extend the concept of the “litigation wall” to include subjects of sufficient seriousness that arise without the tenant being deemed a “problem” yet, such as retaking possession of the premises. Alternatively, landlords can create a “retaking possession wall” that identifies a single person who may authorize and approve retaking possession of the premises, who may or may not be the same person handling the “litigation wall.”
Landlords can establish these walls and create communication clarity with a tenant by using any number of people, from the regional manager, property manager, assistant property manager, or maintenance supervisor to the landlord’s attorney. There is no “one-size-fits-all” answer here – the best person to select will often depend on the nature of the matter and who – or what – is involved.
Contact your landlord attorney for more information, or if you want to establish or extend “litigation wall” and/or a “retake possession wall” policies and procedures.
Quick Tip:
A salute to our athletes.
The 2012 Summer Olympics will be entering its final states as this newsletter is published. Nonetheless, I wanted to take a moment to recognize the athletes along with their commitment and dedication to excellence in their field. The pride and excitement that my children display when watching the USA Olympians fighting for the extra point, reaching for the extra 0.01 second, or calming their nerves to achieve a new world record is something I cherish.
Whether winter or summer, my family really enjoys watching the USA athletes competing on the world stage for the chance to hear our national anthem from atop the medal stage. And, every time the Stars and Stripes are hoist above all other nations’ flags and “Oh say can you see…” echoes in our minds, I feel that same pride and excitement in my own bones.
One final salute to the part of our team that we often take for granted – the men and women of the U.S. Armed Forces, whose own commitment and dedication makes it possible for our athletes to compete and for us to spend our evenings every two years enjoying the competition.
Here’s to our team!
Quick Tip:
Orderly files prevent disorderly trials – especially in complex cases.
Recently, we’ve had multiple clients requesting us to review the status of their files. Typically, the catalyst for these reviews center on either the tenant’s desire to review their file, or more recently, for the tenant’s attorney to conduct a full file review prior to a complex case.
Complex cases are those where, rather than answer the Complaint directly, the tenant, usually with assistance of counsel, is filing motions and discovery that ultimately make the case longer and much costlier than it could have been. The complexity comes in the form of time and resources that you and your attorney must bring to bear to achieve your desired outcome in the case. So, as a precursor to releasing the file for review, we are often asked by our clients to inspect the file to ensure it is in order, contains the proper information, and omits those items either unnecessary or privileged.
In each case, we are more than happy to oblige as there are any number of tiger traps that can be identified and avoided with a quick file inspection. As the doctor always says, “An ounce of prevention…”
The phases involved are detailed below:
- The first step of each review is to help our client identify the important, relevant information that will be critical to the legal issues they will face in these complex cases.
- The next step is to ensure that our client’s confidentiality privilege is protected. As you all know, your communication with your attorney and their responses is privileged information. Nobody, especially an attorney representing your tenant, has a right to see that information. That is one of the most important aspects of your relationship with your attorney. Your discussions are protected by attorney-client privilege and need not be disclosed to your opponent. Inadvertently losing this advantage because your file discloses privileged information to your tenant’s attorney is one way to make a complex case nearly insurmountable. It’s almost like giving the other team your playbook.
- Lastly, most file inspections unearth bigger and better discussions regarding operational improvements that may ultimately make the manager’s daily life, as well as that of their staff, much more efficient and effective. How you maintain your tenant files is often a reflection of your operational processes. Even a quick inspection by your attorney in complex cases can have long-term downstream effects if that inspection reveals a flaw in your processes.
The important point is that orderly files invariably make complex cases much more efficient and cost effective. Being familiar with their contents and their organization will make any discussion with your attorney (be it be during the preparation or execution of a complex trial) a seamless, well-organized exchange with a focus on achieving your desired outcome.
DISCLAIMER:
The reading of this newsletter does not form an attorney-client relationship. The contents of this newsletter are for informational purposes only and do not constitute legal advice. Nothing in this newsletter is intended to imply or predict the outcome of any legal matter that you may be considering or be involved in. The Landlord Law Firm makes no warranties of any kind regarding the information contained in this newsletter.