Archive for June, 2011

The Cleaning Service Overflowed the Toilet.

June, 2011

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Q1

I had hired an auction service to clean out one of my vacant rentals. One of their workers used the basement toilet and caused an overflow which put 7″ of water throughout the ranch home. My insurance will cover all the structural damage and drywall replacement but my rental policy does not cover contents. There was furniture, a pool table and there are several boxes of goods that the auction company has boxed, but haven’t removed yet. Is the auction company liable for the damage to my furniture and contents?

It is their worker who left on Friday with the toilet running. There was nobody else in the house. They were hired to clean-out the house for the next rental. Actually, they were going to pay me for the items removed. Where do I go with my damage claim?

A1

You should attempt to get the vendor to pay for the damages. Depending on the amount involved, they may be willing to contribute towards part or all. However, if you tried to get me to pay under such circumstances, my initial position would be that the damages were the result of your failure to properly maintain the toilet and a judge could very well agree with me. The vendor likely flushed the toilet and immediately left the area as do most people. Few, if any hang around to confirm that the toilet doesn’t leak or run unless already aware of a potential problem. Returning to me being the culprit, the result might be different if you could prove I knew my use of the toilet was particularly risky. I would almost certainly be liable if you had told me not to use the toilet because it was defective, if you could prove I had reason to know there was a problem, perhaps even if the supply valve had been turned off and I turned it back on.

You should certainly determine whether or not they have insurance that will cover the problem, as most real businesses would have coverage for error or basic negligence. However, even if they do, their insurance company might refuse the claim based on the same argument I would have used.

If you are unable to negotiate an acceptable solution when you approach them nicely, you can decide whether you want to proceed with a lawsuit, taking into account the cost of a suit and your chance of winning. Your decision may depend on whether the amount of damages will allow you to use “small claims court” or will require a significantly more costly venue.

In general, a landlord should always have coverage for furnishings that are included with the unit. In my 33 years of management experience, damages to furnishings are just as likely (perhaps more so) to result from things such as leaking roofs, failed plumbing (such as your case), or broken water-using appliances rather than either accidental or purposeful tenant actions. I always included specific lease clauses that explicitly made the tenant liable for water damages caused by a tenant-owned washing machine or other water using item and for water damages caused by landlord-owned washing machines and dishwashers that were left unattended while in operation. Insurance coverage of furnishings should include events that are (1) acts of nature, (2) the result of plumbing and appliance failures (whether the fault of tenant, landlord, or an agent of the landlord or tenant), or the theft or malicious damage by any party other than the landlord.

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Q2

If I want to remove a lodger from my property, can I do so immediately or is he entitled to a certain number of days notice?

A2

It will depend on which state you’re in and whether he is really legally a “lodger” as defined by your state’s law or instead legally a guest or a tenant. In most states there are specific facts regarding the occupancy that will determine the proper classification. The name given to the occupant’s residency is irrelevant. There are certain factors that can change a guest into either a lodger or a tenant or change a lodger into a tenant. Whether you need to give a certain number of days notice and even the number of days that might be required will likely depend on the correct classification of his occupancy. I would need to know more details in order to provide an answer.

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Q3

I need a form to extend a lease.

A3

We do not have a form to extend a lease, at least for the several states that I checked. However, it is not difficult to create an amendment document to change anything regarding the lease. Simply include information identifying the existing lease (names of the landlord and the tenants and the date of the lease), the date of the amendment, what term or terms are being changed, and a statement that all other terms of the lease remain unchanged. You could also have all parties sign a new lease using your existing form. Be sure that the same parties that signed the existing lease agreement sign the amendment or new lease.

In general, when changes are being made to a lease you can always either amend the lease or create a new document. It is usually best to create a new lease document when the number and complexity of changes being made is significant relative to the overall document. There are no set rules regarding the decision point, but for your case, with only one simple change being made, one would usually do an amendment. However, again, there is nothing to stop you from using a new lease if that seems easier to than creating a new document.

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Screening Prospective Tenants

June, 2011

Screening Prospective Tenants

Choosing a tenant to fill a rental vacancy is a critical decision for any landlord. Those landlords that “choose well” often sleep better at night than those landlords who are forced to “choose often” because the first tenant did not work out. As those landlords that choose over and over again find out there are no do-overs, only start-overs, a time consuming and expensive process.

For many reasons, not the least of which is to reduce income loss, a landlord needs a reliable, consistent system of attracting prospective tenants, adequately screening applicants, properly selecting a qualified tenant, and retaining good tenants. For those that choose often, it may seem like a case of easier said than done. However, those who choose well reply that it may not always be easy, but it is simple. They develop a system specific to their business and follow that process each and every time a vacancy occurs. Repetition is not the key here, but rather understanding the filling vacancy process, analyzing what works and what needs to be changed, and incorporating necessary changes or additions for future vacancies.

As a first time landlord you probably researched the subject of tenant screening and drew up an initial plan that you followed. As you gained experience you probably continued to work according to plan but made more allowances as markets, rents, and economies fluctuated. Now you may just know what to do, which may or may not be the same process you initially designed. If you’ve gotten away from following your plan, we suggest you take a few minutes to review the primary objective for filling your vacancy – namely  to choose a good tenant who will pay the rent on time, maintain the property in good condition, be a good neighbor, and not cause problems for you. Having a good system in place is not a guarantee of choosing a good tenant; however, it does maximize your chances. With a plan in place you are not likely to forget an important screening, rush to judgment, or become emotionally involved with the prospective tenant’s situation. Your goal is to make a good business decision, one that protects your investment and does not incur liabilities or violate the law. If your existing plan needs updating, be sure it covers the real life lessons (the worst tenant scenarios you’ve dealt with over time) with appropriate lease clauses, screenings, deposits, etc.

Your system is only as good as the foundation it is built upon. That foundation is business law and landlord-tenant laws. Without a firm understanding of applicable federal, state, and local laws, you cannot properly (and legally) set your rental policies and practices. You have a responsibility to keep current with laws. Almost all aspects of rental property management are regulated by laws at some government level, some aspects at multiple levels. As new laws and more restrictions are proposed, the administrative side of landlording may become more burdensome. Knowing the laws, understanding the laws, and complying with the laws can prevent unnecessary legal problems and financial penalties. Knowing the laws can also help you defend against applicant fraud or illegal tenant activities.

As cornerstones of your system, your written documents – the lease, application form, and rent rules – should reinforce your policies and practices. These documents spell out your expectations of a tenant. The lease sets forth the contractual basis of the landlord-tenant relationship and together with the landlord-tenant laws of your state defines the duties and responsibilities of landlord and tenant. Applicants need to know what your rules are – e.g., parking or use of property amenities – in order to decide, even before submitting an application, if your property suits their needs. Landlords should also remember that they themselves as prospective landlords are being screened by prospective applicants.

You will need to establish qualification criteria before you can select a tenant. You can be as choosey as you want to be or willing to take risks in setting your standards. However each and every applicant must be judged against the same standards. In this one instance applicants are all the same. There can be no deviation or variance in your qualification process – every applicant must be treated the same. Federal, state, and local anti-discrimination laws are very specific as to what you can do in screening applicants. You are free to choose your next tenant from prospective applicants as long as you base your selection on legitimate business criteria. For example you can reject applicants with insufficient income to meet rent obligations, have credit histories that show serious delinquencies or collections, are known to have caused property damage at a prior rental address, or cannot meet requirements for security deposits or fees.

Federal Fair Housing laws prohibit discrimination against the protected classes of race, religion, national origin, sex, color, familial status, or disability. State and local fair housing laws may have additional protected classes and thus be more stringent than federal law.

You will need to decide the logical progression of the screening steps to qualify your applicants. Your first screening is always to verify identity. The next step is to review the completed application. Some landlords prefer to run credit reports on all applicants, while others prefer to contact landlord references regarding prior rental history before spending money for a credit report. However, early in the qualification process you will need to verify current employment or other income sources to establish if there is sufficient means to meet rental obligations and ascertain that the applicant has adequate cash resources to pay the security deposit, utility deposits, the first month’s rent, and other costs of moving into your rental unit. This is usually best accomplished by providing upon first contact with applicant written information regarding costs rather than by requiring proof of cash availability. If the applicant just can’t afford it, there is no reason to conduct further screening.

Initial screenings (identity, rental history, employment/income) being done, you’ll want to know a little more about the applicant’s background. This type of screening can include credit history, criminal conviction records search, public records search, eviction records search, and reference checking.

All screenings should be conducted on every applicant of legal age. While the costs of checking multiple occupants can seem burdensome, some of the expense, if allowed by state law and under certain restrictions, can be offset by charging an applicant deposit. This can work to the landlord’s advantage, but conversely, requirement for excessive application fees can reduce the pool of qualified applicants. Accordingly, you may need to absorb part of the processing expense.

You will almost certainly use a tenant screening vendor to conduct your background screening reports. While public records are, well public, personally checking the various types of records thoroughly would require significant time and effort on your part, particularly if your applicant has lived in multiple locations. Entering location data into an online form provided by a screening service is certainly much easier and more cost-effective.

The ease and availability of information that can be provided by a screening service is a real benefit to busy landlords. Also, the quicker applicants are qualified per your standards, the sooner the vacancy can be filled. However, being in too much a hurry to install a tenant (without being satisfied that this is indeed the tenant you want) can end up costing you more than an empty unit.

In our opinion, screening services provide the most efficient and effective means to conduct thorough searches for credit and criminal conviction history. Report formats may vary from vendor to vendor but most are quite detailed and provide sufficient information to aid landlords in their qualification of applicants. Selecting a screening service requires due diligence on your part to ask questions and review sample reports to determine which service meets your business needs. Once you have selected your vendor and signed up for services, it’s simply a matter of choosing the reports you want, entering applicant data, and retrieving your report. While the final determination is entirely your decision, many services offer rental recommendations that you can accept or use as guidance in your decision.

My Tenant and I want to Renew a Lease.

June, 2011

Q1

My tenant and I want to renew a lease. The only item on the old lease that will change is the lease term. Do I have to enter into a new lease, or can I do a short addendum to the existing lease?

A1

It is an “amendment” rather than an “addendum” that you are considering using.

When changes are being made to a lease (or any other contract) you can always either amend the existing contract or create a new document. It is usually best to create a new lease document when the number and complexity of changes being made is significant relative to the overall document. There are no set rules regarding the decision point, but for your case, with only one simple change being made, one would usually do an amendment.

Be sure that the amendment states that all other terms of the lease remain as before.

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Q2

I have a male applying for a 1 bedroom unit. Is it legal to rent to him if his 2 children (1 male, 1 female) stay with him on weekends?

A2

I can’t at the moment think of any specific reason why it would be illegal for a man’s children of any gender to visit him on weekends as long as the apartment is habitable and presents no known health or safety risk. In fact, one must be very careful about making any restriction related to “familial status” of applicants or existing tenants, as doing so might be considered a violation of federal fair housing laws (and similar, often more restrictive, state or local laws).

Unless you have some specific knowledge based on factual evidence that would lead you to believe the children would be in danger, you probably have no right to question the matter.

Lease agreements usually have and should always have a clause that deals with visitors. Such clauses usually state that visitors may not remain longer than some number of days during a defined period – for example, a maximum of 2 weeks during a 6-month period. Such clauses sometimes require registration of visitors when staying longer than a specified time and often add an additional rent amount when the stay lasts longer. However, imposing such restrictions on children of a tenant could risk discrimination claims.

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Q3

I am renting a commercial building for our business. The roof leaked and destroyed some tool parts. Plus, I pay for the labor necessary to clean the water up after rain or after snow melts. Is my landlord liable for damages?

A3

It will likely depend entirely on words in the lease agreement. For residential rentals, many things are controlled by state and/or local laws because the government seeks to protect consumers of which most are not knowledgeable enough to protect themselves when entering into contracts. However, for commercial rentals the government assumes that tenants who operate businesses are capable of looking out for themselves or will hire an attorney to protect themselves. Accordingly, commercial lease agreements are allowed to have much more flexibility regarding terms to which the landlord and tenant might agree.

The bottom line is that you must carefully read your lease agreement to see if there is any clause that might relate to the matter of concern. For example, you may actually be responsible for maintaining the roof yourself, a not uncommon thing in commercial leasing.

If there is absolutely nothing in the lease agreement that makes you responsible for the roof, then you might be able to pursue collection of damages from the landlord. If you cannot negotiate a settlement with him and consider it is necessary to file a lawsuit regarding the matter there are numerous circumstances that might affect your chance of winning in court. For example, even if you are not explicitly made responsible by the lease, if you had knowledge of the roof leaking or even to suspected that it might leak (e.g., water stains on the ceiling) prior to the subject event(s) that caused damages or extra expense and did not take steps to protect your belongings, this would likely reduce your chance of winning. This would be even more against you if you had not provided notice to the landlord of your concerns regarding possible problems and could prove you did so.

Commercial leases often contain clauses that indemnify the landlord against such problems. Commercial tenants are also expected to protect themselves by having their own adequate insurance coverages against damages and losses, no matter whose fault.

If your lease agreement contains relevant clauses, then those clauses will govern the matter. If you find clauses that you think might be relevant and need an opinion regarding them, you can post again with that information and I can attempt to provide additional input.

Increasing Landlord Workload

June, 2011

Increasing Landlord Workload

Each year landlords’ lives become evermore complicated due to federal, state, and local governments enacting new laws related to both being involved in any type of business as well as related specifically to ownership of income properties. Landlords must be concerned about lead-based paint; mold; bedbugs; fair housing and ADA; the FCRA; the FDCPA; state landlord-tenant laws; credit screening record handling under FTC regulations; a variety of business taxes, income tax, property taxes, and, in some jurisdictions, rent taxes; employee vs. independent contractor issues; insurance coverages and costs; and whether tenants will pay their rents next month.

Recent Supreme Court decisions will likely now further increase the complexity of landlording for all those who manage income properties, even more so for those landlords and property management companies who hire employees.

In May 2011 the U.S. Supreme Court issued a major ruling affirming the right of a state to pass legislation penalizing employers who knowingly hire illegal workers. Arizona was the state whose law was affirmed. The Arizona law provides for revocation of business licenses of offending businesses, with the term “business licenses” considered to be very broad.

At the local level, in September 2010 the Third Circuit U.S. Court of Appeals had stopped city leaders in Hazleton, Pa. from enforcing a new ordinance prohibiting employers from knowingly hiring illegal aliens. The subject city ordinance also sought to prevent landlords from harboring illegals in their rentals. The city was attempting to stop a population explosion of illegal workers who don’t pay local income taxes.

The Hazelton case will now be sent back to the Third Circuit Court of Appeals with instructions to review the matter given the court’s ruling in a nearly identical Arizona case that the Supreme Court had resolved in May.

The required use of the federal E-Verify database when hiring was the focus of both cases. This data base tracks the immigration status of millions of people. The Supreme Court, in a 5-3 ruling, said state governments can force the use of the system even though Congress has never mandated its use.

Kris Kobach of the Immigration Reform Law Institute told the court “Hazleton’s ordinances match the terms and classifications of federal immigration law and require officials to defer to federal determinations of aliens’ immigration statuses,” adding “In drafting the ordinances, the city made every effort to avoid any conflict with federal immigration laws.”

It’s the same argument Arizona’s lawyers made when their case went before the Supreme Court and is one that Chief Justice John Roberts and four of his colleagues agreed with. Roberts wrote last month “(Federal law) expressly reserves to the states the authority to impose sanctions on employers hiring unauthorized workers, through licensing and similar laws. In exercising that authority, Arizona has taken the route least likely to cause tension with federal law.”

During the past decade there has been legislation in various state legislatures and some ordinances at the local government level, all attempting to deal with employment of and rental to illegals. Most attempts have been struck down in lower courts for one or more reasons. While some states and local governments have continued to move forward on such laws, many states and local governments have hesitated to pass such laws, preferring to wait until the Supreme Court clarified what might pass muster and what won’t.

In view of the Arizona law Supreme Court decision and the likelihood that the Third Circuit U.S. Court of Appeals will now change course, it should be expected that many states and local governments will be passing laws regarding both employment and rental issues. Accordingly, landlords must be certain to keep informed about legislation and ordinances being considered in jurisdictions where their properties are located. Landlords should also be sure to follow laws currently in place to ensure that they are not found in violation of old laws when enforcement of new laws is in place, perhaps with more rigorous enforcement. For example, current law has long (since 1986) required the use of USCIS Form I-9 when hiring employees.

How Many Days is a Tenant’s Visitor Allowed To Stay?

June, 2011

Q1

How many days is a tenant’s visitor allowed to stay?
A1

It depends on whether the lease deals with the subject. If it does not have a lease clause specifying a limit, you may have trouble enforcing any limit. If the issue went to court you’d have to convince the judge that there should be a restriction under the legal principle of equity.

A lease agreement should always contain a clause dealing with this issue. Having such a clause provides a clear violation of the lease agreement if a tenant tries to move someone in for a longer period. However, the limitation should be reasonable. If the matter went to court, the definition of reasonable would likely depend on the judge’s personal standard. Typically, such lease clauses limit the number of nights a visitor may stay during a specific period without the landlord’s written permission. This might be 3 days within any 30-day period, 10 days within any 6-month period or 2 weeks within any 12-month period or any other combination of numbers and periods that you consider reasonable and that will not impact your ability to attract and keep tenants. The limit of 10 days within any 6-month period without “registration” is an often used limit.

The limits should not be unduly restrictive. For example, a judge would likely consider it such if tenants are required to “register” all overnight stays. However, keep in mind that you don’t have the right to restrict a tenant’s social life or pass judgment on the propriety of visitors’ stays.

You may want to include a clause within your lease that provides information regarding the need for and the procedures for changing a visitor to a co-tenant. This is generally advantageous, as it results in someone else to go after if there are unpaid rents and/or damages.

Lease agreements should also include clauses prohibiting or otherwise limiting assignment and/or subletting and/or roommates. If not completely prohibited, conditions of approval and explanation of the approval process should be included.

As with any lease clause, such clauses must not violate any state laws or local ordinances (it is possible some jurisdictions may disallow total prohibition against assignment/subletting and/or otherwise limit restrictions) and must be enforced fairly and equally among all tenants and not in any discriminatory manner that might provide cause for a fair housing law violation claim.

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Q2

I have a tenant that is in a month-to-month lease that I would like to terminate. I suspect he is not going to go easy, will likely stop paying rent upon notice, and could leave the property in damaged condition (holding 2 months security deposit that was given by a girlfriend who has left). Current lease stipulates that at least 60 days notice will be given in this situation. Do I need to worry about any fair housing issues.

A2

Detailed discussions of evictions and fair housing issues can be found in the Mini Training Guides and the eCourses. As examples, the Training Guides titled “9 Steps to Eviction” and “9 Steps to Avoiding Fair Housing Problems” cover those particular topics. Those subjects and many others are also covered in certain lessons of the various eCourses. Both topics are covered extensively in lessons of the “Income Property Basics” and “Managing Income Property” eCourses. The “Evictions” eCourse is dedicated to that particular subject.

The above being said, I will try to briefly discuss some of the issues in your posting. First, I must assume that there is some reason that you wish to terminate this tenancy. If you are getting the rent on time and he’s not causing any other significant problems, be sure that you consider the total costs of a vacancy. For a month-to-month tenancy the rent can be increased at any time upon appropriate notice – 30 days in most states, although some states require a longer notice period under certain conditions and any longer period specified by the lease agreement must be followed. Sometimes a significant rent increase will cause a problem tenant to depart.

In general, no reason need be given for termination at the end of a lease period – month-to-month in your case – and it is best to not provide a reason that might be turned into a fair housing claim due to the way the reason was worded or how the tenant interpreted the reason. One should usually not let fear of retribution prevent termination of the occupancy of a bad tenant, including one who doesn’t pay the rent in a timely manner. If he does purposeful damage, report the matter to the police as a crime.

For an existing bad tenant, retribution problems can sometimes be reduced by some simple steps. First, give notice immediately after the most recent rent check has cleared the bank rather than the required notice period before the due date. Most states allow the date of termination to be any day of the month as long as proper notice is given. Second, take immediate action if rent is not received as required. This means, for example, serving a “pay or quit” notice the day after the rent is due and not paid and then filing with the court to begin the eviction immediately after the notice period expires as allowed by law of the particular state.

The fact that his girlfriend paid the tenant’s deposit may or may not be an issue. If she was also on the lease you will need to be sure that an accounting for the security deposit be provided to both parties and that any possible refund be made via a check made payable to them jointly. Of course, the accounting/refund must be provided within the period required by your state’s law, because failure to do so can result in substantial penalties in some states, including treble damages and/or prohibiting deductions from security deposits, requiring the landlord to file a lawsuit to obtain any money.

Although, perhaps not directly helpful for the current problem, I will mention that a landlord can minimize the costs resulting from bad tenants. As for many potential problems, the first line of defense is to have adequately screened and properly selected the tenant in the first place. The next most important defense is to utilize good documentation, including an adequate lease agreement and good move-in/move-out procedures that include a good checklist.

Finally, if you are really worried that the termination “will not go easy” you should consider turning the matter over to a competent attorney from the initial notice to the eviction if necessary. There are numerous ways in which a knowledgeable tenant can delay the eviction when the landlord is not experienced in such matters and mistakes made by the landlord can result in needing to start over after weeks of effort, adding to both time and expense of evicting. The cost of a good attorney can sometimes be considerably less than the cost of delays in eviction.

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Q3

Do you have any resource on what you can and cannot ask during tenant screening and if it is permissible to make copies of tenant documentation? Also, can I give the applicant a copy of the report?

A3

You can ask for almost any documentation that might be of use in screening and you should make copies of anything that could ever be of use in (1) tracking down a skipped tenant, (2) collecting a judgment, or (3) defending yourself against a fair housing complaint. However, you must be very careful to request the same information from all applicants in order to avoid any claim that you discriminated against a particular applicant(s) or protected class of applicants.

Obviously, there will be cases where certain information/documentation is not applicable because of reasons not related to protected classes. For example, you would not expect to obtain W-2 forms from a self-employed applicant and you would not usually care about seeing tax returns of an applicant who provides W-2s. The best procedure is to provide written information with your application forms about this and other relevant issues related to screening. For the example, you might state in the information that tax returns to verify self-employment income and W-2s must be provided to verify employment income. This would take care of all three cases – that is: self-employed only, employed only, and those who are both.

Regarding providing a copy of credit reports or other screening reports, the credit reporting agencies recommend you not do so. Some states require the applicant be provided a copy upon request. You need to check the law of your particular state.

For applicants to whom you must provide an adverse action notice, FTC regulations require that when an adverse action is taken that is based solely or partly on information in a consumer report the FCRA requires the landlord to provide a notice of the adverse action to the consumer. The notice must include:

  • The name, address and telephone of the CRA that supplied the consumer report including a toll-free telephone number for CRAs that maintain files nationwide,
  • A statement that the CRA that supplied the report did not make the decision to take the adverse action and cannot give the specific reasons for it, and
  • A notice of the individual’s right to dispute the accuracy or completeness of any information the CRA furnished, and the consumer’s right to a free report from the CRA upon request within 60 days.

However, be aware that certain states have more restrictive consumer credit laws and additional requirements. For example, CA requires the landlord to give a receipt for any fee collected ($30 or $35 as I remember) and provide the applicant a copy of the credit report when requested.

Be sure you understand which types of screening require an adverse action notice and which do not, as the penalties can be quite high for failing to provide the notice if required. Landlords who fail to provide required disclosure notices potentially face legal consequences. The FCRA allows individuals to sue landlords for damages in federal court. A person who successfully sues is entitled to recover court costs and reasonable legal fees. The law also allows individuals to seek punitive damages for deliberate violations of the FCRA. In addition the Federal Trade Commission (FTC), other federal agencies and the states may sue landlords for non-compliance and get civil penalties. However, a landlord who inadvertently fails to provide a required notice in an isolated case has legal protections, so long as he can demonstrate “that at the time of the violation he maintained reasonable procedures to assure compliance” with the FCRA.

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.