Written By: Todd Ortscheid, RMP
If you’re on the NARPM® Discussion Board or follow any of the property management groups on Facebook, you’re probably familiar with the following kind of conversation:
Question: “How should I handle XYZ issue with my tenant/owner?”
Answer: “Well, it depends…”
“It depends” should be thought of as the two scariest words you can say in business. And even more so for the property management business, which is constantly inundated with litigation.
When the National Association of REALTORS® (NAR) did a study on real estate litigation, they found that “property management cases are overwhelmingly the most common type of claim” in real estate litigation. They went on to say that “property management cases…also represent some of the largest damage awards.” In fact, they found that two out of three of the largest damage awards were from property management cases. They measured in the millions of dollars, by the way.
I point out this litigation threat because when you say “it depends,” you’re basically putting a giant target on your back and leaving your company exposed to litigation risk.
Prior to working in the property management industry, I served as an executive vice president of a large labor union. Risk management is a way of life in labor unions because litigation is never-ending. Labor unions are constantly having to make big decisions that affect thousands of their members, and it’s impossible to make everybody happy. That means lawsuits are inevitable. When I had to attend board meetings, legal briefings from our attorneys on the plethora of cases we had going at any given time were just a necessary evil; and it seemed that there was never a time when we weren’t in negotiations with insurers and re-insurers for our various insurance policies that protected us from all of this litigation. While all of this made for some very boring meetings, it did give me a great understanding of risk management. I learned the best practices for avoiding litigation and for reducing financial exposure when litigation can’t be avoided. That experience has carried over quite well into the property management industry and helped me to put policies in place to avoid litigation risk.
Here are the lessons that I learned and have applied to my property management business:
1. First and foremost, consistency should be your goal. You never want to create a situation where you’re treating one person differently than you treat another. This is true with tenants, owners, and even employees and vendors. Disparity of treatment is a litigation magnet.
2. Make sure your policies are all in writing, the revisions dated, and a record of all past revisions kept on file. Detailed records of your business practices make you look like a studious manager who is trying to treat everyone fairly. Business owners who keep their policies all in their head create a situation where they’re asking everyone to just take them at their word that a certain practice is company policy and uniformly applied to everyone. You don’t want to find yourself in court asking everyone to just trust you. Juries, and even judges, are far more likely to think the worst of you and assume that the reason you don’t have written policies in place is because you want to treat each person differently.
3. Make sure that every staff member receives a copy of the policy manual when they start with your company. Get them to sign an acknowledgement form stating that they have received, read, and understand the policies contained in the manual, and keep that form on file. When you revise your manual, go through the same process. When you take this level of care to ensure that your policies are understood by everyone in your organization, and you have the records to prove it, it makes for great evidence to defend yourself against a claim. In some cases, if an opposing attorney finds this level of detail in your policies and records during the discovery process, they may decide that it’s not worth pursuing. They’re looking for easy targets. Make sure that you don’t look like an easy target.
4. Make sure that your written policies pass the smell test. It isn’t enough to say “that’s our policy” if the policy itself is clearly arbitrary, discriminatory, or in bad faith. This goes back to Rule #1: don’t treat different people different ways. A good way to look at it is to ask yourself whether the policy is differentiating based upon the person or based upon the relevant circumstances. So, a policy that waives late fees if the 1st of the month falls on a federal holiday would be reasonable, as it deals with the same kind of circumstance for everyone. However, a policy that waives late fees if the 1st falls on a religious holiday recognized by Christians, but not if the 1st falls on a Jewish holiday, would not be kosher (pardon the pun). Having a written policy and enforcing it gives you a lot of cover, but it doesn’t protect you if your policies themselves are the problem.
5. Never deviate from your written policies and procedures. This goes back to the beginning of the article. “It depends” does not work. You cannot “wing it” and make up policy as you go along based upon the individual circumstances in each case. You need to make written policies and stick to them like your life depends upon it. Because, while maybe your life itself doesn’t depend upon it, your livelihood certainly does. Sometimes this means going against your gut and doing something that’s in the written policy even though you don’t particularly like it in that specific circumstance. For example, I recently had a tenant show up at my office asking for a late fee waiver because her husband had died, and she had been bogged down with arranging the funeral and completely forgot about the rent. My “gut” told me to have compassion for this woman and give her the waiver. But there was nothing in our written policy on late fees that would allow for a waiver in this circumstance. After a decade in business managing many hundreds of houses, it surprisingly had just never come up before. We have a written policy that contains five different circumstances under which we’ll waive late fees. This was not one of them. So, I had to go against my “gut” and tell this poor woman that my hands were tied, and I simply couldn’t approve a waiver because it wasn’t allowed in our policy. It may not feel great, but it was the smart decision, because it prevents any tenant from ever being able to say that we display favoritism and don’t stick to our written policies. I can still walk into court, sit on the witness stand, and testify that we have never deviated from our written late fee policy. And no opposing counsel could ever show any evidence to the contrary. We have since amended our written policy to include the ability to wave late fees under this kind of circumstance in the future. However, we couldn’t make it retroactive to help this tenant, as that might be seen as favoritism.
Remember, your business is your livelihood. Litigation risk doesn’t just mean the risk of legal fees, it also means the risk of a monetary judgment against you that could bankrupt your company. At the recent Broker/Owner Conference, one of the speakers discussed how every one of us has a dollar amount that would end our company if we had to write a check for that amount. That amount varies widely from one of us to another, but every single one of us has that number. Insurance provides some protection, and we all need to make sure our insurance is in place, reviewed regularly, and covers what it needs to cover. But insurance coverage should be the fail safe, not the front-line defense. Solid risk mitigation strategies such as those discussed in this article should be your front-line defense so that the insurance coverage never has to pay out a claim.
In other words, let’s all stop saying “it depends,” and instead ask “what does the written policy say?”
Copyright © 2023 National Association of Residential Property Managers®. All Rights Reserved. Do not reprint without permission.