If you’re a real estate professional acting as a Property Manager, you face many risks every day in the course of business. Attorney Rinat Klier Erlich recently covered key risks you should watch out for — and how to mitigate them — in a webinar for CRES Insurance Services. Erlich is a certified legal malpractice specialist with Manning & Kass Ellrod Ramirez Trester — as well as a licensed real estate broker in the state of California. We’ve summarized the webinar below or you can watch the recorded webinar here:
Real estate agents and brokers are often subject to claims by the Department of Real Estate, Department of Fair Housing, and Department of Consumer Affairs — as well as criminal prosecution and civil lawsuits by tenants. By being aware of the top risks you face in your property management role, you can better protect yourself and your business.
Risk #1 — The Lease
The lease is a highly important document that should be signed by the owner/landlord (not the agent). As a property manager, you should not be drafting a lease, or even drafting clauses in the lease. But you should be sure the lease includes all of the terms you later plan to enforce, such as:
Number of occupants
ADA (Americans with Disabilities Act)
Indemnity and insurance
Risk #2 — ADA Accessibility in Public Areas
The ADA (Americans with Disabilities Act) only applies to public areas. But, there are some things to keep in mind when dealing with tenants with a disability. For example, what if your tenant requires a special parking place? If you assign the parking spot as a disability spot per the Americans with Disabilities Act, that spot must be available for all disabled persons coming on to the property — it cannot exclusively be used by the tenant alone.
Some other barriers to consider in relation to accessibility include: alarms without flashing lights, narrow doorways, and high drinking fountains.
If your property management company has a website, the website needs to be accessible as well. Include transcripts of videos for the hearing-impaired, and consider audio for sight-impaired.
Risk #3 — Pets
Do not advertise that the property is pet free or advise a potential tenant that pets aren’t allowed. An animal can be a service animal, a guide animal or an emotional support animal. Property managers and landlords can request a certificate, but these can be prepared by someone who just knows the tenants well.
Risk #4 — Fair Housing Act and Social Security Numbers
The Fair Housing Act does not allow discrimination against protected classes, which includes sex, religion, national origin, and disability. Requesting a Social Security Number from a potential tenant who may not have one could be considered discrimination in some regions and states (like California).
Many property managers request credit information from tenants (tenant provides a copy of his/her credit report), and this may be best practice. However, it’s imperative to make sure this information actually does belong to the person applying for the lease and is current.
Risk #5 — Preferences
It’s important to remain objective and unbiased in advertising the property, in discussions with potential tenants, and in the selection of tenants. Property managers should not show any preference to tenants on the basis of:
Type of work or occupation
Failure to remain fair and objective can be perceived as a violation of the Fair Housing Act, and you could be facing a lawsuit.
Risk #6 — Families
As a property manager, you may not impose rules that apply to children primarily, even if you try to justify them as applying universally. For example, rules such as:
No making noise at certain hours
No running or playing in a certain area
These rules can be perceived as discriminatory against families, and families are a protected class under the Fair Housing Act.
Risk #7 — Harassment
You cannot harass or discriminate against a tenant with a mental disability. You can only terminate the tenancy in cases where a tenant is causing nuisance to others and the interference is significant, and/or the tenant is putting others at risk.
You also cannot harass a tenant who fails to comply with rules and regulations. However, some leases may have provisions for termination of the lease on the basis of a failure to follow regulations.
Risk #8 — Dealing with Mental Disability
As a property manager (or landlord), you may not discriminate against any disability or mental disease. This also includes hoarding. You may require that a tenant comply with the rules and regulations, however, which can include access within the unit.
Risk #9 — Deposits and Repairs
Deposits can be an area of risk because they are highly regulated. Keep in mind you cannot ask for an animal deposit for a support animal. For regular pets, the pet deposit cannot be more than twice the rent.
If repairs are required, California Civil Code section 1950.5 states the tenant must be provided with a notice of pre-moving out inspection and items of repair. That means you need to give the tenant a notice that they have a right to inspect before they move out. You do a walk-through with the tenant to identify problems, and the tenant has a right to repair them.
Deposits must be returned within 21 days. If you are deducting repair costs from the deposit, attach receipts of repairs that were done. Where repairs are carried out by your employees, you must provide the number of hours worked and the hourly rate instead. So anything deducted for repairs must be the actual expenses without any other fees on top.
Risk #10 — Late Fee
Late fees must be included in the lease and based on actual charges. They must be reasonable — you can’t charge an unreasonable fee and then charge interest and seek to evict the tenant because they fail to pay.
You also need to be aware of unfair business practices. These include charges such as transfer fees and breaking lease penalties. Any charges must be based on actual costs, they must be reasonable, and they must be part of the lease.
Risk #11 — Rental Increase
California Penal Code Section 396 states it is a violation to increase rent during any local or state emergency. The Code does not clarify where the state of emergency must be declared, so a proclamation of a state of emergency in an adjoining County may be sufficient grounds to prevent a rental increase during that period.
Risk #12 — Bed Bugs
Bed bugs are a difficult issue. It’s often impossible to prove that the bed bugs came from the tenant. Therefore, you cannot always charge the tenant for bed bugs remediation. A written notice regarding bed bugs must be provided pursuant to Civil Code section 1954.603.
Risk #13 — Cannabis
Cannabis is sometimes related to a disability, but you can consider a “smoking free” environment because there are other forms of cannabis that can be used for those needing it for medicinal purposes. So you can’t stop tenants from using cannabis, but you can prevent them from smoking.
For commercial leases, you will need to consider:
Gaps in insurance — the tenant may not be able to obtain renters insurance
Exclusion of certain types of losses related to the type of cannabis business using the space
Eviction of a cannabis business based on violation of the laws around marijuana
Inspections regarding compliance
Risk #14 — Vacation Rental
When dealing with a vacation rental, ensure there are no local ordinances that prohibit this. Also make sure the lease does not allow sub-leasing to a vacation rental. This will ensure you don’t lose control of the property.
Risk #15 — Mold
If there is any form of flooding or a water intrusion event, consider hiring an expert mold company to assess and remediate the property. Also, consider that mold can affect the personal property of the tenants.
Protecting Yourself and Your Business
Check your real estate E&O insurance and ensure you’re covered for risks associated with your property management activities.
If you’re a firm or firm + agents in need of coverage, click here.
If you’re an individual agent looking for personal coverage, click here.
CRES Insurance has decades of experience in assisting real estate professionals. This means you’ll have peace of mind that you and your business have adequate protection in case things go wrong.
This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.
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