Make Sure You Are Covered When Disaster Strikes

It is not uncommon for a unit to be partially or totally damaged.  From fires to floods, there is never a shortage of events that cause damage to units.  Sometimes the damage makes the unit uninhabitable.  However, while the damage might be significant, in many cases the unit remains habitable.  Sometimes even if the unit is uninhabitable, the resident claims that it’s not that bad, and wants to continue to occupy the unit.  Regardless of the damage scenario, clients regularly seek our advice on common damage questions.

Who is responsible for paying for the damages?  Specifically, who is going to pay for the resident’s property?  Can you terminate the lease?  Can the resident terminate the lease?  If the damage doesn’t make the unit uninhabitable, but repairs would be impractical or even dangerous if the resident continues to reside in the unit, can you force the resident to move out or transfer to another unit?  Are you responsible for finding and paying for alternative housing?  Does the resident still have to pay the rent?  If the casualty event was not an act of God, does it matter who was at fault?

As a general rule, when the premises are destroyed in whole or in part, risk of loss falls on the resident.  If your lease doesn’t cover this issue, the law states that the resident is responsible for his damaged property.  Many leases provide that no matter what happens, the landlord is not responsible for damage to the resident’s property.  This lease provision is called a damage waiver.  However, many in the industry aren’t aware that damage waivers will not always hold up in court.  Fault usually determines whether a damage waiver will hold up.  For example, if there is a water leak and even though the lease states that the community is not responsible for damage from leaks, courts often hold the community liable for water damage to a resident’s property if the court determines that the community was negligent or otherwise at fault.

In Colorado, you can contract around your own negligence.  Some leases attempt to do this by stating that the landlord isn’t liable for damage even if caused by the landlord’s own negligence.  However, this doesn’t entirely solve the problem because of the Colorado Premises Liability Act (“the Act”).  Under the Act, residents can recover damages caused by your failure to exercise reasonable care to protect against known dangers or dangers which you should have known about.  In the water leak example above, this means that if you knew there could be a chance of flooding, but took no action, the community is going to be liable regardless of what your lease states.

If damage waivers won’t hold up, especially against premise liability claims when you’re at fault, why have them in your lease?  First, damage waivers should hold up in court when you’re not at fault.  This reason alone mandates that a well written lease contain a damage waiver.  Second, lease language is often written to have a deterrent effect.  Most residents, and even many attorneys that we have encountered over the years, aren’t familiar with the legal ability to challenge damage waivers.  Thus, liability and damage waivers may not win the war, but they might prevent the war from ever starting.

Under Colorado law, in the absence of any lease language, the total destruction of the premises results in the termination of the lease.  If the unit is destroyed, you have the right to terminate the lease, but so does the resident.  However, if you rely on the law alone, many unanswered questions will remain when a unit is damaged.  For example, if the lease were terminated by law due to destruction of the premises after a fire, this would also relieve the resident from his obligation to pay rent even if the resident caused the fire.  You could still sue the resident for negligence, but a lease that makes the resident responsible for both paying the rent and all corresponding damage is a much stronger legal position.  Thus, a well-written lease should specifically address what happens when the premises are partially or totally destroyed.  However, many leases we review do not adequately address partial or total destruction issues.

Rather, many leases simply state that you have the right to terminate the lease if the unit is destroyed.  While this is a good start, such a plain clause doesn’t address most of the common problems that arise when the premises are damaged.  A termination clause should specify that you have the right to terminate upon written notice.  Some leases provide for written notice, or provide upon reasonable written notice.  Reasonable written notice is better than not specifying anything.  However, when notice requirements are not clear or specified, you have to guess what type of notice and how much notice to provide.  Over the years, we have seen that notice related issues after destruction of the unit have caused significant problems.

Often the unit is dangerous after it has been damaged, however, since the resident has nowhere to go or lacks the funds to go somewhere else, the resident now argues that it’s not that bad and refuses to leave.  In one recent case, the unit had been significantly damaged by fire, had potential asbestos exposure, and the local fire department had declared the unit uninhabitable.  Despite all of this, the resident not only refused to leave, but moved back into the unit.  Because the owner’s lease wasn’t clear and for the resident’s own safety, the owner had no other choice but to lock the resident out to prevent the resident from attempting to reoccupy.

Similarly, partial significant damage creates as many if not more problems than total destruction of a unit.  A situation one of our clients experienced serves to clearly illustrate this problem.  The roof in the master bedroom caved in after a big snowstorm.  The master bedroom had an eight-foot hole in the roof, but the remainder of the unit was not damaged nor declared uninhabitable.  The community told the resident that he needed to either move out, or transfer to another unit at the resident’s cost.  The resident refused to move.

In the above example, the resident’s lease provided that the community could terminate the resident’s lease if the unit was destroyed.  Because the unit was not totally destroyed, the resident argued that the community had no right to terminate his lease or to make him relocate while repairs were made.  Based on the lease, the resident was technically right.  Because partial destruction to units occurs more frequently than total destruction, your lease must cover partial damage scenarios along with total damage scenarios.  Ideally, your lease should give you the right to terminate a resident’s lease regardless of the extent of damage to a unit if in your sole and absolute discretion, any needed repairs would be either impractical or dangerous if the resident continued to occupy the unit.

Even when residents cooperate after damage to their unit, residents still claim that you are responsible for arranging and paying for substitute accommodations.  When you are not a fault, you have no obligation to pay for putting a resident up at a hotel.  However, as discussed above, regardless of your lease language, you could be liable to the resident for damages when you’re at fault and the resident’s unit is partially or totally destroyed.  Damages include moving and living expenses.  Regardless, your lease should spell out to the resident that you have no obligation to pay for moving expenses or alternative accommodations if their unit is damaged.  If nothing else, this lease language hopefully will encourage the resident to obtain renter’s insurance.
Renter’s insurance (insurance) is now wisely required by a substantial majority of landlords.  Mandatory insurance solves many, if not most, problems that arise when a unit is damaged.  Insurance certainly solves the number one issue, which is a lack of funds on the resident’s part to move or make other arrangements for alternative accommodations.  However, renter’s insurance only works if the resident actually gets it, and more importantly, maintains it.  A recent situation illustrates a typical scenario.  The community required renter’s insurance.  The resident obtained a policy.  The unit was totally destroyed.  The resident refused to move out, presumably due to a lack of money.  After persistent prodding from the community, the community finally discovered that the resident failed to pay the insurance premiums, and the resident’s renter’s insurance had been cancelled.

To address this problem, we recommend including a number of renter’s insurance related provisions in your lease documents.  Your lease should provide that resident will not be given the keys to the unit until they have provided proof that they have a valid policy.  Too many times residents are allowed to move in and then never obtain the required insurance.  Your lease should also provide that not only is the resident required to obtain a policy, but also that the resident is required to maintain the policy.  If your lease only provides that the resident has to get a policy, the resident is in compliance if the resident gets a policy and then allows it to lapse.

You want to be notified if the resident’s insurance lapses or is cancelled for any reason.  Some management companies have addressed this issue by requiring that the property be named as an additional insured under the renter’s insurance policy.  As an additional insured, you should be given notice if the policy lapses or is cancelled.  However, at least one major renter’s insurance provider has informed clients that this is impermissible.  Specifically, a sales agent for a renter’s insurance provider informed an onsite manager that this was illegal.  This is not true.  It is not illegal to require that you be named as an additional insured.  The reality was the agent’s company would not issue a policy if the community required that the policy name the community as an additional insured.  Similarly, some insurance providers may prohibit waiver of subrogation in renter’s insurance policies.  If you make a renter’s insurance company or program available to your residents, check with the company and make sure that you’re familiar with the types of policies they will and will not issue.

Regardless of whether you require your residents to maintain renter’s insurance that names you as an additional insured, your lease should require your residents to provide adequate proof that they have a current complying policy, and that failure to obtain and maintain a policy is a material breach of the lease, and that you have the right but not the obligation to obtain the required insurance at the resident’s expense.  For example, your lease should have the following or similar language.  Upon demand, resident shall provide proof that resident has a current valid complying renter’s insurance policy.  If resident fails to obtain and maintain renter’s insurance, resident’s failure shall constitute a material breach of the lease. To avoid such a breach, resident agrees that you may, but are not required to, purchase at resident’s expense, a policy of standard complying coverage.

Unfortunately, damage to units will always happen.  Your lease can go a long way in addressing the specific issues that result when a unit is partially or totally destroyed.  Mandatory renter’s insurance is also an invaluable tool to address damage issues.  However, renter’s insurance only works if the resident has a current policy.  Thus, your lease needs to provide you with the specific rights to monitor and enforce renter’s insurance requirements so that if disaster strikes, your residents have a valid policy.   Otherwise, you may find yourself dealing with a resident’s problems, rather than the resident’s insurance company.

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