As you considered your goals for the New Year, did acquiring rental property make the list? Are you hoping to create a second stream of income? Retire early? Or perhaps you are already a landlord and are discovering that it is more complicated than you anticipated? Being a landlord presents unique legal challenges. This article will provide you with examples of the most common legal pitfalls facing landlords and with tips on how to avoid falling into these traps.
Your Rental Agreement Fails to Comply With Indiana Law.
As a landlord, it is important to have a residential lease agreement that complies with Indiana and Federal law. Avoid the mistake of placing conditions in a rental agreement that require a tenant to waive the right to a refund of a security deposit or the right to bring a lawsuit. It is also important to avoid including any conditions that would discriminate against a tenant based on race, national origin, gender, familial status, disability, or religion.
Failing to Make Timely Repairs
A rental agreement should specify who has the duty to make repairs. Importantly, though, pursuant to Indiana law, a landlord must make some repairs even if a rental agreement does not specify these duties. A landlord has the duty to provide a rental unit that is fit to live in, safe, and clean. This is called an “implied warranty of habitability.” Pursuant to Indiana Code Section 32-31-8-5, the property must be in a “safe, clean, and habitable condition.” Additionally, a landlord must ensure that the following are in “good and safe working condition:” the electrical systems, the plumbing systems sufficient to accommodate a reasonable supply of hot and cold running water at all times, sanitary systems, heating, ventilating, and air conditioning systems, and appliances supplied in the rental agreement. The failure to timely make these major repairs could result in a lawsuit against you.
Failing to Provide a Functional Smoke Detector and Obtain Written Confirmation
A landlord is required to provide a functional smoke detector in the rental property. A landlord and tenant may not waive this requirement in either the rental agreement or in a separate writing. Additionally, according to Indiana Code 32-31-5-7, at the time a landlord delivers a rental unit to a tenant, the landlord must require the tenant to acknowledge in writing that the rental unit is equipped with a functional smoke detector.
Keeping the Security Deposit
Upon termination of a rental agreement, Indiana law requires a landlord to return to the tenant the security deposit minus any amount applied to: (a) the payment of accrued rent; (b) the amount of damages the landlord will suffer due to tenant’s noncompliance with the law or the rental agreement; and (c) unpaid utility or sewer charges the tenant is obligated to pay under the rental agreement. It is important to note that you, as the landlord, have a duty to provide a written notice to the tenant with an itemization of the amount due and the estimated cost of each repair not more than 45 days after termination of the rental agreement and delivery of possession. Indiana Code Section 32-31-3-14 also provides that the landlord must include a check or money order for the difference between the damages claimed and the amount of the security deposit with this notice. According to Indiana Code Section 32-31-3-12, if the landlord fails to deliver this notice, the tenant may recover all of the security deposit, along with reasonable attorney’s fees and costs against the landlord. The landlord would forfeit any rights to the security deposit in that scenario, according to Indiana Code Section 32-31-3-15.
Ignoring Eviction Rules
A landlord cannot remove a tenant from a property without going through a legal eviction process. Further, unless the parties have agreed otherwise, pursuant to Indiana Code Section 32-31-1-6, before removing a tenant for failure to pay rent, a landlord must provide a 10-day notice to the client. If the tenant refuses to comply, the landlord must then file an eviction action in Court. If the landlord attempts to remove the tenant without a court order, the tenant may be entitled to damages for the landlord’s actions.
Inadequate Insurance on a Rental Property
As a landlord, it is important to obtain a landlord or rental dwelling policy. These provide property insurance for physical damage to the structure of the home and for any personal property that you may leave on-site, such as appliances or lawnmowers. The policy should also include liability coverage to protect you in the event that the tenant or a guest is injured on the property. The rental policy only covers the structure itself and your financial interest in it. You should also require the tenant to obtain a renter’s insurance policy to cover the tenant’s personal possessions. Finally, you may want to consider obtaining an umbrella policy, especially if you have substantial personal net worth.
Failing to Consider Forming an LLC to Hold Your Rental Property
There are some compelling reasons to hold your rental property in an LLC. The main reason is to protect your personal assets and to protect you from personal liability should you be sued. For example, if a rental property was titled in your name and a tenant’s guest falls down the stairs and is injured, the guest could sue you, as the landlord, for her injuries, claiming that the stairs were maintained in a hazardous condition. If the guest were to win this lawsuit, any judgment in excess of the liability insurance can be satisfied using the owner’s personal assets. If your property was held in an LLC, only the LLC’s assets would be under attack so long as you follow appropriate corporate formalities. The formation of an LLC to hold rental property can also have estate planning advantages, including a more seamless transfer of property or the ability to gift certain percentages of real estate to family members. There are important legal and tax considerations to consider before forming an LLC. Consulting with an attorney and accountant can be helpful in determining if forming an LLC is right for you.
This article is not legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author and attorney, Carla V. Garino, or attorney William Webster, with Webster Legal LLC, located in Westfield Indiana. Ms. Garino and Mr. Webster can be reached at (317) 565-1818 or at cgarino@websterlegal.com or wwebster@websterlegal.com.