mtschetter

Real Estate Commission compliance is once again a hot topic; partly because of the flood of new owners and property management companies coming to Colorado; and  partly driven by the Colorado Real Estate Commission’s step-up of enforcement efforts.  Due to budget cuts and political considerations, the Real Estate Commission (the “Commission”) had stopped random audits for a number of years.  Since property management is one of the leading sources of complaints received by the Commission, the Commission has recently reinstated random audits as part of its proactive and stepped up enforcement efforts. As a result of the complaints received, the Commission considers property management to be a complex area of practice.  A blog cannot address the complexity of the Commission regulatory scheme.  However, we can answer some of the most common questions client ask.

Do we need a Colorado Real Estate Broker’s License, is by far the most common question we are asked.  The quick answer to this question is straightforward.  If you own the property you manage, you do not need a broker’s license.  This is commonly referred to as the “owners’ exemption”.  If you third party fee manage, you need a license.  The question is not complicated for fee managers.  Fee managers must be licensed.  Whether an ownership and management relationship meets the owners’ exemption can be extremely complicated.

Companion animals are also known as emotional support animals or therapeutic animals.  Companion animals are a form of assistive animal under fair housing laws.  As a form of assistive animal, there is no difference between a companion animal and a service animal.  Recently the number of companion animal requests are going through the roof.  It is important for landlords to adopt and have policies in place to deal with companion animal requests.

Companion animal requests are skyrocketing for several reasons. Money makes the world go round, and thus is the primary driver of the rapidly increasing number of companion animal requests.  Because the companion animal is not a pet under fair housing laws, landlords cannot charge pet fees, pet deposits, or pet rent.  Savvy tenants know this.  So now Fido’s owner is much more likely to suffer from depression.  Websites spread the word that tenants do not have to pay pet fees for companion animals.  Websites also encourage tenants to claim their dog or cat as a companion animal by selling assistive animal documentation, for a fee.  Specifically, websites will certify an animal as a “certified service animal”.  Websites also sell letters (prescriptions) that document a tenant’s need for a companion animal.

Abandonment is a timeless issue.  Clients never stop asking about it since abandonment scenarios happen regularly.  Because failure to follow abandonment best practices can cost you thousands, or even tens of thousands of dollars, this month we want to reinforce everything you need to know about abandonment.

In layman’s terms, abandonment means that the tenant has left, and is not coming back.  Abandonment turns on the answer to two questions.  Has the tenant left?  Does the tenant intend to give up his right to possess or occupy the unit?  While there are common signs of abandonment, such as removal of personal property, there is no black and white test.  Courts determine the answers to abandonment questions on a case-by-case basis.  However, Colorado law is clear on the effect of abandonment.  If a tenant has abandoned a rental unit, you may take possession of the unit without having to evict.

Does credit reporting significantly increase collections?

Credit reporting does benefit collections, but its overall impact is not well documented.  Credit reporting’s impact on collections is more anecdotal (somebody wanted to buy a house so we got paid), and probably grossly overestimated.  Most collection agencies report to the credit bureaus.

If credit reporting magically collected money, collection agencies reporting 100% of the debt referred to them would be liquidating at phenomenal rates.  However, ACA International, the leading trade association representing credit and collections professionals, reported in 2008 that just 18% of all money referred to collection agencies is eventually recovered.  Based on our experience with clients, collection agencies often liquidate rental debt at substantially lower percentages.

What is a collection rate, or collection percentage?

Almost, without exception, all rental debt is collected on a contingency percentage, also known as a collection rate, or collection percentage.  You pay nothing if no money is collected.  If an agency is successful in collecting money, the agency’s fee is a percentage of the amount collected.  If a collection agency rate is 40% and they collect $100, you get $60 and the agency gets $40.

What is the most important issue about a collection agreement?

The term of the agreement.  Everyone in this business knows you’re only as good as last month’s performance.  For this reason all vendor contracts can be cancelled, without cause, upon thirty days notice.  Most collection agency agreements contain this provision.  Yet, many collection agreements contain other provisions, which nullify your right to cancel on thirty days notice.  Specifically, collection agency agreements contain buy back or cancellation fee provisions.  For example, over the last ten years you have placed $20M in debt with a collection agency.  The collection agency is not performing, so you give them thirty days notice of cancellation, and you request return of your debt (the collection files placed).  The collection agency then informs you that you must pay them a 10% cancellation fee, or $2,000,000 to get back your own debt.  The debt is yours.  Never sign a collection agreement that requires you to pay for the return of your property if the agency is not performing.

Lease related legal costs are driven by the amount of attorney time involved.  Lease work is not rocket science, but it is time-consuming and tedious work.  Sometimes clients forget the time-consuming nature of lease work.  This can cause unrealistic expectations about lease review and drafting.  For example, clients want a lease review, but don’t want us to spend more than an hour on it.  We cannot comprehensively review a five to ten thousand word document in an hour.  During a one-hour review, an attorney can only read the lease and highlight the most fatal or obvious flaws.  This brings us to a critical point about lease review work and related costs.  It is always less expensive to buy a well-developed lease product, then to try to fix a bad lease.  Reviewing, revising, and fixing most leases can easily exceed five hours of attorney time which is more than the base cost of our most expensive lease product.

Frequently, landlords and managers have just enough information to be dangerous.  One of the most dangerous statements in the business is the "I heard that under Colorado law I do not need a reason to non-renew a tenant".  Is this a true statement? Yes, under Colorado landlord tenant law, you do not need a reason to non-renew a tenant.  However, under federal and Colorado Fair Housing Laws, you may only non-renew tenants for legitimate non-discriminatory business reasons. While you don't need a reason to non-renew, landlords renew good tenants.

Landlords only non-renew bad tenants for specific reasons.  Thus, while under Colorado Landlord-Tenant Law, you do not need to have a reason to win an eviction case or end the relationship with a tenant, you have reasons for non-renewing.  If the Colorado Civil Rights Division comes knocking on your door with a discrimination complaint, you will have to provide these reasons for non-renewal.  To avoid fair housing liability, your non-renewal reasons must be nondiscriminatory, i.e. based on a legitimate nondiscriminatory business reasons.  Accordingly, every non-renewal decision should be thought through in advance to ensure that it is based upon a legitimate non-discriminatory business reason.  If you fail to think through the situation and just fall back on the old "I don't need a reason" rationale because you just want a tenant out, you may have a difficult time responding to a discrimination complaint.

You run a no-pet community.  Can the guest of a non-disabled tenant bring a  a companion animal onto your property?  Unfortunately, the law is not clear on this issue.  Under fair housing laws, only disabled residents and prospects are entitled to make requests for reasonable accommodations.  A guest is not a tenant, and therefore not entitled to a reasonable accommodation (an exception) to your no-pet policy. Landlords who do not want to allow the tenant's guest to bring a companion animal onto the property frequently cite this rule.  Yes, this is a correct statement of the law. However, it is a shortsighted analysis. The fair housing act also provides that it is illegal to discriminate in connection with the leasing of a property because of the disability of any person associated with the tenant.

Landlord tenant litigation often involves small sums of money.  We are not saying $500 is chump change, but in litigation world it is not a significant amount.  One of the reasons $500 is not considered to be a significant amount is because of attorney’s fees.  Attorneys charge by the hour, and at today’s rates, $500 is less than three hours of an associate attorneys’ time.  When you consider an attorneys’ hourly rate, and the amount of time it takes to litigate a landlord tenant matter, attorneys’ fees almost always exceed the amount in controversy.  The type of landlord tenant case has no bearing on this issue.  Whether it is a security deposit dispute, a warranty of habitability claim, or an eviction case, attorneys’ fees almost always exceed the amount in controversy.

Attorneys’ fees have an even bigger impact in landlord tenant litigation because frequently the loser has to pay the other sides costs.  So before you go all in the next time over that $500 your tenant owes, stop and ask yourself some questions.  One, what are my fees going to be? Two, what are the risks that I’m going to have to both my attorney and the tenant’s?  Obviously, if there is a substantial risk you might pay $5000 in attorneys fees over $500, you will need to adjust your strategy and settlement posture accordingly.