Property Management

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Property Managers, Property Owners, and Liability

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Be Responsible, But Know When That Means Liability and When It Doesn’t.

Imagine you’re a judge sitting on the bench, and a homeowner makes this argument in your court: someone broke into their house and beat them senseless, and they want to sue the contractor who installed their window, because it never did lock quite right. Pretty straightforward, right? If the lock is what failed, the improper installation is reasonably at least partly to blame.

Now imagine the same case, but the homeowner is now a renter, and their argument is that the window, while installed correctly, was a model known to be a security risk, with a lock that is easy to break. The renter isn’t suing the installer, but rather the property owner who chose that particular window to put on their rental home. But the property owner is claiming that the property manager should be responsible, as he was put in charge of the rehabilitation of the home after the previous tenant left it in a dire condition, and the windows were part of that rehab.

Who wins now?

The real answer lies in laws that change from state to state, so there’s no single definitive law that applies in all conditions, but in general, the most common answer is “it depends on the contract between the owner and the property manager.” Each contract should specify precisely to what extent the property manager is assuming responsibility (and thus liability) for each property. In the absence of a precise description, however, the court is likely to fall back on the doctrine of an ‘assumed contract’ — if you as the property manager agree to oversee a home’s renovation, you imply as part of that agreement that you are responsible for any problems caused by that renovation.

Common Areas of Liability for PMs Under Most Contracts

Most ‘standard’ property management contracts make a PM liable for several areas of potential suit, including:

• Tenant Injuries from Failure to Repair any damage that the PM was properly informed of, but also for any damage the PM should rightfully have noticed on a standard property inspection.
• Defective Construction involved in any renovation, building, or upgrades that the PM oversaw.
• Environmental Hazards that the PM had (or should have had) knowledge of and the ability to repair, such as from mold, lead, or pests.
• Inadequate Security as in the example above; a PM may legally be obligated to take security precautions appropriate for the neighborhood the structure is located in.
• Tenant’s Animal’s Actions that you could reasonably foresee (i.e. you saw the tenant’s dog trying to attack someone through a fence, did nothing, and later that same dog escaped and hurt someone), but only if you could have reasonably taken action to remove the animal.
• Tenant’s Actions that you could reasonably foresee, much as above. If a tenant has been cyber-stalking a neighbor, the neighbor complained to you, and then the tenant rapes the neighbor, you could be held liable for not removing the tenant. (Of course, if you were in process — as in, you have proof that an eviction notice was being delivered within a reasonable timeframe after the neighbor’s complaint — that will generally clear you.)

Reducing the Impact of Your Liability as a PM

A property manager isn’t without options for reducing the effects of their liability, however. The three main methods are all absolutely standard practice for all property managers:

• Form an LLC — a Limited Liability Corporation will, as long as you follow all of the rules (such as not commingling funds and adequately funding the company), deflect the vast majority of liability problems away from you personally and into the corporation.
• Have excellent insurance — There are dozens of policies that a PM needs to operate with the most security possible, many of which are specific to various kinds of liability suit. Professional Liability, Property Liability, Errors and Omissions, Workmen’s Compensation, Umbrella Liability, and other, more specific kinds of policies are all on the ‘good idea’ list for property managers.
• Require excellent insurance: make sure your owner-clients have acceptable insurance and add you as an ‘additionally insured’. Same goes for tenants, you can require they have Renter’s Insurance and also add you as an ‘additionally insured’.
• Take care of your tenants — the most obvious one: do your job well, keep the properties in good repair, secure, and free of unnecessary sources of risk. Listen to your tenants when they have safety concerns, and act appropriately.

Do those three things, and you’re protecting yourself to the best of your ability.

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Posted in: 1. Property Owner Blog Posts, Managing Rentals