Webinar On Mortgage Forbearance for Landlords under the CARES Act

May 27th, 2020

Brian Huddleston, and Kristin Maun, Housing Coordinator for the City of Tulsa, presented an educational webinar on the mortgage forbearance and eviction moratorium provisions for landlords under the CARES Act. This webinar was recorded and we will post a link as soon as the video is available. The PowerPoint slides are here. It is helpful for landlords and property owners to learn more about mortgage relief and the eviction moratorium under the CARES Act. Including the secondary eviction moratorium applicable to those multi-family properties covered by a federally backed loan for which the borrower obtains a temporary mortgage forbearance after the general moratorium ends in late July.

https://www.newson6.com/story/5eccd0e029d2410c30484c72/webinar-on-eviction-moratorium-to-be-held-tuesday-

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Street Law School: Commercial Landlord Self-Help Evictions

May 26th, 2020

The ability of a landlord to evict a tenant during the COVID-19 outbreak is severely limited by executive or judicial orders issued in response to the pandemic. Most courts have limited operations and some have suspended residential and commercial evictions in addition to the CARES Act (discussed in a separate Blawg post).

In the absence of the ready availability of judicial eviction proceedings, landlords are asking if they can use self-help methods to evict or lock out tenants. In Oklahoma, the answer is a resounding “NO!” For example, in the Oklahoma Residential Landlord and Tenant Act, the landlord’s self-help remedies are outright eliminated, and the landlord is required to pursue judicial remedies only. Commercial landlords may think that the self-help remedies carefully detailed in their leases are enforceable as written. But they are not! Landlords may enforce their rights only by the judicial process despite language to the contrary in their commercial leases. See, Parker Livestock, LLC v. Okla. City Nat’l Stock Yards Co. (W.D. Okla., 2015) (An action for forcible entry and detainer is the exclusive procedure for ousting a both residential and commercial tenants.).

Thus, self-help measures, such as changing locks, cutting off utilities, or removing tenant property, may expose a landlord to civil damages, and a landlord should carefully consider and seek legal advice before acting. The statutory penalty for a wrongful residential eviction is two (2) times the rent for the period of the eviction until the property is restored to the tenant, plus attorney fees and court costs.

Demand for Cleaning and Quiet Enjoyment

Cleaning issues are likely to take center stage after the outbreak ends and business restrictions are lifted. Even if not expressly provided for in the lease or demanded by the tenant, landlords should take reasonable steps to maintain the property during and after the outbreak, following CDC guidelines for proper cleaning and disinfection.

Failing to maintain the property or failing to take appropriate steps to clean the property and prevent the spread of disease may be grounds for a breach of the landlord’s covenant of quiet enjoyment or for constructive eviction. Constructive eviction is a high bar, but issues related to the pandemic will provide opportunities for the development of case law applicable to our current circumstances.

As the length of business shutdowns grow, so will the scope and magnitude of issues that landlords and tenants need to navigate. The most effective method for dealing with the effects of the COVID-19 outbreak is for landlords and tenants to proactively communicate and avoid making decisions that could be regretted later.

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Victory on Appeal! Beeler vs. BONY

May 17th, 2020

Huddleston Law Offices is pleased to announce that Brian Huddleston just won a successful appeal in a long fought real estate foreclosure case involving the application of 12 O.S.2011, § 2025 and 12 O.S.2011, § 2017. The Oklahoma Court of Civil Appeals issued an unpublished decision on May 12, 2020 reversing and remanding the case to the trial court in Tulsa County for further proceedings.  The opinion can be viewed here.

Case No. CJ-2005-1683 (yes, 2005!) began as an action for foreclosure of the Beeler home by The Bank of New York, Trust U/A dated 12/1/01 (EQCC Trust 2001-2). BONY was granted summary judgment that was reversed on appeal in 2013 due to BONY’s lack of standing to sue under the 2012 line of Oklahoma Supreme Court cases following Deutsche Bank Natl Trust V. Brumbaugh, 2012 OK 3, 270 P.3d 151. After the case was remanded, Huddleston argued that BONY’s petition should have been dismissed with leave granted to allow BONY to file an amended petition with the required properly endorsed note attached under the curative procedure established in HSBC Bank USA V. Lyon, 2012 OK 10, 276 P.3d 1002.

At BONY’s peril, the trial court did not require BONY to follow Lyon to cure the jurisdictional defect. Instead, BONY was allowed to substitute Nationscredit Financial Services Corporation as the plaintiff. Nationscredit in turn was allowed to substitute DLJ Mortgage Capital as the plaintiff (the latter two arguing in turn that they were the “holder” of the note and thereby entitled to substitution). DLJ filed and obtained summary judgment. On appeal for the second time, the COCA validated Huddleston’s argument that, because BONY never established its standing at the time it commenced the foreclosure case in 2005, it could not ignore the Lyon procedure and use 12 O.S.2011, § 2025 and 12 O.S.2011, § 2017 to substitute NationsCredit or DLJ as plaintiffs. That is to say, a plaintiff lacking standing to sue can’t cure that jurisdictional defect by simply substituting in a new plaintiff that arguably does have standing. Rather, the case must first be dismissed and refiled by the new plaintiff that must establish its own standing to sue.

The Beeler case stands for the proposition that, if a foreclosing plaintiff lacks standing to sue, the trial court also lacks jurisdictional power to grant any relief under 12 O.S.2011, § 2025 and 12 O.S.2011, § 2017 until the original petition is first dismissed and refiled by the original plaintiff with the properly endorsed note attached to the petition. Absent committing fraud upon the court, BONY could not do this after the first appeal in 2013, and cannot do it now after the second appeal, because BONY signed a special indorsement of the note to NationsCredit in 1998, and recorded an assignment of the mortgage and note to NationsCredit in 2007. After 15 years of fighting BONY, vindication was had with these words by the COCA in the Beeler opinion: “Bank was never the holder of the note.”

Brian Huddleston has achieved several appellate court victories since the foreclosure crisis began over a decade ago. While lenders usually win their cases on summary judgment, Huddleston defends borrowers with an extensive motion practice that many times provides the basis for the summary judgments to be critically reviewed and reversed on appeal. The lender’s legal arguments and evidentiary materials can be deficient in many ways. Often the errors are procedural and a technicality. Huddleston Law Offices is gratified to once again be found to be technically correct, which when it comes to appeals, is the best kind of correct.

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CARES Act Impact on IRS 1031 Tax Free Exchanges

April 10th, 2020

Late yesterday, the IRS issued Notice 2020-23, extending a variety of deadlines, including 1031 deadlines. Although the Notice is confusing, because it is not written like the typical Disaster Relief Notices, this Notice extends any 45-day or 180-day deadline that occurs between April 1 and July 14, to July 15, 2020.

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Landlords Beware: CARES Act Impact On Leases

April 10th, 2020

The CARES Act includes a number of provisions affecting properties with federally backed loans (e.g., Fannie Mae, Freddie Mac, FHA, HUD, Section 8, VA and USDA). Specifically, a moratorium is in place preventing evictions of residential tenants. The key provisions include the following:

  • There is a 120-day period beginning on March 27, 2020 (the “Moratorium Period”), where the landlord of a “covered dwelling” cannot (A) make, or cause to be made, any filing to initiate a legal action to recover possession of the covered dwelling from the tenant for nonpayment of rent; (B) impose any late fees, penalties or other charges on a tenant for late payment of rent; and (C) mail or post any notices to pay rent or quit (not limited to nonpayment) during the 120 day period.
  • During the Moratorium Period the landlord of a covered dwelling cannot: (A) require a tenant to vacate a dwelling unit located in an applicable property before the date that is 30 days after the date the tenant is provided a notice to vacate; and (B) may not issue a notice to vacate until after the expiration of the Moratorium Period.
  • An “applicable property” includes one that has a Federally backed mortgage loan or a Federally backed multifamily mortgage loan.
  • A “covered dwelling” is (A) a dwelling that is occupied by a tenant pursuant to a residential lease or without a lease or with a lease that is terminable under State law and (B) is in or on a covered property.
  • A “dwelling” includes apartment buildings, mobile homes, trailer parks, condominiums and certain single-family homes.
  • A “Federally backed mortgage loan” is any loan that is secured by a first or subordinate lien on real property (including individual units of condominiums or cooperatives) designed principally for the occupancy of from one to four families that is (A) insured by the Federal Housing Administration or the National Housing Act, (B) guaranteed under Housing and Community Development Act, the Department of Veterans Affairs, or the Department of Agriculture, or (C) purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.
  • The “covered period” is the period commencing on March 27, 2020 and ending on the first to occur of (A) the termination date of the national emergency concerning the coronavirus disease outbreak declared by the President on March 13, 2020 and (B) December 31, 2020.
  • This moratorium is not limited to tenants affected by COVID-19, but appears to apply to all tenants regardless of their situation.
  • Nearly half of the nation’s mortgages are owned or backed by Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac have easy loan look-up websites to determine if they own a mortgage. To look up online whether a mortgage is owned or backed by Fannie or Freddie, click these links:
  • The CARES Act authorizes criminal penalties, under existing law, for fraud or other misconduct, and creates an Office of the Special Inspector General for Pandemic Recovery within the US Department of the Treasury to coordinate the auditing and investigation of the management and spending of funds under any program established under the CARES Act.
  • Finally, the CARES Act protections are in addition to any state or county limitations on evictions. Here is a link to the current emergency orders in place for Oklahoma.

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Street Law: I am a Landlord, can I get COVID relief Too?

April 9th, 2020

President Trump signed the Coronavirus Aid Relief and Economic Security Act (CARES Act) into law on March 27th. That Act included relief in the form of $349 billion for loans to small businesses through the Payroll Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”). The SBA initially described the PPP as a program “for any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by coronavirus/COVID-19.”

Last night the Small Business Administration issued Interim Regulations relating to the Paycheck Protection Program (“PPP”). Although the CARES Act provides that any business is eligible for the PPP Loan Program, the Interim Regulations refers to 13 CFR 120.110 and the SBA “standard operating procedures” (SOP) 50-10 Subpart B Chapter 2. Both of those provisions make it clear that “passive businesses” are not eligible for CARES Act money. In that regard, 13 CFR 120.110 excludes:
“c) Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds.” SOP 50-10 further states that “Businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose are not eligible”, that “Apartment buildings and mobile home parks are not eligible”, and that “Residential facilities that do not provide healthcare and/or medical services are not eligible.”

As a result of the Interim Regulations, unless Congress changes the CARES Act to circumvent the Interim Regulations, Real Estate holding companies, Landlords, RE investors, HOAs, Co-Ops and Condominiums are not eligible for to receive PPP Loans.

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COVID’S IMPACT ON LEASES PART 2: What About Impossibility?

March 25th, 2020

What is the defense of impossibility?

The doctrine of impossibility is an affirmative defense that excuses certain breaches of contract. (“Affirmative defense” means a defense raised by the defendant in answering a complaint alleging breach of contract). Generally, the defense applies when someone makes a promise they are unable to perform because of a change in circumstances that occurred after the contract was entered into. In legalese this is referred to as a “supervening impossibility”. Another key point is the doctrine recognizes that the contract is valid and enforceable, but when a court or jury finds that the doctrine applies, the doctrines operates to “excuse” performance. The defense of impossibility is distinct from a force majeure clause in a contract because the defense need not be in a contract, whereas a force majeure clause is a specific contractual provision that may define conditions in which performance is excused.

When might the doctrine of impossibility apply?

Typically, impossibility may excuse a party from performing its contractual obligation in circumstances such acts of God, supervening illegality, death or disability of a person required to perform, war, and labor strikes. The defense does not apply if the person who seeks to be excused from performing is at fault for making the performance impossible in the first place.

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What is not a supervening circumstance that makes performance impossible?

Financial hardship and most unexpected difficulties. Courts are nearly uniform in ruling that a price increase, or an increase in the burden of performing, even if unanticipated, is not sufficient to establish that performing a contractual promise was impossible. A key issue is whether the risk was one that reasonably should have been anticipated at the time of contract formation and, if so, whether it should have been addressed in the contract.

What have courts said about impossibility in the context of epi(pan)demics like COVID-19?

Naturally, no case concerning COVID-19 and impossibility has yet found its way through the courts. But courts considered such questions a century ago in connection with influenza and diptheria outbreaks:

  • Crane v. School Dist. No. 14 of Tillamook Cty., 95 Or. 644 (1920)—holding that the closing of a school by a health officer on account of an influenza epidemic was not a sufficient to establish the defense of impossibility because, in part, the closing of the school did not necessarily suspend the need for transporting students.
  • Gregg School Township v. Hinshaw, 76 Ind. App. 503 (1921)—holding that where a school closed because of a flu epidemic, a district’s contract with a teacher was impossible to perform and the teacher was not entitled to payment for the period the school was closed because of the epidemic.
  • Napier v. Trace Fork Mining Co., 193 Ky. 291 (1921)— holding that where a construction contract entitled a contractor to an bonus payment for completing the work before a certain date, the contractor’s completion after that date did not entitle the contractor to the bonus payment even though performance before that date was rendered impossible by the prevalence of the influenza epidemic.
  • Sandry v. Brookyn Sch. Dist. No. 78, 47 N.D. 444 (1921)—holding that a school district was excused under the impossibility doctrine from paying a school bus driver during a three-month period in which the school was closed because an influenza epidemic.
  • Phelps v. School Dist. No. 109, 134 N.E. 312 (Ill. 1922)—holding a school not relieved of liability to pay teacher during a closure caused by diptheria because the spread of a contagious epidemic was something foreseeable that could have been addressed in a contract of employment.
  • Poss v. The Western Assurance Co., 75 Tenn. 704 (1881)—holding a policy of insurance against loss by fire that voided coverage if manufacturing “shall cease to be operated” did not apply where the factory temporarily shut down because of a deadly epidemic.

Before a landlord responds to a tenant’s claim that the lease is impossible to perform, both the lease and local law should be reviewed. Impossibility does not dispute the validity of the contract, but is a legal “excuse” that might allow a court to not hold a party liable for failing to perform their end of a bargain.

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COVID’s IMPACT ON LEASES

March 25th, 2020

As tenants and landlords brace for partial closings, lease disputes and funding issues in the midst of the pandemic, many are calling their real estate attorneys to discuss possible protections like force majeure and business interruption insurance. Huddleston Law Offices represents landlords who are receiving calls from their commercial tenants (e.g., restaurants, bars, gyms, & salons that were forced to close), and residential tenants asking for rent concessions, or simply informing the landlords that they cannot (or will not) pay their rent. In many cases these leases do not have rent abatement provisions other than for casualty losses or condemnation. Some complex leases may have force majeure clauses, or commercial tenants may rely on the doctrine of force majeure anyway.

Force Majeure And Business Interruption Insurance May Not Be The Solution CRE Hopes

This post will discuss the effect of force majeure provisions in leases and the applicability of business interruption insurance.

Force Majeure.

A typical “force majeure” provision in a lease excuses each party from any delay in performance of that party’s obligation under the lease to the extent that the delay is caused by “strikes, riots, acts of God, shortages of labor or materials, war, terrorist acts or activities, governmental laws, regulations, or restrictions, or any other causes of any kind whatsoever which are beyond the control of such party”.

a. Is the COVID-19 pandemic a force majeure event? Yes, but not in a bad way for landlords. COVID-19 is included within the definition of most lease force majeure clauses. Using the definition above, COVID-19 (and/or the inability to open for business due to COVID-19) falls within one or more of acts of God, …governmental laws, regulations, or restrictions, or any other causes of any kind whatsoever which are beyond the control of such party.

  1. But does the tenant still have to pay rent? Yes. Most force majeure clauses carve out from the force majeure definition the mere obligation to pay money. As a result, under a typical force majeure provision, a tenant who could not be open for business due to governmental restrictions, such as a shelter in place order, would not be in default for breach of a “continuous operations” clause of a lease. However, a typical force majeure provision will not excuse that same tenant from the non-payment of rent (such being an obligation that is performable by the payment of money). Each lease force majeure clause must be separately reviewed. Some unfortunately worded clauses may fail to exclude the obligation to pay money as an event of force majeure, or may even excuse all other tenant performance, including rent payment, during the existence of the force majeure event.
  1. What are the landlord’s options if the tenant doesn’t pay rent? If the tenant is not paying rent in accordance with the lease, the landlord has all rights and remedies provided under the lease.
    • Most leases include, among landlord’s remedies for a tenant default, the right to terminate the lease or terminate the tenant’s right to possess the premises. In electing whether or not to enforce those remedies, a landlord needs to consider whether, at the end of this pandemic, it prefers a leased space (even if it has not collected full rent for some period of time) or vacant, unleased premises. The answer will differ on a project by project and tenant by tenant basis.
    • Landlords should also be prepared for tenant requests for rent abatement. Preliminarily landlords can point tenants to new state and federal SBA disaster loan programs offering zero percent loans that may be converted into grants as a way to assist tenants to make payroll and pay rent. Another option is to negotiate some temporary deferral of rent in exchange for an extension of the lease term, or a “payback” period. State specific emergency declarations may affect the rights and responsibilities of abatement-requesting tenants, and landlords should be aware of same, if any, before negotiating with a tenant.
    • Keep in mind that the laws are changing during this pandemic, and landlords may not have all of the rights and remedies that are set forth in their leases. Temporary moratoriums on eviction (both residential as well as commercial) are already in effect in Oklahoma, and there are rumors that freeze legislation may be enacted at the federal level.
  2. What about force majeure as it affects Landlord’s obligations? The particular landlord lease obligation most likely to be delayed by COVID-19 is the tenant improvements, or construction/delivery obligation. This is a lease-specific issue, but most landlord work or premises delivery provisions include a force majeure concept, pursuant to which the landlord is not penalized for late delivery to the extent it results from force majeure.
    • Landlords need to confirm whether there is a limit on force majeure delays for construction. Sometimes a tenant will not agree to unlimited delays, and instead the parties negotiate a “cap” on force majeure delay days, after which penalties will kick in.
    • Be sure to confirm whether the landlord is obligated to notify the tenant of force majeure delay days as they occur, at the risk of having waived those delay days if it fails to do so.

Business Interruption Insurance.

a. Does business interruption insurance cover losses due to the COVID-19 pandemic? No.

  1. Business interruption insurance generally covers a company’s actual loss of business income (e.g., lost rent and similar lost revenues) to the extent that the loss of business income directly results from a casualty such as fire, tornado and the like, during the period of reconstruction and restoration. For business interruption coverage to apply, there must be a “direct physical loss” of the premises caused by a covered cause.
  2. Most policies specifically exclude all coverage for damage or loss “resulting from” a virus. These exclusions began being added to policies between 2003 and 2006 in response to the SARS outbreak.
  3. To the extent that a policy includes civil authority coverage (e.g., losses resulting from “shelter in place” orders), such coverage typically will still require physical damage or direct loss, either to the insured property or an adjacent property in close proximity and will usually be limited to thirty (30) days of coverage.
  4. Some landlords who have maintained more expensive policies may have applicable coverage through endorsements and the like. Prudent landlords will want to obtain an expert review of existing insurance policies to confirm whether coverage exists.

b. Other related issues. The currently existing exclusions of COVID-19 from business interruption coverage are being contested as we speak. Legislative efforts to ban the virus exclusions are under consideration in multiple jurisdictions. Some bills under consideration would require business interruption policies to be “construed” to cover business interruption due to Covid-19 virus.   

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Contracts Are King, Or Are They? How the Case of Abercrombie & Fitch v. Penn Square Mall Effects The Commercial Leasing Landscape

March 18th, 2020

The commercial real estate leasing industry is notable in the extent to which business terms and legal obligations are memorialized in great detail in written contracts.  The exclusive use of written agreements is driven by the subject of the contracts, i.e., real estate, complexity of designing an agreement that may remain in effect for many years, and the potentially conflicting interests and incentives of the landlord and tenant. Perhaps few industries are as awash in standardized contract forms and boilerplate terms like the real estate industry.

It is understandable and appropriate for commercial landlords and tenants to focus their attention on the important task of memorializing their agreements about known issues such as the allocation of risk of potential unknown factors such as damages for water leaks, and other casualty and force majeure events.  In the event of a dispute, the contract is meant to be the determinant of who bears the risk of loss.  However, the parties should not lose sight of the fact that their legal rights and remedies are not based solely on the agreements they may have signed.

In addition to agreement-based rights and obligations, Oklahoma “tort” law imposes all sorts of implied rights and obligations independent of what parties may have formally agreed to.  The foremost “tort” obligation is to use reasonable care so as to avoid damage to others.  The failure to use reasonable care is negligence.

Because of the dominance of formal contracts in the commercial real estate leasing industry, courts in other jurisdictions historically were reluctant to recognize the applicability of tort remedies on commercial contracts. The philosophy was that parties were expected to define their obligations in the written agreements that would be the sole determinants of their rights.

One party could not sue another outside of contract for negligence if the harm was merely economic and the duty arose from the contractual relationship. The recent case of Abercrombie & Fitch v. Penn Square Mall, 2018 OK CIV APP 56, 425 P.3d 757 (Okla. Ct App. 2018), however, teaches commercial landlords and tenants that Oklahoma courts will permit the pursuit of both contractual and negligence theories for economic losses. This case emphasizes the serious risk of claims and damages outside the scope of the parties’ carefully negotiated contracts.

Abercrombie & Fitch v. Penn Square Mall, arose from a water leak in a roof drain line running above the ceiling of the leased premises in Penn Square shopping mall. Abercrombie & Fitch, the tenant, filed suit against Penn Square Mall LP alleging Penn Square “had a contractual duty to maintain the mall’s plumbing lines in good order, condition, and repair,” and that Penn Square breached this duty. Abercrombie asserted theories of breach of contract and negligence against Penn Square, and asserted that as a result of the water leak it “incurred substantial damages in cleanup, repair, lost merchandise, lost profits, and interruption to its business,” and sought damages in excess of $300,000. Despite the existence of a commercial lease with a limitation of liability clause, the case went to trial for damages under both contract and negligence theories.  At trial, the tenant was awarded nothing at all for its breach of contract claims, but the jury awarded $243,000 in lost profits, cleanup, repair, lost merchandise, and interruption to its business on the negligence claim. 

The landlord appealed, arguing that the tenant should not have been able to pursue damages for both breach of contract and negligence, and that the lease contract had a clause waiving such consequential damages.  However, the appeals court ruled that the language of the consequential damages limitation in the contract could reasonably be interpreted to relate only to the tenant’s contractual claims and not its negligence claims.  Therefore, the tenant’s judgment for lost profits, cleanup, repair, lost merchandise, and interruption to its business on the negligence claim was upheld.

Abercrombie & Fitch v. Penn Square Mall is a good reminder that commercial landlords and tenants must consider the extra-contractual risks and remedies under Oklahoma tort law.  As the court in Abercrombie found, a waiver of consequential damages provision, depending upon its wording, may only protect against contractual claims, not negligence claims.  Notice and other procedures may be interpreted to relate to contractual claims unless the contract explicitly includes the full universe of claims—both contractual and non-contractual.

The issue of extra-contractual claims can also arise in the context of determining the scope of an arbitration clause.  If an arbitration clause is drafted narrowly to encompass claims arising under the contract, it may not be broad enough to include negligence claims related to the leased premises and the parties’ relationship as a whole.  Absent unusual situations, care should be taken to ensure that the arbitration scope broadly covers all claims that might arise, not just contractual claims.

A good contract will recognize and address the possibility that parties may resort to tort remedies.  That way, the contract will retain its primacy in governing the rights and obligations of commercial real estate landlords and tenants. To anticipate this problem, the drafter should include language in the contract to this effect: “The parties agree that, regardless of the failure of the sole and exclusive remedy, landlord will not be liable for any consequential damages of whatsoever kind or nature.”

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Street Law: I Found Bed Bugs In My New Apartment, Now What?

January 25th, 2020

Bed bug bites are caused primarily by two species of insects of the Cimex type: Cimex lectularius (the common bed bug) and Cimex hemipterus, primarily in the tropics. Bed bugs’ increased presence across the United States in recent decades can be attributed largely to a surge in international travel and trade. It’s no surprise then that bed bugs have been found time and time again to have taken up residence in some of the fanciest hotels and apartment buildings in some of the nation’s most expensive neighborhoods. Nonetheless, false claims that associate bed bugs’ presence with poor hygiene and uncleanliness have caused apartment residents, out of shame, to avoid notifying landlords of their presence. This serves only to enable the spread of bed bugs.

While bed bugs are, by their very nature, more attracted to clutter, they’re certainly not discouraged by cleanliness. Bottom line: bed bugs know no social and economic bounds; claims to the contrary are false.

The Burden of Proof: Who’s Responsible for Bed Bugs?

With bed bugs on the rise, property managers are questioning the legal ramifications of their new residents. Can they be held liable if a resident files suit over the presence of bed bugs? It is important to understand that the liability issues surrounding bed bug infestations are governed by state and local law. At the end of this article is the Tulsa Ordinance that clearly delineates the circumstances when the owner or the occupant is responsible for bed bugs in single and multi-family dwellings. Responsibilities of property management companies may vary from state-to-state and range from zero liability to significant exposure. Deciding factors for assigning liability include the responsibilities of the owner and resident as defined by the language in lease documents, policies indicated to the prospective resident and the agreement between the management company and the owner.

In most jurisdictions, owners and management companies should take steps to guard against a negligence or gross negligence tort claim. An owner or management company is negligent if it fails to act reasonably in light of foreseeable risks that result in damages to the resident. The damage to the resident must be proximately caused by the negligence of the owner or management company. A defendant commits gross negligence if its acts or failures to act amount to willful or wanton disregard for its responsibilities. In essence, the defendant acted with reckless disregard or in bad faith. For example, ignoring bed bug complaints or attempting to “self-treat” the problem in an ineffective manner could result in a ruling of negligence.”

Bed Bug Lease Addendums Provide Some Level of Protection

Property management companies and property owners are pushing to shift responsibility onto renters and tenants in leases that say that if bed bugs don’t turn up before or soon after a resident moves in, the resident must pay for extermination. One way to ensure that residents, owners, and property managers work together to minimize the potential for any bed bug outbreak in a rental dwelling or apartment community is to include a bed bug addendum in the lease. The primary purpose of a bed bug addendum is to outline the responsibilities and potential liabilities of residents and owners when bed bugs are discovered in a rental dwelling. Yes, it involves extra paper work and time to train employees and educate residents, but preventing a large jury award from a lawsuit is well worth the extra effort.

The problem with the bed bug addendum is most property owners aren’t actually having apartments inspected by licensed pest control operators or firms, nor are they providing copies of the inspection results. In addition to this, bed bug addendums are one sided, purely for the benefit of the property owners, not the residents. More or less residents take full responsibility for bedbug infestations, regardless if they are responsible for the infestation or not. It can take fourteen days or longer for bedbugs who are already established in a dwelling to make their presence known, so forty-eight hours is absolutely a nonsensical amount of time to “identify” a current infestation in a vacant apartment.

Tulsa Code of Ordinances

TITLE 55 – PROPERTY MAINTENANCE CODE

Section 309. – Pest elimination.

309.1 Infestation. Structures shall be kept free from insect and rodent infestation. Structures in which insects or rodents are found shall be promptly exterminated by approved processes that will not be injurious to human health. After pest elimination, proper precautions shall be taken to prevent re-infestation.

309.2 Owner. The owner of any structure shall be responsible for pest elimination within the structure prior to renting or leasing the structure. Where the infestations are caused by defects in the structure, the owner shall be responsible for pest elimination.

309.3 Single occupant. The occupant of a one-family dwelling or of a single-tenant nonresidential structure shall be responsible for pest elimination on the premises.

309.4 Multiple occupancy. The owner of a structure containing two or more dwelling units, a multiple occupancy, a rooming house or a nonresidential structure shall be responsible for pest elimination in the public or shared areas of the structure and exterior property. If infestation is caused by failure of an occupant to prevent such infestation in the area occupied, the occupant shall be responsible for pest elimination.

309.5 Occupant. The occupant of any structure shall be responsible for the continued rodent and pest-free condition of the structure.

107.6 Transfer of ownership. It shall be unlawful for the owner of any dwelling unit or structure who has received a compliance order or upon whom a notice of violation has been served to sell, transfer, mortgage, lease or otherwise dispose of such dwelling unit or structure to another until the provisions of the compliance order or notice of violation have been complied with, or until such owner or the owner’s authorized agent shall first furnish the grantee, transferee, mortgagee or lessee a true copy of any compliance order or notice of violation issued by the Code official and shall furnish to the Code official a signed and notarized statement from the grantee, transferee, mortgagee or lessee, acknowledging the receipt of such compliance order or notice of violation and fully accepting the responsibility without condition for making the corrections or repairs required by such compliance order or notice of violation.

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