This post was written by Jeff O’Brien for Simply Residential Property Management Magazine.
Last month, I discussed the pertinent legal standards under Minnesota law for when a landlord can be held liable for injuries to tenants and/or their guests. This month, I’m going to discuss some basic steps that landlords can take to minimize their exposure to such claims.
The Difference Between Liability and Being Sued
When it comes to civil lawsuits, Minnesota – like most states in the U.S. – is known as a “notice pleading” state. That means that a plaintiff does not have to prove his/her entire case in the complaint. If the plaintiff has a good faith basis for a claim, their attorney is permitted under the lawyer ethics rules to commence a lawsuit, and the details of the case are then explored later on during discovery, and then come the motions and, well you get the idea.
What does this mean? It means that, even though ultimately you as a landlord may likely prevail in a lawsuit brought by a tenant, you still have to defend the lawsuit. Hence, taking some additional steps to prevent exposure for a claim brought by a tenant for injuries is a wise course of action. Here are a few simple steps you should undertake immediately to audit your level of exposure to a tenant claim:
Use of Liability Limiting Entities
Use of a liability limiting entity such as a limited liability company can insulate a property owner’s personal assets from liability arising from tenant claims. For best results, it is recommended to own each property in a separate limited liability company (or LLC for short). In this manner, in the result of a tenant lawsuit related to one property, only the assets of the LLC which owns that property are at risk; in other words, the potential claim should not affect your other properties owned within separate LLCs.
Note that I said that the potential claim should not affect your other properties; in order to make certain that other entities and properties are not affected, you must be certain to respect the corporate formalities of each LLC. Separate bank accounts should be opened for each separate LLC and the income and expenses relative to each property should be run through those bank accounts. Do not commingle funds between properties and do not commingle funds from your rental properties with personal funds. Otherwise you leave yourself open to “veil piercing” claims in the event that a tenant prevails in a lawsuit but finds no assets available to satisfy their judgment from the subject LLC.
Do You Have Adequate Insurance Coverage?
In order to best minimize the risk of liability for injuries to their tenants and/or guests, landlords should make sure that they have adequate insurance coverage – including provision of and payment for legal counsel in the event of a claim – for each of their properties. If you choose to utilize separate entities for each rental property, make sure that each entity is properly named as the insured under the policy.
Review Your Leases
A final preventive step to take would be to review your leases to make sure that they do not create any express liability occasioned by a tenant injury.
With respect to both the lease review and entity formation matters, use of a knowledgeable attorney to audit your entity documents and lease forms would be a cost effective investment given the alternative of expensive litigation.
Jeffrey C. O’Brien is an attorney with the Minneapolis based law firm of Lommen Abdo, P.A. voice of the “Legal Minute on Minnesota Home Talk, heard Saturdays on 1500 ESPN, and a Minnesota State Bar Association Board Certified Real Property Specialist. He can be reached at (612) 336-9317 or via email at firstname.lastname@example.org.