Getting back your security deposit

The most common legal dispute between residential landlords and tenants is over the withholding of deposit funds.

The purpose of the deposit is to secure the landlord in paying for repairs to the rented premises resulting from damage to the premises caused by the tenant, which is not the result of normal wear and tear.

Two of the most common concerns regarding tenants’ deposits are:

(1) Damage the tenant believes existed prior to their tenancy; and

(2) Damage the tenant believes is the result of ordinary wear and tear.

If the security deposit is retained to pay for pre-existing damages or ordinary wear and tear, that application of the deposit would be improper.

However, without a clear evidentiary record of pre-existing damage, personal memory is a notoriously unreliable source of evidence that is difficult to accurately rely upon.

With respect to ordinary wear and tear, there are common misconceptions about what constitutes ordinary wear and tear.

The best first step in protecting your deposit is to inspect the rented premises, then itemize and disclose all defects to the condition of the premises within three days of moving into the rental unit. Your landlord will usually provide you with a checklist that you can fill out and return.

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It is important to complete this checklist in a timely fashion. At the end of your tenancy, if you are charged for a piece of damage that is shown as already damaged on the checklist, you will have good evidence to protect you.

You might not remember when something in your rented premises was damaged during the tenancy, but after reviewing your move-in checklist you may be reminded that there was no damage when you took possession. This document protects both you and your landlord from mistakes.

Ordinary wear and tear is the unavoidable incremental damage that rental properties suffer from regular use.

However, just because damage was accidental does not mean it was a result of ordinary wear and tear.

A common example is with carpets. Just because you accidentally spilled red wine on the carpet does not mean that a large red wine stain is a result of ordinary wear and tear; you may be charged for cleaning or replacement of the carpet.

There may also have been wear and tear present prior to your use of the premises, but this does not mean that you won’t be held liable for further damage. If carpet was not new when you moved in, remember that carpet has an estimated useful life.

If you moved in to a rental with two-year-old used carpet and caused a need for the carpet to be replaced, you may be charged for the pro-rata value of the remaining useful life of the carpet.

Deposits are factually dependent and every incidence is different. Take photos when you move in and photos when you move out, and schedule a pre-move-out inspection with your landlord during the last week of your tenancy.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on December 20th, 2016. You can read it on the Register's website here: "Getting back your security deposit"

Can landlord reject sublease?

Dear Alex:

I own a nail salon in a small retail shopping center.

Last year, we planned to expand our operation by opening a retail boutique in the space next door to our nail salon. We signed a lease for the space next door, but our plans didn’t work out and now the additional space is vacant.

We want to sublease that space to a masseuse, but our landlord won’t approve of the sublease. Can the landlord do that?

Many small businesses change their growth plans over time, and it is common for businesses to extend their overhead costs in anticipation of growth.

It is also common for plans to change. Many times, a business will never experience the growth that they anticipate, and will have to reduce overhead expenses to remain viable.

It is understandable that your nail salon would have difficulty supporting a vacant retail space next door, and it is reasonable that you would want to reduce your expenses by subleasing that space to another tenant.

Almost all modern commercial leases contain provisions regarding the tenant’s rights or restrictions on subleasing. If the lease permits subleasing at all, it is usually only permitted with the landlord’s prior consent, which may be withheld in the landlord’s discretion.

Many times, a tenant who wishes to sublease their space will propose a potential sub-tenant to the landlord, and become upset when the landlord rejects that sub-tenant.

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However, your landlord must consider many factors when approving a potential sub-tenant. You as the original tenant will become the “sub-landlord,” so you should also consider these factors, because your business will most likely have to guarantee the performance of the new sub-tenant under the sublease.

If the sub-tenant fails to pay the rent, you may be liable to pay for their default.

The potential sub-tenant must satisfy the landlord’s credit requirements.

A small business without much capital and without a long history of successful operations may be too risky of a tenant in the landlord’s opinion; in addition to the possibility of the tenant’s failure to pay the rent on time, the eviction process is time consuming and costly.

Those expenses are concerns of the landlord, and as the potential sub-landlord, they should be concerns of your business as well.

Tenant mix is also a significant concern of landlords, particularly in retail centers. The landlord may have granted exclusivity to other tenants on certain business types.

You wouldn’t want the landlord to allow another nail salon to move in next door, and other tenants may not want competing uses in the center either. Additionally, certain use types may be less desirable for family-oriented shopping centers.

For example, a landlord would probably not want a tobacco store to open next door to an ice cream parlor and toy store. Massage providers are a use type that landlords are historically cautious of permitting.

For all of those reasons and others, your proposed sublessee may not be a good fit for the space, and depending upon your lease terms, it is likely within the landlord’s discretion to reject the proposed sublessee.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on October 25th, 2016. You can read it on the Register's website here: "Can landlord reject sublease?"

Friends need advice about rental property investment

Dear Alex:

A good friend and I want to buy a house together to rent out as investment property, but we want to make sure that we are legally set up the right way.

What do we need to do?

There are two primary fields to consider:

1. How will title to the house be held

2. How should you organize your business partnership?

While these areas are separate legal issues, they overlap.

The most common way for investors to take title together is as “tenants in common.”

Tenants in common means that you each own a proportional, interest in the property, but it is an undivided proportion.

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For example, if you each own 50 percent of the house, the ownership rights of the property aren’t split in half, where one person owns and controls the north half and one person owns and controls the south half.

Instead, each person owns a one-half interest in the whole thing, and you share ownership and control over the entire property. There are default rules in the law for owning a property as tenants in common which govern what happens when the property requires repairs or improvements, decision-making authority, and other factors which you may not have considered.

You may use a written Tenancy In Common Agreement, to more specifically describe the intended rights and obligations of the co-owners. Upon death of an owner, that person’s ownership interest will pass on to their heirs or devisees according to their estate planning instructions or by operation of law.

A tenancy in common agreement is useful among separate owners who are not necessarily doing business together, but if you intend to continue to purchase properties with this person, another common arrangement is to form a Limited Liability Company (LLC), and for the LLC itself to own and hold title to the property.

The owners each own their agreed upon proportion of the LLC, and therefore own that proportion of the assets held inside the LLC. By structuring your investment this way, the liabilities associated with the property will be contained to the LLC due to the liability protections offered by that business structure.

Your operational rules may be governed by the Operating Agreement of the LLC, much like the Tenancy In Common Agreement would outline the operating rules for tenants in common. It is generally unwise to use a corporation for real estate holdings, because corporations are subject to tax treatments which are different from LLCs and which are not favorable to real estate investment.

In each case, your lender will have specific requirements for you to consider in order to be approved for a loan, and your property insurance provider will need to be informed that the property is intended to be used for investment as a rental.

Both tenancy in common interests and LLC membership interests can be contributed to a trust for estate planning purposes.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on August 30th, 2016. You can read it on the Register's website here: "Friends need advice about rental property investment"

The case of the accidental landlord

Dear Alex:

When my adult granddaughter moved back to Napa from out of state last year, I allowed her to move into a guest house on my property.

Since then, she has acquired two dogs and allowed her boyfriend to move in with her. The dogs are damaging the house, there are too many cars in our driveway, and while I love my granddaughter I would like her to find another place to live.

I have tried to talk with her about the situation, but she won’t hear me out.

What do I do?

If a mutual agreement cannot be reached between your granddaughter, her boyfriend and yourself, unfortunately your only recourse will be to commence formal tenancy termination procedures.

You have inadvertently created a landlord-tenant relationship, and are now subject to the full scope of California’s landlord-tenant laws.

This is a classic example of what I call “the accidental landlord.”

It frequently starts with a favor to a friend or family member, and over time the generosity of the homeowner is taken for granted, the occupant may develop a sense of entitlement to remain in possession of the property, and in the worst cases what started as a loving gesture results in a legal landlord-tenant dispute and eviction.

What many people fail to realize is that when you allow a person to move into your property, even if they aren’t paying you rent, that occupancy comes with legal rights that cannot be waived or ignored.

Even permitting just one person to move into a spare bedroom of your house can grant that person rights as a “lodger,” which are rights very similar to the rights of a tenant.

If you and your occupants come to a disagreement, if they disobey your house rules, or if you simply think that it is time for everyone to move on, without reaching a mutual agreement your only option will be to proceed through legal avenues in order to recover possession of your property.

Terminating a residential tenancy is not as simple as posting a 30-Day Notice of Termination and changing the locks.

Many times, 30-days’ notice is insufficient; the notice period for terminating a month-to-month tenancy can be 60 days, 90 days, or some other length of time if there is a lease that calls for a different notice period.

Only after that period expires is the occupant in violation of his or her legal right to remain. At that time, you cannot compel the occupant to move until you have a court order granting you that right. That means an eviction case must be filed with the court.

As you can see, the process of recovering possession of property from an occupant who does not wish to vacate is anything but simple.

Property owners should always use caution and discretion when allowing a person to move into their property. It is best to use a written lease from a reliable source, and be aware that even a favor to a friend or relative comes with significant legal implications.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on May 24th, 2016. You can read it on the Register's website here: "The case of the accidental landlord"

'Haunted' house for sale

Dear Alex:

We are planning to sell a property in which the current tenant believes that the house is haunted by a ghost. We don’t believe in ghosts. Do we actually have to disclose the alleged ghost to prospective buyers?

In California, sellers have a duty to disclose known facts that materially affect the value or desirability of a property, if the facts are not known or readily accessible to the buyer. In some cases, psychological factors can be just as materially detrimental to property values as physical defects.

There is even a case from New York in which a property buyer was permitted to rescind a home purchase contract because the sellers did not disclose that the property had a reputation for being haunted. In that case, the house had been widely publicized as haunted, had been featured in Reader’s Digest as haunted, was among several houses on a haunted house walking tour and had a local reputation for being a haunted house.

Luckily, the issue does not require a factual determination as to whether the property is actually haunted. The real issue is whether the property has a reputation for hauntings to the point that it has become stigmatized and its value or desirability is reduced.

The New York case described above, permitted the buyer to rescind the purchase agreement because of the house’s reputation for being haunted and the stigmatizing effect that such reputation had on the home, not because of the alleged haunting itself.

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The rules governing disclosure of some of the more common property-stigmatizing issues, such as recent deaths within a property, are regulated by statute in California under Civil Code §1710.2. Unfortunately, a reputation for hauntings is not a condition defined by the statute.

Whether or not you believe in ghosts, if the house is has a reputation for being haunted to the point that it could be stigmatized and suffer a decrease in value or desirability, the reputation should be disclosed. On the other hand, if it is only the current tenants who believe the house to be haunted, it is probably not a stigmatizing factor.

Whether the alleged haunting is a stigmatizing factor that would require disclosure is a determination that can ultimately only be concluded by a judge or jury. This is a fine line to tread; if only one person believes the property to be haunted, the broad disclosure of that one individual’s belief could create a stigma against the property.

However, if the rationale for not wanting to disclose the alleged haunting is because prospective buyers would be driven away from the property, the condition probably has a sufficiently negative effect upon the desirability of the property and disclosures should be made. Remember that under no circumstances is an owner or owner’s agent permitted to make an intentional misrepresentation in response to a direct question posed by a potential buyer.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on May 12th, 2015. You can read it on the Register's website here: "'Haunted' house for sale"

Should I Create an LLC for Real Property?

"I own a personal residence and a rental property. I was told to put the rental property into an LLC to protect my personal residence from the liability of the rental property. Is this a good idea?”

This is probably good advice. There are benefits and drawbacks to LLCs (limited-liability companies), but if you are planning to put your rental property into a limited-liability entity to protect your other personal assets, an LLC is usually the best choice. There are other entities that offer limited liability, such as C-corporations and S-corporations, but the tax consequences of putting real estate into a corporate entity like those can be disastrous.

When you contribute real property into an LLC, the liabilities associated with that real property and its business activities are cut off from the personal assets of the owners (called “members”) of the LLC. People who have multiple properties or other assets (for example, investment accounts or ownership of a business) can benefit greatly from separating their rental properties from their other assets by use of LLCs.

Of course, the property within the LLC is still subject to the liabilities of the LLC. If there is a lawsuit related to the property held in the LLC, the property itself can still be subject to any judgment associated with that lawsuit.

While the principles of liability protection by an LLC are appealing, they aren’t without limitations. Individuals can always be held responsible for their own acts of negligence, so keeping property in an LLC is does not always protect the members from their own bad or negligent actions. Additionally, much of the financial protection that LLCs offer can be accomplished through insurance.

Not only will lenders require minimum insurance coverage, but in the event of a lawsuit or claim, it is better to have cash paid out of an insurance policy than be forced to sell the property to pay for money damages.

A problem with relying solely on insurance as a protection from liabilities is that insurance policies have limits in the amount of damages they cover, and exceptions and limitations on the types of damages that are covered. Best practices call for property owners to both hold the property in an LLC, and to carry adequate insurance.

There are other drawbacks to an LLC. One of those drawbacks is the annual minimum Franchise Tax that the state of California assesses against LLCs and other corporate entities, which is currently $800 per year. For some, the Franchise Tax may make the LLC not worth the cost. Additionally, many lenders won’t lend to an LLC directly and at minimum will require LLC members to personally guarantee the debt.

Alex Myers is an attorney with Myers & Associates in Napa, and can be reached at alex@myers-associates.com or at 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice you should contact an attorney.

This column originally ran in the Napa Valley Register on March 3rd, 2015. You can read it on the Register's website here: http://napavalleyregister.com/business/should-i-create-llc-for-rental-property/article_21e4c0ce-5cf3-5875-a9e8-7e3477beea82.html