Legal Corner Q&A
by Stephen C. Duringer, Esq., The Duringer Law Group, PLC
Question I am about to enter into a five-year term lease for an industrial unit in Southern California. The unit has been vacant several months and I do not want to lose this deal, seems like good tenants are kind of few and far between lately. We have agreed on just about all of the deal points except a couple. At the last minute, the tenant requested the lease be prepared with a subsidiary of his company rather than the parent company, saying it is for ‘tax reasons.’ Additionally, he wants to make the use provision extremely broad rather than specific allowing him to do just about anything in the premises without having to get my permission. He knows I need to lease the space, but I am not sure I want to give in on these points, what are my options?
Answer Negotiating commercial leases involves a bit of horse trading. Often, terms that are very important to your tenant may not be so important to you, and vice versa. Knowing the pros and cons of each deal point allow you to knowingly accept or reject certain risks when considering certain requests. Generally, parties meet somewhere in the middle of a request, allowing certain concessions, but protecting the interests of the Lessor. The tenant’s last-minute request to substitute a subsidiary in its stead is an attempt to shift the risk away from the financially stable parent company, and obligate a less financially qualified entity, often times a mere shell, with relatively few assets. Screen the proposed replacement tenant as you would any proposed tenant to determine if it meets your rental criteria. Is it an existing concern or a new entity recently formed solely for the purpose of signing this lease? Is it an independent business concern, generating its own revenue stream? With its own assets? Or merely a subsidiary of the parent with no independent means of sustainability. There are many options to offer that would allow the tenant to satisfy his ‘tax reason’ while still protecting the Lessor’s interests. You may allow the replacement tenant but require the parent company to guaranty the lease. The Guaranty can range from an unconditional full-term guaranty to a limited guaranty based either on a certain period of time, or a certain maximum exposure. An increased security deposit adds protection as well. Options such as an irrevocable declining letter of credit issued by a reputable financial institution allow parties to salvage deals that might otherwise fail. Use provisions are important for a number of reasons. It is important that the tenant’s use does not overburden the facility or interfere with the neighbors. Certain unacceptable tenant uses may involve high levels of noise, or the use of corrosive or carcinogenic materials, or other toxic byproducts. As your facility is an industrial complex, parking is no doubt limited. It is important that the approved uses do not overburden the limited available parking. Rather than approving a very broad undefined use, it is better to identify the allowed use, but allow the tenant to request approval for a change of use in the event its operations change in the future.
Question I just received the most curious letter. Seems my local police department has identified one of my residents as an undesirable, they say he is suspected of being in a gang and is dealing drugs. They say that if I do not evict him, the police will prosecute me for allowing a criminal to operate on my property. I may even lose the property! The family has been there for several years, other than a couple bounced checks they have been model tenants. Help, I cannot afford a vacancy right now, what do I do?
Answer In this upside-down world we live in today, this actually is a growing trend in law enforcement. Rather than prosecute the criminal, many law enforcement agencies are taking the lazy way out and threatening the law-abiding landlord, forcing them to evict the resident. Rather than locking up the bad guys, just shuffle them off to another community. If the police are certain he is dealing drugs, why isn’t he in the “gray bar hotel”? If the letter you received is inconsistent with your experience with your resident, follow up with the police department by asking for documentation supporting their claim. Have there been arrests on the property? Have illegal drugs been found there? Ask other residents in the building, gather independent information. If the information you gather supports your resident’s involvement in criminal activity, take action immediately. Consult your attorney to determine if you have enough facts to support a three-day nuisance notice, or if a thirty day or a sixty-day notice is appropriate. Remember, a letter from the police department is not sufficient evidence in court to base a nuisance notice on, testimony from percipient witnesses will be required.
Question With the recent heavy rains, my apartments have experienced some roof leaks. Most of the leaks are minor, but there is a pretty big leak in one apartment. This is of great concern to me, because the roof is less than five years old, and has never leaked before. I even had it inspected prior to the rainy season by a competent roof inspector. The trouble is that the water leaked into one of my resident’s unit, and apparently caused a substantial amount of damage. The resident claimed that his stereo equipment, television, computer, furniture, and clothing were ruined. He even has pictures of the water dripping from the ceiling onto his stereo and television set. The resident is threatening to sue me if I do not reimburse him for his losses. What should I do? Am I responsible for the resident’s personal property losses?
Answer An owner is not generally liable for damage caused to the personal property of a tenant, absent negligence on the part of the owner or his agents. Provided a licensed roofing contractor performed the roof installation, you maintained the roof adequately, had it inspected on a regular basis, and were not on notice of any prior problems, you should not be responsible for damage to the resident’s personal property. Additionally, the tenant has an obligation to mitigate his damages when faced with a leaking roof. This basically means that if the leak was coming slowly through the roof, and the tenant knew about it, then he should have taken some measures to minimize the damage to his personal property. The fact that the resident had time to grab a camera and take pictures of the dripping water, while letting his television set, stereo and other belongings get soaked suggest the resident failed to mitigate his damages. In simple terms, the tenant should have moved his stuff, and grabbed a bucket, rather than watch it drip.
Question I am getting conflicting advice about whether or not I must rent to some one that does not have a valid social security number, nor an official picture ID. Seems like most of the attorneys and the Fair Housing guys say I ‘cannot discriminate’ and that I must rent to all, regardless of whether or not the prospect can prove who he is, or verify his tenancy history, or his ability to pay the rent. I have been following that advice for years, and now have a building full of undocumented people, that I could never find in a million years if I ever had to collect from them. The rent usually gets paid, but the building, and the neighborhood, look like hell. I want to take my building back, and only rent to persons that qualify, that have verifiable identities and credit, and are good credit risks. What are my rights?
Answer The dirty little secret is that our industry has passively allowed this erosion to occur over many years. Many landlords have looked the other way, in favor of the quick rental, the cash payments, the full building, the reduced confrontation, we have taken the easy way out. Landlords have been wary of lawsuits claiming discrimination and have believed the bullying taunts and threats from the tenant and immigrant rights activists, that we have just taken the easier and less confrontational course of allowing it to happen. We blame our government for not addressing the illegal immigration issue; one side of the aisle wanting cheap labor, the other wanting cheap votes. We blame employers for hiring, and our ‘welfare state’ for creating the magnet that keeps drawing. Landlords are part of the problem as well. By succumbing to the short-term temptation of the quick rental to the unverified, the undocumented, we are contributing to the problem. Many landlords are realizing that rather than just complaining, they can be a part of the solution. Landlords have absolutely no obligation whatsoever to rent to an individual who is unable to independently verify his identity, his past tenant history, and his ability to comply with the terms of the rental agreement, including his financial ability to pay the rent. Our system of society is built around a numeric social security or tax ID number. Our life history, good and bad, is reported more often than not, into a data base that is organized by, and sorted by the social security number. Names are common, but social security numbers are unique. No two people should share the same number. Credit as well as criminal convictions are reported similarly. These very basic requirements should be applied uniformly to all applicants, regardless of race, national origin or ethnicity. It is just good business sense. With average rents over $1,500 a month, landlord investment of $200,000 or more per rental unit, and a litigation climate that is out of control, landlords must know who their residents are, must reduce their risk of financial loss and must know how to recover from a breaching resident.
This article is presented in a general nature to address typical landlord tenant legal issues. Specific inquiries regarding a specific situation should be addressed to your attorney. Stephen C. Duringer is the founder of The Duringer Law Group, PLC, one of the largest and most experienced landlord tenant law firms in the country. The firm has successfully handled over 285,000 landlord tenant matters throughout California and has collected over $200,000,000 in debt since 1988. The firm may be reached at 714.279.1100 or 800.829.6994. Please visit www.DuringerLaw.com for more information.