Protecting a Landlord from Tenant Liability
Landlords who lease residential or commercial property to tenants should be concerned about liability stemming from the tenant or guests of the tenant. For example, a tenant or a guest of the tenant could become injured on the property and then make a claim against the landlord. The gist of a claim could be that the landlord was negligent in the maintenance of the property, and that negligence lead to the injury. Or, the landlord’s personal interaction with a tenant or guest could result in claims for intentional torts such as civil rights violations or assault.
Under Florida law, a landlord’s liability for negligence depends on how much the landlord actually possessed or controlled the property and the defect that led to the injury. For example, in Russ vs. Wolheim, the court found that the landlord could be subject to a negligence claim for a tenant’s damages because the lease stated that the landlord must preapprove any tenant alterations or improvements to the property.
Individual property owners should own rental property inside a legal entity with a corporate shield, such as an LLC or family limited partnership. Negligence claims would properly be made against the landowner entity and not the individual that owns the entity. Florida law makes it very difficult for a claimant to pierce the legal entity and pursue claims against the entity owner.
Landowners should always carry sufficient liability insurance as the first line of defense against liability negligence stemming from the property. And claims for intentional torts can be avoided by minimizing the owner’s personal interactions with tenants or tenant guests.
Sometimes additional work is needed to protect the property-owning entity from tenant liability. There are two practical steps to further minimize legal exposure from rental property ownership: (1) use a leasing company and (2) put debt on the property.
The property-owning LLC can lease the property to a separate company, which will in turn serve as landlord for the tenants that take possession under a sublease. The lease agreement between the property LLC and the leasing company should be a triple net lease.
The triple net lease allows the property-owning company to avoid maintaining any control or possessory interest over the property. The lease agreement between the leasing company and the actual tenants could specify that the tenant can only sue the leasing company for any issues or negligence concerning the property. Furthermore, without any privity of contract between the actual tenant and the property-owning company, it would be difficult for the tenant to sue the property-owning company. Of course, the property-owning LLC can also hire a third-party commercial property manager to manage the property and interact with tenants.
Debt on Property
Additional protection can be obtained by placing secured debt onto the property itself. Individuals can consider having their property-owning LLC guarantee personal or other business loans, using the property as security. The security interest would deplete the property equity and make the property unattractive for judgment creditors. This step works particularly well with related-party loans.
About the Author
Gideon Alper specializes in asset protection planning for individuals and their families.
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