Like many other industries, real estate has been significantly affected by COVID-19. Property management is one area in particular, which is experiencing much pandemic-related change. There’s no doubt the risks are much greater in this current environment, and lawsuits are on the rise.
For many property managers, keeping on top of COVID-related laws and restrictions presents a challenge in itself. This is especially so if you’re managing properties across different counties or cities. But, it’s essential if you want to avoid a lawsuit in a COVID world.
In this webinar, Mark Carlson, attorney from Carlson Law Group and Dave Miller, Regional Vice President with Fidelity Home Warranty, discuss what California real estate professionals can do to reduce the risks when managing property.
This comprehensive and informative session covers:
- An overview of the COVID-related risks property managers now face
- The importance of property management agreements
- What to consider when dealing with evictions
- Habitability claims
- Arranging access to properties for inspections, repairs and/or emergencies
- Best practices for property managers during the pandemic
Watch the full webinar, listen to the podcast, or read the transcript below:
Laura Prouse: Thank you for joining us today for reducing property management risks in a COVID world. I’m Laura Prouse with CRES Insurance Services. Today we welcome attorney Mark Carlson from the Carlson Law Group. Mark has been defending real estate professionals since 1993, and has worked with CRES for over 20 years as a founding member of our legal panel. Along with Mark, we have Dave Miller, regional vice president with Fidelity Home Warranty. Dave manages the CRES Advantage Home Warranty plan. (When CRES real estate E&O clients purchase a Fidelity Home Warranty, it gives their sellers $25,000 in Seller’s E&O insurance protection.)
Dave Miller: There seems to have been fewer lawsuits arising out of property management in the past. Now, it’s one of the leading E&O claims (and some E&O carriers have stopped offering this coverage because of the claims history). What has changed in property management, and why has it gotten so dangerous in California?
Mark Carlson: There are a couple of things to look at. First, in the past there was a period when we had a higher frequency in property management claims. That’s when we had the peak of the short sales and REOs in the 2009 to 2012 time period. Listing agents were trying to maintain properties while the banks were trying to get people out.
What’s making this time period more dangerous is that the value of the claims seem to be higher than they were in the past. It used to be the ordinary “you wrongfully evicted me, and I had to go to another rental and that cost me more money.” There were more generic eviction lawsuits.
Now we’re starting to see more habitability claims, and I think that’s stemming from a couple of different things. Firstly, more local governments and cities are enacting their own rent control and tenant protection ordinances. And every one of those ordinances seems to have its own attorney’s fee provision. So now, the value of the claim goes up, because there’s the ability to recover attorney’s fees and that motivates plaintiff attorneys to take those claims.
Really, there may not be any actual damages, but there’s a technical violation of one of those ordinances. Now the lawsuit is filed just so that the attorney can recover attorney’s fees.
And they’re not letting these claims go, because attorneys know that at some point they’re going to be successful in the lawsuit. Meanwhile, they’re just churning their fees, and it makes it much harder to settle those kinds of cases.
So the value of those claims or the exposure is going up, and that’s what’s causing insurance companies to not want to write property management errors and omissions insurance.
Your Name as Additional Insured on the Property Owner’s Policy
It’s an important point, now more than ever, that if an agent is taking a property management client, be sure your name appears as an additional insured on the owner’s policy.
Keep in mind that the coverages between your client’s homeowners policy and your own E&O policy are completely different. If there’s personal injury or if there’s any kind of bodily injury, a lot of times those kinds of damages will be covered under an owner’s policy but won’t be covered under an E&O policy.
Make sure that as an agent, you have in your property management agreement the obligation for the owner to name you as an additional insured.
- Get proof to make sure it actually happens. A lot of times, that provision will be in a lease, but nobody will pay any attention to make sure that it happens. Or if you have a longtime property management client, you just forget to ask every year, which you have to do in order to protect yourself.
You don’t have to sign a new property management agreement with your owner every year, but you should have a tickler that reminds you on every house that you have to contact the owner and ask, “You just renewed your homeowner’s insurance. Can you send me a copy of the policy page showing me as additional insured?”
COVID and Property Management
Dave Miller: How has COVID affected property management, and how has it affected obtaining access to a tenant-occupied unit?
Mark Carlson: Cal/OSHA and the Department of Health for the State of California have issued some guidelines as to how a property can be shown or accessed, it applies to both. (Check with your state for the appropriate guidelines.)
Now, you’ve got to make provisions for Personal Protective Equipment (PPE). You have to be mindful of how many people are in a property. You have to clean up afterwards. All those things have to be done for:
- Regaining access to a property after a tenancy terminates
- Trying to get access to either show it in anticipation of a sale or a new tenant or to make repairs.
- So anytime you go in now, you’ve got to be mindful of the best practices.
Dave Miller: How has it complicated the decision whether to evict a renter? And what’s the importance of using an attorney to do this versus just the property manager or the owner doing it?
Mark Carlson: You’ve got to first look at the economics of being a property manager. The margins are thin, your monthly income per house is not a lot. Successful property managers have to have a lot of properties and be efficient in order to be profitable. Property managers will tend to do things on their own, so they don’t incur additional costs or spend the time going to their landlord or owner to get money to do something or get an attorney hired.
But this is the time period when you really have to be more careful and not try to just do everything on your own because the risks are much greater.
First, you’ve got the risks of violating some sort of eviction moratorium or rent control protection or local ordinance ̶ and they’re changing all the time.
So it’s just very hard to keep up with every single county and every single city that you might have houses in.
When you’re making the decision as to whether to evict somebody or whether you can evict somebody, that decision has to be made on a case by case basis at that particular slice in time. You should get an attorney involved to help a property manager and owner make the decision as to whether there can be an eviction ̶ whether it’s legally allowable.
- Even contacting a tenant has been regulated now in a lot of these emergency COVID renter protection ordinances.
- There are restrictions on what you can ask for and what you can and can’t say.
When the decision is made that you need to get a tenant out for whatever reason, you need to determine at that particular point in time what you can and can’t do, and what you can and can’t say.
There’s also a question of economics. Do you really want to evict this tenant? What if you have a tenant that hasn’t been paying rent since March. Now, it’s September and maybe eviction moratoriums have expired. From a practical perspective, if you keep them, will they pay back some of the past due rents? If you evict them, almost certainly you’re never going to see that money again.
So it becomes a business decision as to whether you want to hope they’ll pay some of that past due rent back ̶ or whether you just want to get a new tenant in there and hope the payment stream is better.
Then, there’s a question that I don’t think anybody can answer, whether it’s an attorney or a property manager: if we have these eviction moratoriums and renter protection ordinances that give tenants a period of time in which to pay rent back that wasn’t paid in a COVID time, can you use the outstanding rent due as a grounds for evicting somebody?
In other words, if there’s an ordinance that gives you a time period to pay back your rent, can you even evict them? Is that even a breach of the lease, if a tenant takes advantage of that time period in which to pay back the rent? In Los Angeles, I think it’s going to be up to a year that you have to pay back the rent that you hadn’t paid during the COVID period. So, it’s going to be very complicated as to who can be evicted and when they can be evicted. You’re going to need an attorney to help you out with that.
Listing Property with Renters: Accidental Property Management
Dave Miller: What should real estate agents be aware of when they’re either listing or showing a property that has renters living in it?
Mark Carlson: This is sometimes, “property management by accident.” Let’s say an agent gets a listing from a bank on an REO. Or it could be a listing on a property occupied by a tenant. The landlord is looking forward to the end of the lease and just wants to get the house marketed and in better shape so it shows well.
Now the listing agent makes contact with the tenants. There’s no property management agreement, they’re not collecting rent, they’re not doing anything. But the agent starts interfacing with the tenant, and the tenant starts saying, “Well, I’ve got this problem. The heater hasn’t worked in two years,” or “This back gate doesn’t work.” And now you can become an accidental property manager if you say as a listing agent, “Well, I’ll go talk to the owner about that.” I’ve had a number of lawsuits where there was no actual property management relationship, and the listing agent got sued as a manager of the owner nonetheless, because these renter protection ordinances are very, very broad.
Dave Miller: So what should real estate professionals know when they’re listing or even showing a property that has renters in it?
Mark Carlson: We’ve had a number of cases over the years where the listing agent did nothing more than just try to secure the property. And the agent gets hooked into a habitability lawsuit where the tenant is making claims against the owner for problems with the property.
An agent needs to be very careful in making it clear to the tenant in that circumstance that they’re just there to list the property. If there’s any kind of friction, it’s best for the listing agent to leave and advise the owner, “When you get that property vacated, I’ll come and look at it and help you get it prepped and ready for sale.”
Almost all of the renter protection ordinances have language that says there are certain things that you can’t do that would constitute a violation. But within that, there’s another clause at the end that says you can’t assist anybody in doing a prohibited act either, otherwise you’re violating the statute.
We had a case not too long ago where an owner had passed and the property was held in a will, so it had to go to probate. The owner had let a friend live in a back unit on the property for years without any kind of rent being collected. The probate attorney made an arrangement with the back unit occupant to leave, so they could sell the property. And then he hired our clients to list the property and get it approved through the probate court.
The lawyer reached an agreement with the occupant and prepared a written agreement. He asked our client, “I know you’re going over there to start getting it ready to be listed. Can you take this agreement to the occupant, so that he can sign it and get it back to me?” That was the only contact. There was no dispute. That was the only contact that our client had.
Once he gets off the property, the occupant talked to an attorney. There was a violation of that particular renter protection ordinance, and our client was brought in on that lawsuit, because the act of delivering the letter was assisting within the definition of that particular ordinance.
The heirs to the estate spent the money from the sale of the house as soon as it was released. So they didn’t have money to pay for the violation that their attorney had done. So we ended up paying a fair amount of money to try and get out of that lawsuit by delivering a letter.
What About Just Making Repairs?
Dave Miller: We’ve heard about this a lot at Fidelity National Home Warranty and when talking to Laura: she’s seen an uptake of risk management calls from property managers about tenants not letting technicians into the home to make repairs. How does that work with the owners trying to uphold their lease agreement, but tenants just being really a pain?
Mark Carlson: We receive calls like this frequently, where the property manager will say, “We’ve been trying to get into a unit, and the tenants are either not available or they wouldn’t let us in because it wasn’t a good time for them. Or they’re worried about COVID. What do we do?”
Step 1: Take a look at the lease. What does the lease say? Get a copy of the lease and show it to the tenant, so that the tenant remembers. Most every lease has provisions that deal with getting access and the notice that’s required.
You can protect yourself and the landlord a bit better by pointing out to the tenant that the landlord has the obligation to maintain the property. The lease provides that we can come in with no notice if there’s an emergency, or if it’s advance notice in whatever the circumstance may be, we’ve given that notice. You’re telling us that there’s a condition that needs to be repaired that you’re not allowing us to repair.
So now you’ve protected yourself, because even on the most tenant friendly ordinances, correcting safety issues or damage to the property is almost always something that a landlord has a fairly wide latitude to be able to do.
Dave Miller: I think when you have a major issue, like a massive plumbing leak or a water heater that really affects the renters being in the property, that’s probably where it gets a little tricky if they’re reluctant to let anybody in.
Mark Carlson: It’s a habitability issue for the tenant, and whether the condition is also creating a habitability issue for neighboring tenants. Those are all things that need to be considered. Usually if there’s a safety issue or a condition that’s actively causing damage, most leases allow immediate access by the landlord. And even if you get to a property and there’s water coming out the front door (like in one of those cartoons), and you open it and a big flood comes out, in most circumstances the landlord can go in even if the tenant isn’t there to fix those kinds of issues.
On the flip side, you can’t say that an emergency condition exists just because you want to get a look at the inside. You might get reports that there’s suspicious activity by an occupant, and so the property manager and the owner want like crazy to get in there. You’ve got to resist that and look at the lease and follow what the lease provides.
Most every lease allows for inspection periodically without a reason provided that adequate notice is given.
Laura Prouse: Thank you again to Mark and Dave for the great information.
Contributing Attorney
Mark Carlson Attorney
Carlson Law Group
Mr. Carlson formed Carlson Law Group, Inc. in January 2005. He currently represents scores of real estate professionals in a wide range of matters. Mr. Carlson also represents individuals in the purchase, sale and lease of residential, commercial and industrial properties. Additionally, he has assisted several clients in building permit, zoning and other land use matters. Mr. Carlson’s practice focuses mainly on litigated matters, and he has handled over a dozen jury trials to verdict as well as several court trials. His trial experience includes two trials that each lasted over five weeks. Throughout his career, Mr. Carlson has strived to provide superior legal services while at the same time containing costs for his clients.
