Liability: Legal Definition and Real-World Examples for Investors

Some of the basic questions we get about liability include: 

  • What exactly is liability?
  • Why does it matter for a real estate investor? 
  • What kinds of situations can make a person liable? 
  • Can you argue and win against these charges? 
  • Are there ways to avoid liability?

Liability is basically any reason you might end up in court. Think of liability as the lifeblood of a lawsuit. Lawsuits tend to resolve in either settlements or judgments, some common misconceptions about liability and lawsuits.

 Legal Definition of Liability

“Responsible for or answerable in law” is the exact legal definition of liability. Essentially, if someone is “found liable,” this means they are on the hook for any damage or harm caused in the situation and can be required to pay for your mistake or oversight. 

Liability doesn’t always include malicious intentions, such as blatant fraud. In the real estate world, most liability issues are accidents. A real estate investor can be held liable without intentionally doing anything wrong. Here’s a real-world example where an investor got legal documents online and ended up getting more than he bargained for: 

Example: When Online Contracts Come Back To Bite You

Paul decided to buy a small home in Florida and rent it out for profit.

To save on expenses, Paul decided to print a template rental agreement off of the internet. “Why hire an attorney,” Paul reasoned, “when I can find what I need online for free?” He read it over, and it seemed to cover all of the basics. He typed his name and address at the top and called it a day.

Paul quickly found a tenant, a law student named Ed, who paid him a $1,200 security deposit and $800 per month for rent. Ed signed a one-year lease and the aforementioned rental agreement. Ed was a model tenant. But a year later, Ed wanted to marry his longtime girlfriend and move in with her. He left the property in the same condition he found it, and asked for the security deposit back.

Paul referred back to his rental agreement, which stated that he would return the deposit within 90 days of Ed moving out.

Then 83 days later, Paul received notice that he was being sued. He was understandably confused—according to the document, both he and Ed had signed, he still had a week to make the payment!

Here’s what Paul didn’t realize: Florida law requires security deposits to be returned within 15-60 days of the tenant moving out. Ed learned this in a law class, and when he couldn’t immediately reach Paul, opted to sue for the return of the deposit. The suit pointed out that Paul also neglected to include a copy of Florida Statute § 83.49(3) in the lease, as is required by state law. Paul found himself in Municipal Court by a first-year law student and now had a whole new headache on his hands.

The first mistake Paul made was using Google, J.D. in place of an actual real estate attorney. A lawyer would have quickly caught the unenforceable part of the contract and made the necessary revisions. That same lawyer also would have advised Paul about his responsibility to include the state statute in the lease. By trying to save a few dollars, Paul ended up costing himself way more time and money dealing with the issue in court.

The second mistake Paul made was not handling the security deposit properly. Breaking a state law is pretty much a way to guarantee you will be sued. The moral of this story for investors is that you should always be educated on state laws and common situations that can turn into lawsuits. This is why you want a real estate attorney in your corner. We know attorneys aren’t cheap—but would you rather spend some money now to stay out of court altogether, or risk it all when someone does sue you?

To better understand how to avoid the courtroom, let’s look at five of the most common situations that can get a landlord on the business end of a lawsuit.

 Let’s take a closer look at how proactivity can keep you out of court.

Common Types of Lawsuits

Real estate investors should be aware of some of the common situations that get landlords into court. Once you are aware of these issues, you can anticipate them. Some of the most common types of suits arise out of the following situations:

  • Discrimination. The Fair Housing Act (FHA) applies in every state in the United States. You can’t discriminate on the basis of sex, gender, disability status, or any other “protected” class.
  • Security deposit issues. Each state has specific laws governing how much landlords can charge for a security deposit, how soon it must be returned after move-out, and where lawsuits over security deposits can take place.
  • Eviction issues. If you’re going to evict someone, you must do so legally. For instance, you can’t kill the electricity to force a tenant to vacate.
  • Repair and maintenance issues. In most states, you’re obligated to make repairs and generally keep a home livable. While there’s some murky territory about what constitutes habitable, it’s always best to make repairs as quickly as possible. Learn more about landlord obligations regarding repairs and avoiding this type of liability.
  • Contractor and property management issues. You can be held liable for the actions of your employees.

Good communication, documentation, and legal counsel can help you avoid many of these issues. Still, you should approach all of the above situations with caution and be proactive.

Avoiding Liability

Fortunately, there are many legal tools available for real estate investors when it comes to avoiding liability. The basics include:

  • Contracts. Well-written, crystal clear contracts (which include lease agreements) can assist every investor. Ideally, you want a contract that is detailed but clear. A skilled attorney can assist you with this matter.
  • Corporate structures. The first rule of asset protection, and one we will drill into your head many times, is to never, ever own property in your own name. Instead, smart investors use corporations like LLCs, Series LLCs, etc.
  • Trusts. The Anonymous Land Trust is just one example of the many options available. Real estate investors can use the land trust to avoid holding property in their own name. When paired with an entity like a Series LLC, Land Trusts can be a crucial part of your asset protection plan.

While a lawyer can argue against liability in court, we find that with asset protection strategy that includes these tools, you can literally stop a lawsuit before it’s even filed.

Bottom Line: Contain Liability and Prevent Lawsuits with Asset Protection

You’ve already taken a critical step toward protecting yourself as an investor. Now that you have a basic understanding of liability, you can begin taking steps to avoiding personal liability and liability for your business.

The goal of asset protection is, obviously, to protect what you own. We found the best way to accomplish that is to make yourself impossible to sue. If you are sued, a properly-employed asset protection plan will protect your personal assets and make the target of your lawsuit a company that doesn’t own anything for the other party to collect even if they do “win.” If there’s nothing to gain, most people won’t bother with the expense of even filing a lawsuit in the first place. As with any fight, you shouldn’t make yourself an easy target.

Last Updated: 
May 5, 2020

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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