New 1099 Reporting Law Repealed

On April 14^th President Barack Obama signed into law a bill repealing expanded IRS Form 1099 reporting requirements that was part of last year’s health care legislation as a revenue-raising measure. The law repeals a section of the Patient Protection and Affordable Care Act of 2010 that would have required businesses and rental real estate owners to fill out 1099 forms for both goods and services valued at more than $600 and purchased from both unincorporated and incorporated businesses. The requirement was to take effect in 2012. The Congressional Budget Office had estimated the expanded reporting requirements would capture $21.9 billion in lost tax revenues on income that currently goes unreported.

However, the tax reporting requirement drew widespread criticism after Congress passed it last year. Subsequently, business groups led a vigorous campaign against the requirement, claiming that the reporting “requirement is an onerous burden on employers of all sizes and provides no health care benefits.”

President Obama finally agreed, declaring in his signing statement that “Small business owners are the engine of our economy and because Democrats and Republicans worked together, we can ensure they spend their time and resources creating jobs and growing their business, not filling out more paperwork.”

Of additional benefit to landlords, the bill Obama signed also repeals a separate tax reporting requirement that was passed in another law last year. That rule, which took effect January 1, 2011, required landlords to report more information about their business expenses.

The “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011” was introduced in the House of Representatives on January 11^th, passed the House on a vote of 314 to 112 on March 3^rd, and passed the Senate on April 5^th on a vote of 87 to 12. These significant margins indicate the strong opposition to the requirements by both Democrats and Republicans.

With the bill signed into law, businesses will now continue to have to fill out 1099 forms only for services of $600 or more in 2011 and beyond and only for payments to unincorporated businesses for services.

During the debate on the repeal, the president and congressional leaders in both parties stated that the cost of repealing the 1099 requirement had to be offset by spending cuts or by increasing federal revenues. The nearly $22 billion cost of the 1099 legislation was offset by requiring some people, if their income level increases during the year, to pay back a portion of the subsidies they receive to join health insurance exchanges created under the health care law.

The expanded reporting requirement was a non-health related revenue-raising provision within the health law. The lost revenue due to its repeal is paid for in the new law by changes in the part of the health-care law that deals with the health insurance tax credits that low- and middle-income Americans will get. This is accomplished via a payback provision that recoups funds from people who exceed their estimated income level during the course of the year after receiving subsidies for health insurance.

Eligibility for the tax credits, which are paid directly to health insurers, is determined each year by looking at income from a prior year. At the end of each year, there is a reconciliation through which the government can seek repayment of credits from people whose incomes rose. The new law changes the calculation and results in more people being required to return overpayments.

The repeal law increases the amounts people would have to repay and accelerates the payback timetable. Any individual or family earning less than four times the federal poverty level will be eligible for the health coverage subsidy beginning in 2014. These subsidies will be provided on a sliding scale to help offset the cost of health care coverage purchases through state health care exchanges. However, any individual or family whose income increases above 400 percent of the poverty level (a threshold of $44,000 per year for individuals and $88,000 for families) will be required to repay all or part of the subsidy that they received.

Additional Information

For additional discussions regarding a wide variety of real estate investing and management issues see our eCourses and our Mini Training Guides.

We provide here a few questions that have been posted in the Community Forums and our answers to them.

*   *   *   *   *   *

Q1                                           

There is ample parking in the driveway for 4 vehicles, yet my tenants continue to park on the lawn in spite of several warnings. The City ordinance states that no one should permanently park on the swale. They are excellent tenants and I do not want to hurt their feelings. Even their visitors park on the lawn. How do I tell my tenants to stop damaging the lawn?

A1

If they are really great tenants and the City won’t be proceeding against you as property owner, you can simply consider the damage as a cost of doing business and repair the damage after they vacate, deducting the expense on your income taxes. Most other options are unfriendly in varying degrees and vacancies are very expensive in a number of ways.

Making it impossible to park on the lawn is the only way to completely eliminate the problem. Depending on the layout of the property, zoning laws, and other possible issues, you might be able to construct barriers. This could be posts in the ground or large rocks close enough together to prevent driving through, a low wall or fence, or a hedge – if you think they wouldn’t destroy the hedge by driving through it before it reached substantial size.

If the City will cite their vehicles rather than your property, perhaps you can persuade the City to take action. Such ordinances will usually first result in an official warning notice and this might provide ammunition for obtaining their cooperation. If, however, the City fines you for the infraction, you might have a legal right to collect from the tenants, but this could require getting “unfriendly” in order to collect. Whether you could get a court judgment regarding them paying you might depend on the laws of your state’s statutes or local ordinances and/or whether such an issue is covered in your lease agreement.

If they are month-to-month tenants, you can give them a termination notice (usually 30 days), following which you will either be rid of them or have been able to negotiate payment for damages and modification of the lease agreement to cover the issue. If they are on a long-term lease, you can wait until expiration of the lease term and do the same thing. Letting them know ahead of time might make them change their ways unless they would as soon move anyway.

Becoming even more unfriendly, you can serve them a “Cure or Quit” notice and, if they fail to cease their activity, terminate their occupancy, if necessary evicting them. You could also consider filing a lawsuit for damages above the amount available from their security deposit.

Finally, you don’t say how long this has been going on or how many and what type of notices you have given them regarding the matter. Assuming it became seriously unfriendly, there is always the chance that a judge would consider you having waived the right to enforce no parking because they have done so for a long period and you have not taken strong action against them. If this issue is not specifically covered in the lease agreement, it certainly should be in any renewal, extension, or new lease. However, neither issue is likely to be a problem if there is an ordinance that explicitly applies to the matter.

*   *   *   *   *   *

Q2

I’m trying to find out if in the state of CA there is a certain interest rate, if any at all, required to be paid on a security deposit and if it has to be held in a certain type of account?

A2

My brief research indicates that the state of CA does not require payment of interest on security deposits and the state does not seem to require deposit of the funds into a special account. However, there are cities in CA that have rent control ordinances which might have one or both requirements.

*   *   *   *   *   *

Q3

I am currently in the process of evicting a squatter from my property. The court date is scheduled for two weeks from now. I also want to file a small claims court lawsuit against him for 2 months rent and attorney fee. Should I file the suit while he is still on my property where he can be easily located and served with the suit or wait until the court date or later after the eviction judgment? Will suing him for damages have any impact on the eviction? And, is it possible to sue him after the eviction with no information to his where about or address?

A3

As you appear to already realize, if you do not serve him regarding the suit while you know where to find him, you may never be able to sue him. This is because our Constitution provides that one has the right to defend oneself and it’s impossible to defend oneself if one has no knowledge of there being a suit. In order to sustain a law suit, it is necessary to serve the defendant in the manner or manners required by the law of the particular state. In some jurisdictions, this means that the defendant must be physically handed a copy of the complaint and summons. Other jurisdictions allow service by mail, usually Certified or Registered Mail being required, in which case the defendant will often avoid accepting the mail. However, in this event, as well as for obvious attempts to avoid physical service, evidence showing the facts – e.g., also sending a copy using a Certificate of Mailing – will often cause a judge to ignore the failure of service.

Although many states allow the plaintiff (you in this case) to personally do the service, it is sometimes better to have it done by an independent process server. First, this avoids a chance of an unfriendly confrontation. Second, it eliminates the judge having to decide which party is telling the truth when the defendant claims he was not properly served and the plaintiff claims he was because, absent serious evidence to the contrary, he will almost certainly believe the process server. In many jurisdictions the process server can be either a private for-hire server or an official officer of the court such as a deputy sheriff. Because failure affects his pay, the former is usually preferred to the latter where allowed. Call the office of the clerk for the court of jurisdiction for evictions in the jurisdiction where your property is located. This may be irrelevant if you are serving him yourself.

Some jurisdictions do allow for service by publication in a defined newspaper for a certain number of weeks when nothing else is possible, but the defendant may be able to later argue against such a service – e.g., he left the state, does not subscribe to the newspaper, or is illiterate. Furthermore, a particular judge may be biased against service by publication.

Court procedures vary among states, among levels of courts within a state, and among various courts (different cities, counties) within the same level, so, again, check with the court clerk when you have any questions about court matters.

If you can once obtain a judgment against the defendant, you can collect from him in any state where you can find him during the term for which the judgment remains valid. Although laws vary among states, judgments are typically good for 5 or more years and can usually be renewed for at least one additional equivalent period. His only defense would be that the court giving the judgment did not have jurisdiction over the matter, a defense not likely to be very useful in the case of an eviction or related matter.

I do not think that filing a lawsuit for damages will have any impact on the eviction. If anything, it might actually reinforce the need for an eviction. However, when getting involved in any litigation, one must consider that judges are not always logical or may simply be biased against a class of litigants (e.g., landlords).

If the occupant is indeed legally a squatter rather than a tenant, I would wonder whether you will be allowed to collect unpaid rent from a squatter. A judge may not allow collection of rent per se from a non-tenant occupant. You may need to attack from the perspective that his unauthorized occupancy prevented you from collecting rent from another person, who would be legally a tenant. However, Small Claims courts do not always worry about such legal technicalities. This would be a question for a competent landlord-tenant law attorney.

Unless you have experience in appearing in eviction proceedings and particularly if the occupant is truly a squatter rather than a tenant, you might consider hiring an attorney to both complete the eviction and file the suit, assuming being represented by an attorney is allowed in Small Claims court in your jurisdiction. In spite of the cost of an attorney, using one can actually be cost effective. A mistake in following the legal procedures can result in having to start over after weeks of waiting for the day in court. For anyone except the most experienced landlord, it is even more important to be represented by an attorney if the defendant uses an attorney.

Most jurisdictions will have experienced competent attorneys who do nothing except handle evictions and related matters. They will also be familiar with particular idiosyncrasies of individual judges. Rather than see who has the largest yellow page ad, it is best to get recommendations from other landlords or management companies because the best attorneys have plenty of business without advertising.

Finally, if he disappears after being evicted, you probably will have a good chance of finding him in the future, particularly after he has established permanent residency somewhere. In addition to the various social networking sites where people tend to provide a lot of personal information that might help track him down there are innumerable Web sites that offer services related to finding people for reasonable fees.

*   *   *   *   *   *

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.

Disposing of Income Property

Some Often Ignored Issues

There are many issues that can cause problems when selling an income property, some of which are not always considered even though quite basic. Attention to the following issues can reduce the number of potential delays and conflicts during the sale process.

Some Contract Issues

Illogical Contingencies – Do not accept any contingencies that are likely to affect the closing or will cost you more than you are willing to spend to in order to close. For example, do not accept a contingency that all air conditioners be in operating condition when you know that some are not, unless you are prepared to repair them. In this case you should have done so before even putting the property on the market.

Escrow Length – Be sure that the requested closing date is realistic based upon the time required to complete all contingencies including financing. Although you, as seller, want to close as soon as possible, it is extra hassle to grant extensions because the original date was unrealistic and you will likely be unwilling to cancel the deal after being into it for a significant period.

Restrictions during Escrow – You should not worry about restrictions regarding what you can do during the escrow period unless the buyer does. In the case he does, try to limit the restrictions to the degree possible, remembering that you don’t want to limit your control more than necessary when there is never a guarantee that the deal will close.

Estoppel Certificates – be sure to require estoppel certificates. Although it is usually thought to be for the buyer’s benefit that estoppel certificates be obtained, they can also benefit the seller because they eliminate potential disputes by buyer or tenants as to rents, deposits, and other lease terms. You don’t want a tenant arguing the terms of his lease or some other matter after close of escrow because you will almost certainly be involved in the dispute and, for a serious issue, could suffer financial repercussions.

Disclosure

Failing to disclose material facts in the beginning is dangerous, both because failures may create legal problems and because the facts will likely be discovered by the buyer later anyway. Discovery late in the deal can result in an upset buyer who will want to use his discovery as a reason to kill the deal or to at least renegotiate the price.

Is the property in a Superfund site? Was it the site of a dry cleaners or auto repair shop? If so, disclose it up-front and then don’t allow the fact to be a contingency except as regards inspections or assessments that might be desired. Do you have a previous Phase One Assessment Report? If so, provide a copy and require the buyer to accept it without contingency if possible.

For a residential property built before 1978, provide copies of executed lead-based paint disclosure forms for each tenant. Also, provide the buyer with the legally required lead paint pamphlet and disclosure form and any required related documentation. This is in addition to providing him copies of the tenant-signed forms.

If you’ve had radon testing performed and/or abatement done, provide the appropriate documentation. The same goes for mold. Regarding any issue, keep in mind that failure to disclose is much more dangerous when there are records proving that you had knowledge of a problem and failed to disclose compared to being truly ignorant of the problem.

Tenant Notification

Since you will want cooperation of tenants regarding buyer inspections and estoppel certificates, it is recommended that you notify tenants of the pending sale as soon as there is a fully executed purchase contract. You should explain that the buyer or his agent will be making inspections and thank them in advance for their cooperation. Keeping tenants in the loop and remaining on good terms with them may reduce the chance of them voicing complaints about the property to the buyer or his agent. Not only does this reduce the chance of defects becoming more important, but it also is best that the tenants appear to be happy when meeting the potential buyer. Disgruntled tenants may concern the potential buyer enough to kill the deal or at least affect the price he will pay.

Contingency Cooperation & Assistance

Although you might resent the need to assist in getting access for inspections, it is again to your advantage to cooperate and even assist in getting the contingencies out of the way as soon as possible and with the least amount of trouble. Again, your presence when the buyer or his agents are interfacing with tenants may reduce the chance of the tenants voicing complaints about the property to the buyer. You might even want to be the one to get signatures on estoppel certificates so that you can deal with any misunderstandings or disputes yourself rather than have the buyer or his agent involved.

Transfers & Terminations

Failure to make sure that all necessary transfers and terminations of services are done can result in problems for the seller after close of escrow, including possible financial liability regarding ongoing services.

Licenses, Permits & Taxes – Be sure that you inform the relevant governmental agencies – e.g., the office that collects rent taxes – about the sale so that you don’t end up being liable for the new owner’s failure to pay fees or taxes or for some other ordinance violation.

Insurance – You will want to cancel insurance coverage after closing escrow. Pro-ration of insurance premiums are usually to the effective date of sale of the insured property rather than to the date when notice is given, so there is no reason to jump the gun and risk cancellation prior to the date of ownership transfer. Doing so could result in an uninsured loss resulting from either a physical loss or a liability claim because closing was delayed and the insurance agent didn’t get the word that coverage needed to be continued beyond the previously scheduled closing date.

Utilities & Miscellaneous Services – While you don’t want to discontinue utilities or other services prior to closing escrow, you do want to be sure to do so immediately thereafter. You should coordinate this with the buyer to avoid disruption of services to tenants and it can be beneficial to even cover this issue in the purchase contract. It’s a good idea to follow up with phone calls after the discontinuance date to verify that it actually happened.

After Closing

Send written notice to all tenants that escrow has closed and provide the name of the new owner and his address and phone number. You might also state that they should contact the owner regarding the exact payee for future rent checks unless you have agreed to pass that information to them for the buyer.

Check the closing statement carefully. In particular check pro-rations of rents, property taxes, and interest and be sure that you are correctly debited for deposits and that the loan payoff amount is correct.

File the closing statement and related documentation where you will be able to find them when it’s time to prepare income tax returns for the year of sale.

Additional Information

For more detailed discussions regarding disposal of properties see our “Buying & Selling Income Properties” eCourse. For additional discussions regarding a wide variety of real estate investing and management issues see our other eCourses and our Mini Training Guides.

We provide here a few questions that have been posted in the Community Forums and our answers to them.

*   *   *   *   *   *

Q1

A future tenant made a deposit on a unit, but now says she will not move in because the schools aren’t good enough for her kid. I have waited over a week for her to come up with the rent before she finally told me. Can we keep the deposit?

A1

You can likely keep some of the deposit, but not necessarily all of it. What you can do will depend on a number of factors not mentioned in your question. Although I’ll mention a few issues, I can better answer your question after you answer the following questions:

Had the applicant and you signed the lease agreement? If not, you probably can’t keep any of it if she took you to court unless the deposit was actually a holding deposit for which you had a written agreement or could otherwise prove the terms of the deal.

If it was a holding deposit without a signed lease, is there a signed agreement that specifies what happens to the funds in the event of default by the applicant?

Has the applicant been given possession of the unit (been given a key) or been allowed to put any belongings there?

What date was the lease term to commence?

By what date was the rent to have been paid?

What date did the applicant tell you she didn’t want to move in?

*   *   *   *   *   *

Q2

How many people can live in a studio?

A2

That might depend on a number of factors including the city and state of location, the size of the unit, the floor plan of the unit, and, if you end up fighting the issue in court, the opinion of a judge.

Occupancy limits are potentially a problem. Landlords may set their own reasonable occupancy standards for their rental properties and there are a number of reasons why landlords may want to restrict the number of occupants in the dwelling unit, including health and safety considerations or property component issues that might create a physical limitation (e.g., water supply or septic tank capacities).

However, unreasonable or overly restrictive occupancy standards may be in violation of federal, state, or local fair housing laws.

Federal fair housing law covers 7 protected classes, of which the most obvious issue related to occupancy limits is “familial status.” The familial status protected class is to prevent unfairly limit housing options because of children in any “family group” with potential groups not related to marital status or biological children. Even pregnancy or pending adoption can qualify the person as being of the protected classes. Some jurisdictions have even more restrictive laws regarding children. A landlord’s occupancy policy that directly or indirectly excludes or even restricts children could be a violation of fair housing laws. A better occupancy policy limits the number of people per unit rather than the number of children per unit.

In all cases, anything that is applied to one unit of a property must be applied to all similar units and to all occupants. For example, a landlord can’t limit a two-bedroom unit to a couple and one child rather than allow two children, no matter what the ages and sexes of the children. Also, you can’t charge more rent for an adult and one child than for two adults who are applying to rent a similar unit at about the same time.

A commonly utilized standard for rental occupancy limits is the Department of Housing and Urban Development (HUD) guideline that “an occupancy policy of two persons in a bedroom, as a general rule, is reasonable under the Fair Housing Act.” However, landlords should note this was intended as a guideline, not as the rule, for maximum occupancy of the dwelling unit. In fact, HUD directives for investigating discrimination complaints regarding occupancy limits, take into account other limiting factors such as the size of bedrooms, size of the dwelling unit, the capacity of sewer, septic, and other building systems, and any state or local occupancy requirements. Additional information can be found at www.hud.gov.

Consideration must also be given to state and local laws regarding occupancy standards. Some states have more lenient occupancy standards than federal guidelines. For example, California statutes allow two persons per bedroom plus one more. When there is a conflict between federal, state, and local laws, landlords are safest by utilizing the least restrictive standards.

There may be local zoning or building occupancy limitations that apply to rental units. Some localities have based guidelines on the Uniform Housing Code (UHC) model code standards. The UHC standard provides occupancy guidelines based upon square footage rather than the number of bedrooms.

Another standard sometimes mentioned in landlording articles references the BOCA codes for occupancy standards. Building Officials and Administrators (BOCA), a national nonprofit member service organization publishes a series of model local building and construction codes. A maintenance code established by BOCA for guidance to municipalities for health and safety issues on existing properties has sometimes been referenced as a safe harbor standard for setting occupancy limitations. The code provided guidance on the maximum number of persons who could safely occupy a building without overcrowding, however the code was not created to use for habitability purposes.

Landlords are advised to perform their own research on applicable occupancy laws and formulate policies according to law and local court interpretations, business necessity, and without discriminating against members of any protected class. Failure to do so will result in defending against a discrimination claim under fair housing laws.

I realize that for the specific case of your question, a studio apartment, it might be impossible to apply any standards that mention number of bedrooms. For a studio, the main considerations other than any explicit laws at each level of government and absent any service limitation (e.g., water or sewer) will usually revolve around the size and layout of the unit.

To be safe, you need to first verify that there are no state or local laws that are more restrictive than HUD occupancy guidelines and federal fair housing laws. You should also consider discussing the matter with any local rental housing agency having jurisdiction regarding the the property.

*   *   *   *   *   *

Q3

If I am managing a rental property for someone else, what do I do about the property tax statement or deed showing ownership of the rental property not being in my name?
A3

I will assume that you or your firm is licensed to do property management in accordance with the laws of your state. If not, there would be additional issues to discuss.

The issues you mention should never be a problem. Most, perhaps all states require that property management firms have a written management agreement executed by the owner and the management firm. Most states specify what issues must be covered in the agreement and/or what cannot be in it.

With such a document, a property manager should be able to do anything on behalf of the owner that is allowed by the agreement. Obviously, the agreement would not allow the manager to sell or encumber the property, but it would usually allow the manager to execute contracts for utilities and all vendors (e.g., repair and maintenance services) and to appear in court on behalf of the owner for evictions or lawsuits (not all states will allow court representation by other than an attorney for all forms of vesting or for all matters). As a practical matter, few if any vendors will ever ask for such proof of contracting authority because the management firm will be liable for any bills in the firm’s name anyway.

Regarding property tax statements, the owner, if he chooses, can have the tax assessment notices and tax bills mailed to the property management firm. However, for numerous reasons it is usually of benefit to both the owner and the management firm to not do so. For example, the assessment notices going to the management firm might make the firm liable for failing to notify the owner of suspicious assessment increases and/or the firm failing to file an appeal of valuation in a timely manner. As an owner, I would prefer to have all tax information sent to me to make sure that I was aware of issues and to eliminate the extra work and potential problems if I wanted to change management firms.

For similar reasons, it is usually best for both parties that insurance policy documentation and billings go to the owner. A failure of the management firm to note important changes in coverages or to pay a bill could result in substantial claims against the firm if a major loss occurred after an important coverage had been eliminated by the insurer or after the policy had been cancelled due to non-payment of premiums.

Finally, for reasons similar to those for property taxes and insurance, it is usually best that the mortgage company mail all correspondence to the owner.

If the owner prefers that the management firm pay the three items – often of importance to the owner because it will then appear on financial statements provided by the management firm – the owner can provide copies of the relevant documentation to the firm. Providing the necessary billing documentation to the management company for its payments in a timely manner should never be a cause for problems if the owner is reasonably organized.

The firm can also keep track of due dates for payment and remind the owner of the issues. It is not unusual that, because cash flow from operations does not cover one or more of the three items, the owner would have to provide additional funds in order for the firm to make such payments.

A deed is an ownership document, so, unless the property manager had an actual ownership interest in the property, the manager’s name should not be on the deed. Creating a new deed with the manager’s name on it would open up all kinds of legal issues, many potentially serious.

*   *   *   *   *   *

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.

Pet Agreements

Ownership of pets is becoming increasingly important to people. Because such a large percentage of potential tenants have pets, allowing pets in rental units significantly increases the size of the applicant pool when it’s time to fill a vacancy. Also, since pets are not allowed in a significant percentage of rental units, tenants with pets are often more likely to remain for longer terms. These factors can lead to shorter vacancies and fewer vacancies, respectively. Accordingly, more landlords are beginning see a benefit to allowing pets in their properties.

On the downside, allowing pets in a rental property can involve additional risks, including additional property damage and injuries caused by tenants’ pets. However, landlords can reduce the potential risks associated with pet-friendly rentals. The most important factor in doing so is utilizing a good pet agreement. The pet agreement can either be incorporated into the lease agreement itself or be a separate document that is referred to within the lease agreement in a way that makes it a part thereof. Having a pet agreement that is a part of the lease agreement provides notice to the tenants and increases the landlord’s legal power to deal with pet problems, including termination of tenancy.

Pet agreements should executed by all tenants, even those who do not have pets at the time of their move-in, to be sure the tenants know the rules and have already agreed to abide by them in the event they later acquire a pet.

There are a number of issues that should be covered in the pet agreement.

List Allowed/Disallowed Pets – The pet agreement should specify which types of pets are allowed (e.g., dogs, cats, birds, fish) and disallowed (e.g., chickens, pigs, snakes). Neither list need be all-inclusive, just representative. In order to avoid wasted time by both the applicant and the landlord, this information should also be provided with the application form. The agreement should also specify any limit to the number of pets allowed.

Some landlords ban certain dog breeds that many people believe have a propensity toward violence, such as pit bulls and Rottweilers. Landlords can legally ban these breeds even though the question of whether certain breeds are truly dangerous is debatable. Before allowing such breeds, landlords should check with their insurers. Some companies won’t issue liability policies or will issue the policy with excluded coverage for incidences involving certain so-called “dangerous breeds” kept on the property. A landlord cannot prohibit “dangerous breeds” that are bona fide service or companion animals.

Some landlords limit the weight of dogs, although small dogs can cause more damage than large ones.

No Pet Sitting – The pet agreement should make it clear that only tenants’ pets are allowed and the tenants are not to care for other pets. The agreement should specify whether guests are allowed to bring their pets with them while visiting tenants.

Require Approval of Pets – Require that tenants get approval for any pet that they have when applying to rent the unit or at any later date when they wish to acquire one. Approval should be contingent on the owners stating, as part of the pet agreement, that the pet has no record of damaging property or injuring people or animals belonging to others. Landlords should ask about this issue when checking with previous landlords.

Conditional Approval – Finally, state that the agreement should state that approval is conditioned upon the tenants’ continued compliance with the terms of the pet agreement. The agreement should make clear that the landlord has the right to ask the tenant to remove the pet from the property or terminate tenancy in the event of violations of the agreement.

It is also important that landlords enforce their pet policies to avoid the risk of creating a waiver because of ignoring known violations. This means giving written notices of violations and a termination notice when a problem is not corrected, subject to any related rent control restrictions. It is extremely important to deal with violations where the animal was a threat or appeared to be a threat to others in order to minimize liability for a future injury by the animal.

Identification, Licenses, Vaccinations – Require that all dogs and cats wear identification collars or tags, are properly licensed and vaccinated as required by local ordinances, with proof of compliance being provided to the landlord.

Responsibility – Tenants must agree to always control their pets, insure that they don’t disturb or annoy others, clean up after them in the tenant’s private area and in common areas, not leave pets unsupervised for extended periods, and keep pets in appropriate contained areas within their unit.

Pet Fee or Deposit – Expecting that pets may cause damages or additional wear and tear, many landlords impose a “pet fee” or “pet deposit” in addition to the normal security deposit. Think carefully before implementing such a policy.

First, landlords must be sure they know of any statutes or ordinances governing such items. Many states do not allow non-refundable fees or they specifically define which types are allowed. Many states consider any funds collected in addition to rent, whether called fees or deposits, to be part of the maximum allowed security deposits that are defined by statute in a majority of states (typically one to two months rent). Therefore, if the total amount of the deposits that are required from a tenant has reached the maximum, the tenant cannot be charged a pet deposit on top of that in many states. Controlled housing may have different restrictions.

Second, be sure to consider that there can be downsides to such funds. For example, calling something a “pet” deposit may mean that the amount can’t be applied to damages not done by a pet. This is particularly disadvantageous when the security deposit is reduced in order to allow a pet deposit when the state limits the total of all deposits. For this reason, in many states it’s better to impose a non-specific deposit.

Third, there can be issues regarding pet fees and deposits even in those dates that allow such items in addition to a maximum security deposit. If a pet fee or deposit is considered by a judge to be unreasonably high the judge may not enforce it.

Finally, do not impose a pet deposit or fee for a tenant who keeps a service or companion animal. Such animals aren’t pets — they are animals needed to accommodate a disability.

Fair Housing – Keep in mind that even if landlords don’t wish to have pet friendly rentals, they cannot prohibit service animals.

Make Agreement Changeable – Landlords may find it desirable, even necessary to change their pet policies at sometime in the future either due to experiences related to a certain type of pet or, particularly for dogs, a change in their insurer’s breed exclusions. Accordingly, the agreement should state that the landlord has the right to amend the rules by giving tenants a reasonable notice, e.g., 30 days. Landlords should consider grandfathering existing pets (but not replacements for them) except when the need for a change is related to insurance or governmental action. Requiring removal of existing pets will likely result in serious deterioration of landlord-tenant relations, even potential legal actions.

Additional Information

For additional discussions regarding a wide variety of real estate investing and management issues see our other eCourses and our Mini Training Guides.

We provide here a few questions that have been posted in the Community Forums and our answers to them.

*   *   *   *   *   *

Q1

I’m looking for the legal limits when raising the rent on lease renewal and anything specific on that issue within the state of AZ.

A1

Except for properties subject to rent control or rent stabilization laws or otherwise restricted (e.g., Section 8 or other type of subsidized housing) or otherwise specified in the lease agreement, one can raise the rent by any amount desired.

In general, one cannot raise the rent during the term of a lease unless allowed by the lease agreement or agreed to by the tenant. For month-to-month leases, most states require 30 days advance notice and that is the period for AZ. However, a longer notice period can be specified in the lease. Whether a month-to-month tenancy or the end of a long-term tenancy, it is best to give notice of a rent increase somewhat more than the minimum required by law in order to avoid arguments regarding whether or not the minimum notice requirement was met. As with most things related to landlording, it is best that all such notices be in writing

Unless otherwise specified in the lease agreement, an increase need not be effective on the 1^st of the month or on the day of the month that the current lease expires – you would simply pro-rate accordingly. A lease clause specifying the rent upon renewal or extension is binding on both parties. In general, the landlord is not required to offer renewal or extension of a lease unless the lease states otherwise. If the lease will not be renewed or extended, it is best to provide notice of such plans well in advance of the termination of the current term, preferably more than the 30 days usually required. It is best to not give reasons for not extending or renewing, particularly any reason that could be somehow interpreted as a violation of fair housing laws.

When considering whether to raise the rent for existing tenants, whether for extension or renewal of a long-term lease or with proper notice for a month-to-month tenant, there really can be no specific criteria, but there are some basic principles.

For a tenant that a landlord would like to retain, the most basic thing that must be considered is what amount of increase would motivate the tenant to move. Vacancies are costly for a landlord – with zero-rent downtime, repairs and redecorating, utilities, advertising expense, and a lot of time required of the landlord and/or manager. It would require that a replacement tenant remain for over 2.5 years in order to make up for a one month vacancy on a $900/month unit, with preparation costs of $600, if the new rent were $50/month higher. The time spent on the vacancy and the possibility of major expenses related to correcting just normal wear and tear can make the event even less attractive.

Tenants will usually not leave over a reasonable increase that still leaves the rent slightly under market because moving is costly in a number of ways. It is better to give regular annual small increases rather than large occasional ones.

The decision for a specific case must be based on a number of factors, including the condition of the unit, local market conditions, the current rent compared to market, and the known history of the existing tenant compared to the uncertainty of the next one.

*   *   *   *   *   *

Q2

Why does my commercial lease contract – for a business that occupied the space when I bought the building – read “minimum monthly rent” $2500. Why does it say minimum?

A2

A typical commercial lease agreement is much more complex than a typical residential lease agreement and what is legal for commercial leases is not nearly as regulated as for residential. There may be no reason for it to say “minimum” other than whoever wrote the clause wanted to use that term. There may also be an important reason to have used the term because of one or more other clauses, particularly clauses related to options to renew or extend and to cost of living adjustments. Without reading the entire lease there is no way for me to know whether there is any real reason. Practically speaking, unless there are clauses such as previously mentioned, I do not think it matters whether the word minimum is used or not. In either case, the monthly rent would be the same and that amount would be the minimum amount payable. Absent some unknown other clause, it would also be the maximum rent payable until the existing lease term expires.

*   *   *   *   *   *

Q3

Our tenant has not paid rent for 3 months, we have asked him to move out and he is taking his time. The house is dirty and there is still stuff there. We have already filed for eviction once. What can we get if we file a complaint in court for abandonment of the property and not paying rent? Is it worth it to go to court and spend a lot of money, do we have right to enter their house and throw away his stuff? Please help. Thanks.

A3

Until the tenant gives up possession, you have NO right to enter a tenant’s unit except for purposes allowed by law and in accordance with the notification period required by the law of your state (except for a bona fide emergency). You have NO right to touch his stuff unless you have good reason to believe that he has purposely abandoned the stuff.

Some states’ laws include specific procedures that must be followed in order to consider that a tenant has abandoned the premises and lost the right to possession. Such laws enable the landlord who follows the procedures to safety take possession of the unit even though the tenant has not demonstrated intent to terminate tenancy. Absent such defined procedures and absent specific things that would otherwise be certain to satisfy a court regarding evidence of abandonment, landlords must proceed carefully.

Even then, you must follow any abandoned property laws of your state in order to minimize risks, laws which vary significantly among the states. A few states allow landlords to dispose of abandoned property in any way they see fit. Some states have very complicated requirements regarding abandoned property including that it must be stored in a secured manner, notice of the matter being provided to the ex-tenant as required by the state law, notice of a public sale of the property published in the manner required by state law, and the proceeds of the sale must be applied against amounts legally owed the landlord, with any balance being paid to the ex-tenant. The laws of other states fall somewhere between those two extremes. Failure to follow abandoned property laws can result in lawsuits in which the ex-tenant may claim that his property included jewelry, antiques, or other valuable items.

You state that you filed for eviction once. However, you do not say why the tenant is still in the property. Did you actually process an eviction through the court or only serve a notice? Did you not follow through with the process, win a judgment, and have the tenant legally removed via the proper officer of the court? In many states, completing an eviction can simplify the personal property abandonment issue.

For future reference, I recommend that a “pay or quit” notice be immediately served on a tenant the day after the rent was due (including any grace period required by state law or the lease agreement) and, if the rent is not received within the notice period required by state law, immediately start the eviction through the court. It is sometimes a good idea to proceed to completion of the eviction even when the tenant  leaves voluntarily after being served with the complaint and summons. Whether the extra cost of completion is cost effective depends on issues beyond the scope of this reply.

*   *   *   *   *   *

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.

Quit Claim Deeds

Sometimes misnamed a “Quit Claim Deed,” or worse, a “Quick Claim Deed,” a Quitclaim Deed, is a very useful document under certain circumstances, but has characteristics that make its use risky under many circumstances.

Most real estate investors will run into use of a quitclaim deed at least once during their investment career. It may be when buying a tax sale property or when a spouse must sign one.

Although some may think that a Deed is a Deed, such is not the case. While all types of deed documents transfer some kind of real property interest, each type of deed has one or more characteristics that are different from other types.

In review, a deed is a document that conveys real property from one party to another. A deed includes a legal description of the land and the names of the party giving up an interest (grantor) and the party receiving an interest (grantee). It also includes words that describe the interests being conveyed. While there are a variety of deed types, with some differences regarding what might be available among states, there are two basic types that are most often of interest: warranty deeds and quitclaim deeds.

A warranty deed, the most commonly used type, certifies that the grantor is the sole and rightful owner of the interest being conveyed, that there are no undisclosed liens or other claims against the property, and that the owner does not know of any defects in the title. If, in fact, it is later discovered that any of these issues were untrue, the grantee would be able to seek legal recourse against the grantor. Of course, whether or not satisfaction could be obtained against the grantor would depend on a number of possible factors, including the financial condition of the grantor and the ability of finding him/her in order to serve legal documents – hence, the importance of title insurance policies which will cover many types of such problems.

In contrast, quitclaim deeds simply convey whatever interest, if any, that the party executing the deed might have. Therefore, if the party is in fact the sole owner, there are no material undisclosed facts, and the deed is properly written, executed, notarized, and recorded, there should be no problems. Unfortunately, there are many possible ways in which that might not be the end result. Possible problems include:

• The grantor is not the sole owner of the property or even has no interest whatsoever in it and another interest holder or sole owner surfaces in the future to claim the property, resulting in legal headaches, even loss of the property.
• It later turns out that there was a lien against the property, perhaps with the amount owed even being more than the current value of the property – not improbable in the housing market of the past few years. One way that such a problem could occur is that the grantor did not pay a contractor for work recently completed and the contractor records a lien after the quitclaim deed is given, but within the legal period for filing the lien.

Depending on the facts of a particular case, the grantee may have grounds for a lawsuit against the grantor and/or may at least be able to have the grantor incarcerated if fraud is involved. However, as previously mentioned collecting on a lawsuit judgment or even being able to sustain a lawsuit is not certain if the grantor is judgment proof or cannot be found, respectively. Seeing the grantor jailed for fraud may provide some satisfaction, but (1) the grantor may not be located, (2) fraud is often difficult or impossible to prove, (3) even if there is a conviction, the sentence may be unsatisfactorily light, (4) financial redress is sometimes not provided in the sentence or may not be collectable when it is, and (5) the time and energy that the grantee must put into pursuing either civil or criminal redress will be substantial, as will the related stress.

Quitclaim deeds are often used when one spouse gives up a property interest in a divorce or when one spouse is not receiving a property interest because the other spouse is purchasing a property with separate funds and the two are agreed that the property being purchased will be the sole and separate property of the purchasing spouse. Quitclaim deeds are also sometimes used in transfers of property rights between family members when the involved parties know one another well and are familiar with the history of the property.

Sometimes one has no choice but to receive a quitclaim deed because that is the way it is done by the governmental agency conveying title. This occurs, for example, when a county sells a property because of unpaid property taxes. In this case or in any other case where you acquire title via a quitclaim deed, in order to be able to later sell the property at the market value of comparable properties, you will need to have a warranty deed. This is accomplished with the court ruling in your favor in a quiet-title lawsuit. However, unless prior to accepting the quitclaim deed you had a competent attorney perform a title search or obtained a satisfactory preliminary title report from a title insurance company, you could find yourself on the losing end of the court action and holding a worthless piece of paper.

Accordingly, although a quitclaim deed is usually risk-free when it involves the spousal transactions previously mentioned and can be relatively low-risk for a family transfer under circumstances mentioned above, buying property on a quitclaim deed is always risky and should be avoided. If a quitclaim deed is the only form of deed that a seller is willing to provide, the buyer should ask “why?” and take steps to protect himself, including all possible due diligence.

Additional Information

The issues discussed in this article and many other issues of importance to landlords are covered in our eCourses and/or in our Mini Training Guides.

We provide here a few questions that have been posted in the Community Forums and our answers to them.

*   *   *   *   *   *

Q1                                                                

Is it legal for the seller to voluntarily pay the buyer rents for the property before the closing occurs, based on proposed settlement date?

A1

The basic answer is that buyers and sellers can agree to anything they wish, but either party can be at risk when doing something outside of escrow. The principal reason for having an escrow is that an independent party with fiduciary duties to both buyer and seller is in charge of the funds and making sure all necessary things are done, including payment of loans, commissions, back taxes, etc.

Regarding the receipt of rents by the buyer prior to close of escrow, there is also a potential risk that the buyer could become liable for something that occurs prior to transfer of title even though the buyer has no management control.

There are, however, times when it is desirable, even necessary to do things, including transfer of funds, prior to closing escrow. When doing so, both buyer and seller should be sure that the items are documented by signed written agreements within escrow documents.

*   *   *   *   *   *

Q2

I was wondering if there’s an occupancy limit. Basically, I’m renting a two bedroom apartment and it was originally rented to a husband and wife who had twin boys and a daughter from a previous marriage. Since then, another daughter from a previous marriage has moved in and the eldest daughter is pregnant. That’s a lot of people in a two bedroom unit. I was wondering if they’re no longer in compliance to a law or something along those lines. Thank you!

A2

I can’t give you specific advice because occupancy issues can depend on federal, state, and local laws as well as various facts regarding the particular unit, but I will provide some general information.

Limitation of the number of people allowed to occupy a rental unit has been a hotly debated issue in the rental housing industry for many years. Unfortunately, there is still no definite statute that covers every type of property and every practical situation in detail.

In general, landlords may establish occupancy standards that are truly tied to health and safety issues or related to legitimate business reasons such as limitations of electrical or plumbing systems. However, when it comes to occupancy limitations, there are potential federal, state, and/or local laws that must be considered. Further complicating things, health, safety and business issues are often gray areas and there is no guarantee that following rules of one jurisdiction won’t result in problems with jurisdictions at a higher or lower level.

Many state and/or local housing codes include space rules that restrict the number of occupants based on the size of bedrooms.

Even the federal HUD rule on the issue is only a “guideline,” a memo to regional HUD directors stating that Congress didn’t intend to develop a “national occupancy code” and hinting that states should set their own standards. This has resulted in states developing occupancy standards that were either less or more restrictive than the federal guidelines. The federal guidelines can be found at www.hud.gov. You need to check with your local and state housing agencies regarding their rules, if any.

While it is legal to establish reasonable space-to-person ratios, landlords must be careful that their occupancy standards do not conflict with fair housing laws, including the protected class of “familial status.” That is, they must not use the standards to discriminate against children. For example, if you allow three adults to occupy one of your units, you shouldn’t even consider refusing to allow a couple with a child or one adult with two children occupy a similar unit.

Landlords must also be careful regarding those with a physical or mental incapacitation that would be considered a handicap under federal fair housing laws and ADA as well as under state or local fair housing laws. Landlords must allow for flexibility in occupancy limitations under the “reasonable accommodation” requirements of those laws in order to avoid the substantial financial and other penalties associated with discrimination against this class. This can most often come up when a care-giver for an applicant or tenant is involved.

As with all matters that involve fair housing, landlords must be sure to treat all applicants and existing tenants equally, as applying different occupancy standards to different applicants or existing tenants can result in costly discrimination claims. It may be that the safest way to avoid problems is to use common sense and use standards that are at least as generous as the federal guidelines, but follow state and local rules if more generous than federal guidelines.

*   *   *   *   *   *

Q3

Can you give me some move-in do’s and don’ts?

A3

The issues are covered in considerable detail in certain of our resources, most comprehensively in “Managing Income Property” (Lesson 15) eCourse. Here is a very brief summary of the issues covered in the course.

Start With an Adequate Lease Agreement

A clearly written detailed lease agreement will help protect both the landlord and tenant from fraud or misunderstanding in the event of disagreements or disputes.

Before Scheduling Orientation

Be sure your unit is absolutely rent-ready before you schedule your tenant move-in appointment.

Provide Blank Copy of Lease

When an applicant has been selected he should immediately, certainly before the lease signing meeting, be provided with a blank copy of the lease agreement, with instructions that everyone who will execute the lease should read it over carefully before attending the meeting and make notes regarding any questions they might have.

Provide HOA Documents

Provide copies of all relevant HOA documents (CC&Rs, Bylaws, and Rules & Regulations) to the selected applicant with instructions that everyone who will execute the lease should read them over carefully before attending the lease execution meeting. Approval of the documents should be included in the lease agreement or in a separate document.

Tenant Orientation

Having a formal orientation meeting can reduce the potential for misunderstandings during the tenancy. It is possible that the new tenant orientation will be the only time that both parties are face-to-face until the time comes to conduct the move-out inspection.

Giving Possession

Care must be taken to avoid giving possession before all documentation has been executed by all parties, all moneys have been received, and, if utilities are still in the landlord’s name, arrangements have been made for certain transfer to the tenant. Never let a prospective tenant have keys, stay temporarily in the unit, or even move a single item of his personal property onto the property until all pre-possession tasks are completed. If you indicate transfer of possession in any way, you may effectively have given him a legally protected status of tenant even though no lease was signed or rent/deposit money was paid. It will now require an eviction if he can’t complete the terms of move-in and refuses to voluntarily leave.

Move-In/Out Checklists

Many states require a move-in and/or move-out checklist to be completed when possession is given to the new tenant. Even when not required by law, a comprehensive move-in inspection should be done before the tenant moves in any of his boxes or furnishings.

There is no set format for checklists except as might be specified in a state’s laws, in which case that should be considered the very minimum. In general, a lot of detail is more important than having a short document.

Last Minute Problems

Occasionally, the selected applicant informs a landlord at the time when security deposit and rent are to be paid that he/she is short some of the funds due. You should have specific procedures for dealing with the issue.

Move-In Letter

It is recommended that an informational letter be sent to new tenants that not only “welcomes” them as tenants, but also reminds them of important policies and procedures.

Each issue of the above sections is discussed in considerably greater detail in the “Managing” eCourse.

*   *   *   *   *   *

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.

New Record Keeping Requirements for Landlords

As if a landlord didn’t have enough to do…now this!

New legislation passed under H.R. 5297: Small Business Jobs Act of 2010 will have an impact on tax reporting for landlords and investor-owners. The “landlord provision” under Section 2101 established that “a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property.”

IRS regulations have long required businesses to provide a Form 1099 to persons or non-corporate entities performing services for payments of $600 or more in the calendar year. Now landlords have the same Form 1099-MISC reporting requirements as other taxpayers in a trade or business. Prior to this legislation, only those real estate professionals actively engaged in rental activities such as property management were considered to be in the trade or business of renting property and required to file informational forms with the IRS.

The Instructions for Form 1099-MISC for tax year 2011 requires reporting payments of $600 or more for rental property expenses but not if an individual investor/landlord is an active member of the Armed Forces or an employee of the intelligence community as defined in section 121(d)(9)(C) and substantially all rental income is from renting a principal home on a temporary basis.

It also notes that other exceptions may be provided in the future. Such exceptions might exempt landlords whose annual rental income is not more than a minimal amount or those landlords who would experience undue hardship in complying with reporting requirements. However the IRS as of this writing has not yet issued guidance on such other exceptions/exemptions.

A separate Form 1099 will need to be filed for each payee. Payments to tax-exempt organizations are not included in this new requirement. A Form 1099 is not required for any contractor or laborer who is paid less than $600 in the tax year.

The exemption from reporting payments made to corporations for 2011 does not apply to payments for legal services. Therefore, landlords must report payment of attorneys’ fees even if the law firm is incorporated.

As stated, the goals of the new legislation are to:

• ensure that vendors and contractors are accurately reporting all taxable income to the IRS as required by law,
• hold landlords responsible for providing a Form 1099 to contractors who perform services on rental property,
• reduce the number of landlords who falsely report deductions for services that were not performed for the purpose of increasing tax write-offs, and
• verify the deductions that are claimed each year for rental property repairs and improvements.

The number of increased tax filings is expected to reduce the tax gap and result in additional revenues of 2.5 billion dollars over the next decade.

Landlords will be required to provide a Form 1099-MISC to each vendor prior to January 31, 2012 and file IRS and state forms by February 28, 2012. In preparation for the reporting requirement, landlords are advised to review their current bookkeeping practices to ensure that the necessary information is being collected to prepare and file accurate information forms. For some “Mom and Pop” landlords this may mean additional time must be allocated to maintain more detailed records for tracking vendor/contractor information and payments. For those landlords who use an accountant, be sure that you know what your accountant expects you to do regarding documentation.

It will be necessary to gather federal tax identification numbers or Social Security numbers, legal names, and addresses of contractors/vendors that provide services for rental repairs and improvements in order to properly file the Form 1099. The best practice would be to require all service providers to complete a Form W-9 (Request for Taxpayer Identification Number and Certification) prior to work being performed and receiving payment for services. Even if the landlord does not expect to pay the service provider more than $600 total for work done during the year, it is still a good idea to have such a procedure in case of unforeseen future repairs and payments that would exceed the threshold amount.

The Form W-9 is not filed with the IRS but kept by the landlord in his files as support for the tax identification number, address, and name reported on the information form. Tax identification numbers are checked against existing IRS databases to detect fraudulent numbers. Landlords should note that if the W-9 is improperly filled out or false information supplied, the IRS will notify the landlord of any errors and may require backup withholding on payments. In effect, the landlord will be assumed to be the statutory employer of that contractor and responsible for all applicable tax withholdings.

In addition landlords should have a record keeping system to track all payments to specific vendors and contractors made through out the year. Service providers commonly used by landlords include painters, electricians, plumbers, exterminators, landscapers, pool maintenance companies, security firms, other repair/maintenance contractors, or any other business entity which provides a service such as accounting or bookkeeping.

The IRS can impose monetary penalties on landlords who fail to comply with the reporting requirements. The new rules carry an enhanced penalty structure for intentional failure to file the required forms or for late filing. These penalties apply per Form 1099 that is required to be issued. The maximum penalties that can be imposed per year have also increased.

Landlords also may risk repair deductions being disallowed if they are related to payment to service providers and a Form 1099 was not properly submitted.

On a more positive note – while doing more paperwork for the IRS may seem burdensome, in effect it forces landlords to maintain better records, which in itself is a good thing. Full, adequate documentation allows landlords paper protection to claim all legitimate deductions and substantiate their allowance in the event of an audit. Besides, the rules will change again for the 2012 tax year – when Form 1099s must be issued for goods as well as services and when Form 1099s must also be issued for all corporate payees – and now is the time to set procedures in place.

There are other subtleties related to the new law and some issues are yet fully clarified, so landlords need to educate themselves by reading “2011 Instructions for Form 1099” and possible future revisions to these instructions.

Additional Information

For additional discussions regarding a wide variety of real estate investing and management issues see our other eCourses and our Mini Training Guides.

We provide here a few questions that have been posted in the Community Forums and our answers to them.

*   *   *   *   *   *

Q1

One of my tenants recently phoned to tell me he is filing bankruptcy under Chapter 7. He has 5 months to go on a one-year lease. He is current with his rent. I’m curious if I need to contact the court. Will a bankruptcy allow him to avoid making future payments on the lease?

A1

In general, the filing of bankruptcy affects only debt, that is, unpaid rents, and does not impact the responsibility of the tenant to pay rent after filing. However, bankruptcy law is somewhat complex and was revised effective 10/17/05, mostly in favor of creditors including landlords.

There may be ways in which failure of the tenant to pay future rent would impact your ability to evict without bankruptcy court action, so you should immediately seek legal advice if rent is not received on time during the period when the tenant is under court jurisdiction. In the meantime, you might consider seeing if the court office itself or the trustee for the particular case will provide additional information.

*   *   *   *   *   *

Q2

I have often had difficulty obtaining verification of employment. What’s the best procedure?

A2

In recent years it has become ever more difficult to get employment information from employers because of the fear of lawsuits. Some employers will not even admit over the phone to knowing their own employee. Many will not give out any information without written authorization from the employee and will only respond to a written request, sometimes requiring that it be on the employer’s own form. Employers may be unwilling to respond via phone, fax, or email.

It is also important that the form be returned directly from the employer rather than passing through the hands of the applicant if possible. If it does pass through the applicant’s hands, you will need to verify the legitimacy of the returned form.

One option is to leave the burden of verification up to the applicant and only require that the employer mail it or fax it to you or that the applicant authorize the employer to respond to your phone call to a phone number which can be verified as legitimate.

As a landlord, you want to determine whether or not the applicant has sufficient income to afford the rental property and that they will pay the rent when due. However, this can usually be accomplished by means other than verification by employers, in ways that usually provide more certainty.

In general, a landlord can request whatever financial information is desired in order to confirm the applicant’s ability to pay under whatever legal, reasonable, and logical criteria the landlord uses, so long as the same requirements are demanded of all applicants.

Employment and income documentation can consist of requiring the applicant to produce the last several recent paycheck stubs. Review the pay stubs to verify that the applicant’s name, current address and Social Security number are the same as shown on the application and, if not, determine the reason for the fact.

If another source of income will be used for rent payment, verifiable documents, appropriate to the source of income, should be requested. Verification of non-employment income must be considered on a case-by-case basis. Verification of non-earned income – including interest, dividends, and other investment cash flow – and of entitlement items – including disability, Social Security, and private retirement – are all relatively easily verified because the recipients are provided official statements of the amounts.

Self employed individuals can be asked to provide copies of their tax returns. Keep in mind that the tax return will usually not be providing current information, as depending on the time of year, it may possibly be as much as 15 months old. It is usually best to consider multiple documents that together confirm what the applicant puts on the application form.

Finally, keep in mind that a good credit record, absence of an eviction record, and a satisfactory report from previous landlords are usually more important than the details of employment. Many tenants pay their rent on time and take good care of rental property with very minimal income, while many others fail to pay rent and/or trash properties in spite of substantial incomes.

*   *   *   *   *   *

Q3

Am I required to have smoke detectors in every bedroom of my rental units, or is that the responsibility of the tenant?

A3

Specific requirements will vary from state to state, even city/county to city/county in regard to whether it is the landlord’s duty to provide detectors and where detectors must be installed. Your insurance company may also have requirements.

It has become increasingly common over the past couple of decades that it is the landlord’s responsibility to provide detectors in accordance with the applicable law. As a practical matter, I would put them in every bedroom and other living areas of each unit even if not required by any law. Battery operated detectors can be purchased in bulk for under ten dollars each (often including batteries). The safety protection that doing so provides the tenants and the liability protection it provides the landlord is well worth such a minor expense and one then needn’t worry about what rooms are covered by any specific requirements of any level of jurisdiction.

You should be sure that (1) you install new batteries whenever units were vacant, (2) your check-in list includes testing of the detectors, and (3) your lease agreement clearly makes tenants responsible for regular testing and for replacement of batteries when needed during their tenancy.

*   *   *   *   *   *

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.