The LandLord Advocate May 2014

Since this first ran in the Landlord Advocate, we have still seen a number of landlords who are executing a new physical lease each and every year.

When you sign a lease with a new resident who will be moving in for the first time, you are creating a whole new legal relationship between the owner and the resident. Did you know that the same thing happens when you sign a new lease with an existing resident? That’s right. You are creating a “new” legal relationship with that resident. Even if that seems obvious, the subtleties of what that means are really critical in your operations.

Let’s look at the new resident first, which will help us understand the existing resident situation better. A new resident applies for an apartment and provides you an assortment of information to evaluate their eligibility to rent from you. The applicant’s past helps you make an appropriate decision on offering them a lease. Once you offer them a lease and they accept, their past is no longer important to you. Who they owe money to, what kind of tenant they were elsewhere, whether they violated rules at their previous apartment, all becomes useless information to you. In fact, there may be things you don’t even know about the applicant from their past. But, it does not matter. Whatever is past is past. Their slate is “wiped clean” as your new lease takes effect. Their prior transgressions are forgiven by you when you sign the new lease.

Now, let’s look at the existing resident. The situation is only slightly different. Once you offer them a new lease and they accept, their past is of limited importance to you. I am even talking about their past on your property. As I said at the outset, a new lease is a “new” legal relationship with your resident. Their slate is “wiped clean” as their new lease takes effect. Well, almost. It is certainly wiped clean from the perspective of using the “new” lease to address concerns you had from before. If they owe you money from before, you may not use the new lease to address that concern. If they damaged the unit before, you may not use the new lease to address that concern. Signing the new lease resets the relationship back to square one going forward, at least as it concerns addressing your issues under the context of the new lease.

The primary difference between new residents and existing residents signing new leases is that existing residents have a previous legal relationship with you. Existing residents have a new slate with you, but they also have an “old” one as well. Although you can no longer address their past issues using the new lease, all it not lost. Depending upon the circumstances, you may still have remedies available to you to address those past concerns.

One way you can address past issues is to carry them forward into your new relationship. Include the remedy to the past situation as a provision of the resident’s new lease. In that way, you can use your new lease relationship to resolve old concerns. Make sure when you renew or sign a new lease with an existing resident, it covers everything you want included. Otherwise, you risk giving them a clean slate and limiting your ability to address past concerns.

If the prior concern continues after the new lease is executed – i.e., unacceptable noise coming from their unit – you can certainly rely on your new lease to now address the problem. You may be unable to reference the past conduct if your efforts lead to legal action, although in some circumstances, all of the past similar issues are valuable information for your present efforts. Your legal counsel should be able to assist you with identifying when and how best you can use that information.

Finally, even if you cannot address the circumstances under the new lease, depending on the situation, you have other legal remedies. Involving the authorities may be an option. Other legal action in the courts may also be available to you. While their clean slate exists under their new legal relationship with you, existing residents aren’t always given a get out of jail free card.

WARNING – Depending on what the issues are, sometimes your new lease may in fact serve as the free pass. By way of example, let me share a story from a recent court visit. A tenant had failed to pay a considerable amount of rent and was referred for a summary process action.

The landlord simply wanted to get their money paid, and if the case went all the way to court, to have their fees and costs reimbursed as allowed in their lease. While the case was pending in court, the landlord signed a new lease that went into effect 2 days before the case was scheduled for trial. After negotiating a resolution that provided for the resident to pay the entire arrearage and the landlord’s reimbursables, the tenant revealed that her new lease was effective two days earlier. The court required, as was properly dictated by law, that the landlord withdraw the case because the new lease started a new relationship and the tenant’s old slate was wiped clean. Now, that landlord must pursue any amounts owed through a different court case and spend more time and money to recover their receivables from this tenant. Certainly not what they intended.

In these difficult economic times, property managers are forced to exercise their creative muscles to retain occupancy rates and address delinquencies. You may be asked to handle minor resident transgressions creatively while still getting new leases or renewals. Depending upon how your company handles renewals, this process may be a valuable tool in your arsenal to attack both of these problems.

Quick Tip:

To incorporate, or not to incorporate – that is the question.

Landlords usually own their commercial and residential properties in one of two ways – either in their individual name or in a limited liability entity created by state law, such as a corporation, limited liability partnership (“LLP”), or limited liability company (“LLC”). The decision whether to own the property individually or within such an entity is a critical decision that landlords should consider at length.

There are advantages and pitfalls to each choice. We are revisiting this Quick Tip due to the frequency with which this subject has arisen lately, particularly the surprise of landlords in each ownership structure learning about the details in each approach.

Individual ownership allows for excellent clarity in the lease, legal, and regulatory compliance fields. Everyone involved knows exactly who the landlord is, or can easily learn the owner’s name by looking at the lease or public property ownership records in the town or city offices. The owner has the legal right to act unilaterally to handle all property matters, including any legal actions, without having to involve an attorney.

However, with individual ownership, the owner’s entire set of personal assets is exposed to anyone making a claim against the landlord. For example, a tenant (or third party) who wins a lawsuit against the landlord for a personal injury on the leased premises is not limited to the insurance policy or value of the property for compensation. Rather, the tenant (or third party) can go after all of the landlord’s personal assets as well, including his/her bank accounts, investments, home(s), and all commercial or residential property owned in his/her individual name.

This unlimited liability exposure of individual ownership often causes landlords to consider a limited liability entity. A primary component of a corporation, LLP, or LLC is that it allows landlords to shield their personal assets (or other owned assets in other corporations, LLPs, or LLCs) from liability associated with the property in question. However, in exchange for this protection and other benefits, state law requires landlords to behave differently than individual owners when dealing with the property.

Here are some key requirements that come bundled with limited liability ownership that do not arise with individual ownership:

• Paperwork filing requirements to establish and maintain the entity under state law;
• Filing fee and annual fee requirements to keep the entity valid;
• Identification of key players (officers and directors in a corporation, managing partner in a LLP, and member(s) in a LLC) and an agent for service of process (someone who can be served with legal papers by someone suing the entity);
• Separate records and accounts from any key player’s individual records and accounts;
• Requirements to conduct business in certain ways, including the obligation to identify in all transactions, documents, advertisements, correspondence, and other communications that the limited liability entity is acting, not the key player(s) involved as individuals; and
• Use of an attorney to initiate and prosecute legal actions – this is based on the theory that the individuals involved with the entity (as officers, directors, managing partners, members, or employees) control and work for the entity, and are not acting on their own as individuals

Landlords who fail to comply strictly with each of these requirements (for example, persistently acting in an individual’s name when handling property matters) face the possible loss of their limited liability protection.

Contact your landlord attorney if you have questions or concerns about the implications and requirements of your current ownership structure, or if you are contemplating a shift in ownership from individual to a limited liability entity.

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.