If you are a landlord, you have likely put in a lot of blood, sweat, and tears to get where you are. Still, you have to put in a little bit of extra work to avoid the risk of losing it all in a lawsuit.
Let's look at how landlords protect themselves from lawsuits and limit their liability exposure.
While it would be improper to cast the landlord/tenant relationship in an adversarial light, the best way to protect yourself and your assets from lawsuits is to be a good landlord.
Don't get defensive; hear me out. This is easier said than done!
After all, no one sets out wanting to be a terrible landlord who will inevitably get sued by an angry tenant. For this reason, getting competent legal advice on how to effectively meet all your obligations as a landlord will be a huge step forward in making sure there is no grounds for any tenant to sue.
You can start by checking out these asset protection articles. As our backlog of articles will show, we're big fans of corporate structures that protect assets—structures like the LLC. As its name implies, a limited liability company (LLC) limits your liability exposure. Furthermore, if you set up an LLCs for each property you own, you can ensure that each property is isolated from the others in the event of legal action.
Beyond creating an anonymous structure to hide away your assets, you might also establish a shell company through which you manage everything. This keeps your assets from being taken from a lawsuit by making your shell company the entity that interacts in legal issues.
But let's not get ahead of ourselves. Let's look at ...
One of the most fundamental contractual agreements is that between a landlord and tenant. As such, there is a wealth of legislation and case law establishing the exact nature of that legal relationship. For landlords, it is vital to effectively discharge all legal duties in order to avoid a lawsuit.
These primary duties are:
Unless you have a particularly belligerent tenant, lawsuits will be the last resort for most. This means that there will be chances to remedy the situation long before you're facing legal escalation.
That said, it is worth noting the most common reasons a tenant will try to sue. In no particular order, they are:
Although landlords win 90% of all lawful evictions, a wrongful eviction is not good for anybody.
If you need to evict a tenant, seek legal advice so make sure it's done lawfully. You must obtain a court order before simply changing the locks, moving the tenant’s belongings out of the property, or cutting off utilities.
Additionally, a tenant has what is called a right to “quiet enjoyment”, this protects a tenant from harassment and privacy violations. If the tenant is compelled to leave the premises due to a breach of quiet enjoyment then this can be deemed a “constructive eviction” and is subject to be treated as a wrongful eviction.
As the penalties can include everything from legal fees to jail time, a savvy landlord looking to protect themselves will be best to only proceed to evict in a lawful manner.
Another potential opening for a lawsuit is if the property has issues that make the property unlivable. A well-maintained property should not have livability issues. After all, you do want to take care of your investment, right?
Generally, a property will be considered to have livability issues if one of the following is present:
As mentioned, regular maintenance means protecting your investment and rarely having to worry about these potential legal issues. Let's hope you never need it, but be sure to check out our article, When Should a Landlord Hire a Lawyer?
It is common for landlords to screen potential tenants by looking at their credit reports or by running criminal background checks. While a wise policy, the Federal Fair Credit Reporting Act has strict compliance rules for how you use the information obtained. If in doubt, seek qualified legal advice.
If not handled properly, issues around the security deposit can be the most volatile for lawsuits. However, there are key things that can be done to protect against lawsuits:
Above all, know the requirements imposed by the law regarding security deposits as the risks are severe if these requirements are not fulfilled.
At the risk of sounding like a broken record, getting a great lawyer to advise on this issue is essential. Every great player needs a coach, and every great landlord needs a competent lawyer to advise on winning strategies to limit liability exposure.
You should also limit your exposure as a landlord by ensuring that you have these forms completed. Here, attention to detail matters; every detail of the lease needs to be spelled out.
Being a landlord is an achievement, and it is well worthwhile putting in the effort to ensure that your asset is protected from lawsuits. Along with being a good landlord, having a great lawyer is key to avoiding those pitfalls of legal exposure.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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