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. 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. You can watch the webinar, listen to the podcast, or view the webinar transcript below:
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:
- Parties
- Number of occupants
- Noise
- Notices
- ADA (Americans with Disabilities Act)
- Marijuana
- Indemnity and insurance
Risk #2 — ADA Accessibility in Public Areas
The ADA (Americans with Disabilities Act) is a federal statute that only applies to public areas. You need to tink about making a property equally available and accessible to everybody.
You do need at least one disabled parking spot that is wider than a regular spot. That spot should be available to anybody who’s disabled and has come to the property.
If you have a tenant with a disability that requires a special parking place, and you only have a single disabled parking spot, you can’t assign that single disabled parking spot to that tenant. A disabled parking spot must be available for all disabled persons coming on to the property — it cannot exclusively be used by the tenant alone. Best practice: create more than one disabled parking spot to avoid problems.
Some other barriers to consider in relation to accessibility include:
- Alarms without flashing lights (you should have flashing lights because some people have difficulty hearing)
- Narrow doorways (could be considered inaccessible for people with wheelchairs)
- Other property features like drinking fountains that are high (too high for a person in a wheelchair to use)
If your property management company has a website, the website needs to be accessible as well. Every website visitor should have a way to get the message, no matter the disability. Include transcripts of videos for the hearing-impaired, and consider podcasts for sight-impaired.
Other ADA issues might include financial accommodation. Let’s say a tenant is receiving some sort of disability payment that comes in every month on the eighth. But their rent is due on the first. You will have to accommodate that tenant, so they’ll be able to pay rent on the eighth.
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.
In some cases, pets that may endanger other tenants (like poisonous snakes) may be refused because you cannot endanger other tenants.
Risk #4 — Fair Housing Act and Social Security Numbers
The Fair Housing Act does not allow discrimination against protected classes, which includes: race, color, sex, religion, national origin, familial status, 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).
California is a safe harbor state, and it doesn’t want landowners or property managers to send away potential tenants who are immigrants, who may not have paperwork.
Many property managers will ask the tenant to get their own credit report and give it to you. However, it’s imperative to make sure this information actually does belong to the person applying for the lease and is current. Be sure it is a full report.
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:
- Nationality
- Class
- Familial status
- Sex
- 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 skateboarding
- 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.
So if you say this property is not for kids, or kids can’t run around, or no bicycles or skateboards — usually kids are the ones that use bicycles and skateboards. It sounds like you’re discriminating against kids.
Be careful about occupancy limits. You might be facing discrimination if you say, “I can’t rent to your family of 8 people because this is a 2-bedroom home.”
Risk #7 — Harassment and Dealing with Mental Disability
As a property manager (or landlord), you may not harass or discriminate against a tenant with any mental disability or mental disease. 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.
This also includes hoarding. You may require that a tenant comply with the rules and regulations, however, which can include access within the unit.
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.
Risk #8 — Deposits and Repairs
Deposits can be an area of risk because they are highly regulated. If you don’t handle it exactly like the statute says, there are attorneys who are going to make claims. And the statute allows for punitive damages (triple damages) and it also allows for attorneys’ fees.
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.
So you want to be careful. Here are the basics:
- 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.
- If the tenant doesn’t repair or choose to repair, then you get the work done and get receipts.
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 #9 — Late Fee and Early Termination Fees
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.
Any amount of an early termination fee should be what the parties anticipate would be the losses of either party by that early termination.
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 #10 — 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 #11 — 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 #12 — 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.
Be careful if you’re leasing a property for the use of growing cannabis. Federally, it’s still a crime — which means that the property owner can be sued by the federal government. The federal government can pursue the property and owner by basically taking over the property from the owner.
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 — who wil know what to look for? (You do not want to take on the responsibility of doing inspections to see they comply with the law and are using the property for the permitted use.)
- The tenant might not be able to have a bank account and pay with checks
Tell your owners if they’re leasing to a cannabis business, the absolutely need an attorney. They need an attorney to look at the typical clause in a lease that says we can evict you if you’re in violation of the law. And the most important clause is the indemnification where the landlord will be indemnified by the tenant if there is an issue.
Risk #13 — 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 #14 — 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. They will have to close off the affected area, remediate, and then certify they’ve done it properly. Mold remediation is not a job for a handyman.
You may have to pay the tenant to move out or maybe stay in a hotel. Also, consider that mold can affect the personal property of the tenants, and could escalate into a property damage claim and personal injury claim.
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. We have coverage plans:
If you’re a firm or firm + agents in need of coverage
Or, if you’re an individual agent looking for personal coverage
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.
