Monday, May 16, 2011

4 Simple Ways Landlords Can Lower Their Legal Costs

Landlord clients often get understandably frustrated when having to pay for legal help with so many issues. This is partly due to the fact that for many years, landlords didn’t need to take aggressive action on many legal issues. While the economy was growing along with property values, occupancy rates, and rent rolls, landlords of all stripes fell into some careless habits. This is true of landlords who are in property development and management companies as well as individuals who lease residential, retail and commercial properties. Now, with the economy ailing, landlords find themselves under pressure to be more efficient in collecting rent, evicting delinquent tenants, and enforcing basic lease provisions. But, finding quality legal assistance without letting costs get out of control can be challenging for some clients. Yet, there are so many simple ways that a landlord can keep the cost of legal representation down. Hopefully, the next few paragraphs will serve as a helpful aid to those clients who want to find ways to lower their legal bills.

  1. Find A Fee Arrangement That Fits Your Situation.

Most clients don’t understand that there are different fee arrangements. This is especially true of smaller enterprises such as individuals who own a residential property or two. But, it is not uncommon for even big management companies to be very inefficient in the procurement of counsel. Typically, a client will retain one of the first few attorneys they find on a Google search, or a management company will retain a firm that they have networked with for years or heard has a good reputation. This often happens because clients don’t understand the legal process well. What these clients don’t realize is that depending on their situation, they could be negotiating for a more favorable fee arrangement. Or, in some situations, if the counsel they have worked with in the past doesn’t offer a more favorable fee arrangement, they could be getting representation that is just as effective elsewhere for less cost.

Lawyers will usually either charge an hourly rate, a flat fee, or in some instances a contingent fee. The most economically favorable arrangement for a client is a flat fee. And, for many situations, a flat fee is both appropriate and attainable. A flat fee would be appropriate for a situation such as a simple eviction supported by a well written lease. There are firms and individual attorneys who will take these cases for an economical flat fee. I have heard some quotes as low $250.00 plus court costs. Landlords shouldn’t fear that such a low rate means low quality service. For many simple issues that prompt a flat fee arrangement, any competent attorney should suffice. Landlords shouldn’t feel the need to get the highest priced attorneys on every issue. Now, a word of caution is in order here. Most attorneys who offer a flat fee will include a clause in their retainer agreements that allow the fee to shift to an hourly rate in the event of protracted litigation. A flat fee would simply be impossible for any situation that requires more than a few court appearances or any situations where there are legitimate disputes between the parties. In my experience, flat fees work best for situations where a tenant is clearly delinquent according to the lease and the attorney only needs to follow a few quick steps and make a few court appearances to complete the eviction process. Since clients may not know if their situation is appropriate for a flat fee, they should not hesitate to discuss this option with their attorney.

Another option is the contingent fee arrangement. This option has advantages and disadvantages. The advantage is that the client pays nothing except court costs up front. However, in the event that a landlord gets a judgment and collects money, the attorney is paid a percentage of that award. The percentage usually ranges between 25% and 40%. This arrangement would not work for something like a simple eviction, but a contingent fee may be appropriate for a landlord suing for a breach of lease and trying to collect money. The great advantage of contingent fees in collection of unpaid rent cases is that the outcome is so uncertain. Many landlords, even after winning a judgment, collect very little of the rent that they are owed. Those landlords who pay hourly rates to collect rent often find themselves paying heavy legal fees and collecting little or nothing from the litigation. When I have clients who own property in another state and want my help to obtain counsel in that state, I almost always seek an attorney who offers a contingent fee. Finding a contingent fee arrangement is especially wise for landlords who own property in states with favorable debtor laws. If there is a reasonably good chance that a client may not be able to recover in court, it is probably smart to seek a contingent fee arrangement.

Finally, when hourly rates are the best or only option, landlords should seek reasonably priced attorneys. Many fancy and high priced firms will take on landlord issues as part of their repertoire but offer no real advantage over more reasonably priced firms. Any competent attorney should be able to handle certain landlord/tenant matters. Unless a situation is particularly complicated, a client need not feel compelled to obtain the most expensive firm.

  1. Help Your Attorney Help You

One of the very best ways that a client can keep costs down is to understand the role of the attorney. The attorney’s main role is to handle legal matters. Landlords don’t hire an attorney to organize files, extensively investigate issues related to the property, or make business decisions. But, if the client fails to take care of these basic matters, the attorney will gladly do so for more money. This is one way that costs, especially in an hourly rate fee arrangement, go up exponentially. But, even with other fee arrangements, carelessness on the part of landlords can be costly. I have often put extra time and work into messy files with missing documents, missing tenant information, wrong tenant information, etc. This not only takes up more time but this can also lead to serious problems down the road as the litigation unfolds. As an example, if a client doesn’t keep good organized notes on efforts to re-let a space abandoned by a tenant, that client may not be able to demonstrate to a court that he or she made ample efforts to mitigate damages. This means that the ultimate recovery may be far less. Here are some simple steps that landlords can take to help their attorneys represent them better:

A. Keep good organized files with leases, amendments, correspondence, financial transactions, etc.

B. When a space is abandoned by a tenant prior to the end of the lease term, keep track of efforts made to re-let the space. Remember, that if a landlord doesn’t make reasonable efforts to re-let a space after a tenant's breach, he or she will likely not be able to recover a judgment for the whole amount due. In order to demonstrate reasonable efforts, landlords should keep good notes and keep copies of advertisements made in an effort to re-let the property.

C. Stay up to date with your tenants. Too many times, I have handled situations where the landlord didn’t even know who was in a space anymore. This can cause complications. In fact, some of my retail clients would let spaces to non-existent corporations or renew leases to tenants that had been dissolved in the last term. Keeping track of what is going on with tenants is a good way of avoiding paying an attorney to fix easily preventable problems. See more on this subject in the next section.

D. Tell the truth to your attorney about situations. It is better to hear bad news up front than to have an embarrassing moment on the stand in a courtroom. An attorney can best serve his clients when he or she knows all the facts and gets accurate feedback on situations. Landlords will often make mistakes either knowingly or unknowingly and not be upfront about those situations out of a fear that the attorney won’t represent them as aggressively. In actuality, many problems can be fixed if the attorney knows about them right away. As an example, many landlords accidentally or sometimes purposefully, illegally lock out delinquent tenants. Then they try to cover their tracks by saying that the tenant abandoned the premises. Needless, to say this is often discovered in court and looks really bad for the landlord.

E. Know a little about Landlord/Tenant law. Nobody expects a landlord to be a legal expert. But, a good landlord will know a little bit about the law on issues such as locking out tenants, or giving proper eviction notices. Landlords who have reasonable information about the law will get themselves into less trouble and won’t have to pay their attorneys as much to fix these problems.

F. Execute Well Written Leases. Many legal problems can be solved by having well written leases. Remember, ambiguity in a lease is usually resolved in favor of the tenant and unclear provisions lead to more disputes and time litigating in court. See more on this subject in another section.

  1. Know Your Tenants

As mentioned above, know who your tenants are, and keep track of changes in their circumstances. Some of the worst situations that landlords get themselves into are the result of not knowing what they are getting into with some of their tenants. Here are a few helpful tips:

A. Run a credit report on potential tenants. If a tenant has a history of credit trouble, the landlord should have ample warning by running a credit report.

B. Regularly check the Illinois Secretary of State Business Section for corporate and business tenants. It is important to know if a corporate or business tenant is still in good standing with the Secretary of State. Landlords can also check if foreign state corporations are authorized to do business in the state. That will make potential lawsuits easier to manage. Clients of mine have signed leases with non-existent corporations as well as sued tenants who were no longer in business. While these problems can be fixed, it is easier and less costly to know the tenant’s situation. Remember, an improperly named defendant can result in a dismissed lawsuit. Usually, such a dismissal is accompanied with leave of court to amend the suit. But, this is more costly and inefficient.

C. Keep Track of Basic Tenant information such as phone numbers, addresses, and emergency contacts and get photocopies of drivers’ licenses. This is helpful because landlords should know the proper identity of an individual tenant or guarantor. I have handled situations where landlords executed a lease with a tenant who gave a fake name and provided no personal identification information. Finding such a tenant to serve with a summons is nearly impossible, let alone drafting a suit with a properly named party and proving the identity of the tenant in court.

D. Beware of out of state issues. Doing business with out of state entities and individuals is a good thing but it is also good to be aware of the potential problems in such a situation. If you get an in state judgment, you will have to have that judgment entered in the state where the delinquent tenant resides if you are going to collect on any of the tenant’s assets in that state. This is also true of tenants who abandon a premises and flee to other states.

E. Obtaining detailed financial information is appropriate sometimes. In some instances, asking a potential tenant for detailed financial information such as tax returns is inappropriate and may scare that individual away. In other instances it is both appropriate and advisable. If a tenant is asking for a rent reduction or trying to settle for an amount less than what is owed, it is very helpful to know the tenants financial situation. Having such information is very helpful when deciding if a lawsuit should be pursued. If the Tenant’s financials demonstrate that there is serious financial distress in the situation, it may be wise for the landlord to forgo a lawsuit. A landlord should be careful about not chasing bad money with good money. On occasion, delinquent tenants have called me explaining that they are in serious financial trouble with banks, tax liens, other judgments, etc. If their financials back up their story, I usually advise the landlord to save money and forgo filing a lawsuit.

4. Provided Well Written Leases

This may seem like simple advice, but it is often overlooked. Landlords can save themselves from so many headaches by being thoughtful about the leases they use. Many landlords will use boilerplate documents that they got somewhere without making any thoughtful changes to them. In some instances, it may be wise to consult an attorney to review or draft a lease. It will cost more up front but may be a big money saver in the long run. In reality, not every situation requires a long detailed lease. On occasion, I have drafted leases and had landlord clients ask me to cut some provisions out in an effort to make the situation less overwhelming for the tenant. Indeed, some tenants in different situations may get scared away by an enormously complicated lease. This, of course, is a business decision in which landlords will have to weigh the risks and rewards. Nevertheless, there are some things that most leases should contain.

A. Get a jury waiver in commercial and retail leases. Every retail and commercial lease should have a jury waiver. In the absence of such a clause, the tenant can ask for a jury. Conducting an eviction or breach of lease in front of a jury will make the process longer and more complicated.

B. Include the shortest notice provisions allowable under the law. For commercial leases, landlords have to give 5 days notice of default before proceeding with an eviction. In a residential lease, landlords have to give 10 days. In any month to month lease, landlords have to give 30 days notice. Beware of other notice provisions as well. Try to include a waiver of notice in any guarantee. It may be wise to give a guarantor notice of a tenant default anyway. Nevertheless, it is favorable to not be bound by any notice requirement, if it can be avoided.

C. Define Abandonment and other terms. Since illegal lockout disputes often revolve around whether a tenant abandoned a premise or illegally confiscated abandoned items, the lease should clearly define what constitutes abandonment and what is to be done with property left behind. These provisions, of course must comply with state laws on the subject.

Leases should define other terms carefully as well. There should be no doubt about what constitutes a default, how security deposits are handled, etc. Well defined terms will lead to fewer disputes and less litigation costs.

D. Be wise about guarantees. From a landlord’s perspective it is ideal to get an individual or other entity to guarantee a lease, especially with a corporate or business tenant. If a corporation or business is bankrupt, a landlord will want an individual or entity with money to guarantee the lease. Sometimes a tenant will refuse to personally guarantee a lease or refuse to get another person or entity to guarantee. Whether or not a landlord wants to go through with such a transaction is a business decision that should be weighed carefully in light of potential problems. Without a guarantee, you may end up with no recovery. A tenant could file bankruptcy, lose all assets, flee to another state, etc. It is wise to get a guarantee if at all possible. This improves a landlord's chance of recovery.

In conclusion, these simple steps may seem obvious but I am constantly surprised by how often they are overlooked. Implementing these 4 simple changes should not only help landlords lower the costs of legal representation but also make managing property more efficient.

For more information on these matters, see the attached profile of Brian M. Krause.

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