Liability question for taking over a property

[Noelle Eads]

Hi! We are in the process of buying a flip house that has a tenant. Unfortunately the house is in terrible shape and will be a complete gut job so we don’t feel comfortable letting the tenant stay due to liability issues; however in our state (TN) I believe we have to give him 60 days notice to vacate. I want him to have time to find a new place to live, but we will close on the property before the 60 days and I am nervous to be responsible for any safety issues for him (and there are several). Does anyone have a suggestion for us drafting some kind of agreement to let him stay for the 60 days to give him adequate time to find a new home, but for us to not be liable for pre-existing conditions once we take ownership of the property? Didn’t know if we could draft this in a lease (he currently has no lease and pays month to month) or if would need to go through a lawyer for this, and if so what kind. Thanks! 

[Brian Kantor]

I love this question! And I don't have a definite answer, but if this was my property, I'd try to get the tenant to sign a liability waiver drafted by a professional real estate attorney. Also, before you take ownership, make sure you get a strong liability insurance policy in place. That said, if the property is genuinely uninhabitable/dangerous and you're planning to spend a ton to gut-renovate the place anyway, your best bet might be paying for 60 days to put the tenant up in a safe short term rental of equal or better state than this current property. They shouldn't be upset with leaving a dangerous place to stay in something nicer for 60 days while they look for a permanent solution. You could also help them find another long-term lease at a relatively equivalent rent...

[Nathan Gesner]

If you are going to ask for a release, I definitely recommend you have an attorney draft it.

the law requires you to give 60 days, but the tenant could always willingly leave earlier than that. I would write them a notice explaining the dangers of living in the property in its current condition and recommend they move out so you can make the necessary repairs. If they choose to stay, it is at their own risk, they release you from any liability, and they acknowledge that they cannot stay longer than 60 days.

[Bjorn Ahlblad]

@Noelle Eads  welcome to BP. Whatever you add to a lease the tenant won't save you harmless no matter what they sign. I suspect they have no plan to leave (without cash) and may not even be paying rent. Please check that out or don't close; is my advice. All the best!

[Matt M.]

Quote from @Nathan Gesner:

If you are going to ask for a release, I definitely recommend you have an attorney draft it.

the law requires you to give 60 days, but the tenant could always willingly leave earlier than that. I would write them a notice explaining the dangers of living in the property in its current condition and recommend they move out so you can make the necessary repairs. If they choose to stay, it is at their own risk, they release you from any liability, and they acknowledge that they cannot stay longer than 60 days.

I’m going to say a hold harmless won’t stand up in court. This is coming from the husband of an insurance underwriter.  

It is what it is with this tenant. Fingers crossed nothing happens. 

[Bo Bond]

@Noelle Eads - A hold harmless isn't completely worthless and is certainly better than nothing at all. It's really meant to detour people from suing knowing that they've signed such an agreement. However, it's very likely that a good attorney can poke holes in even the most well written waiver.

Your liability policy should be your primary source of protection if you choose to move forward. You could purchase an umbrella for extra limit, but not sure it's necessary. Some carriers will even provide you with a $2M liability limit (without an umbrella), so you do have some options here. I suggest you have at least $1M in liability protection. While $1M isn't what it use to be, claims in this market space exceeding $1M are pretty rare. Not to say it can't happen, but they are rare. That liability policy will protect you for bodily injury or property damage to a third party (the tenant). Keep in mind that the burden to prove that you were negligent after a loss is up to the tenant to prove in court. They (or someone on their side/family) would need to pay for their prosecuting attorney. Keep in mind that most death claims typically pay out around $1M. If a person (especially a child) is injured in a loss and will suffer issues the rest of their life, then that's when a claim can jump up over $1M pretty quickly.

I would suggest you make a pros and cons list of Risk Management. Risk Avoidance is completely passing on this opportunity due to the risk. It sounds like you don't wish to do that, but that is an option that you should consider and put down on paper. Risk Transfer and Risk Control appear to be the main risk management techniques you're considering here, and you should also put this on paper as well (have a plan if you move forward).

The first and most important is transferring your risk to an insurance carrier by was of a $1M+ liability policy. Controlling the risk would be to address any issues that you can while the tenant is still living there. This could mean helping them find a place, paying for them to stay somewhere else for a few weeks or for the entire 60 days, securing the home in any way you can once you've taken possession of it, checking in on the tenant regularly during this 60 day period just to ensure everything is as safe as possible, etc. Having a plan will be key to protecting you and the tenant during this entire process (if that's what you choose to do). Good luck, and I hope you find this helpful!

[Cameron Moore]

This will not fully answer your question but could supplement... Make sure you are covered by a General Liability insurance policy. It will typically cover up to 2 Million and could protect you from losing your assets in the event something like that does happen. 

[Bob B.]

I'm not an attorney and don't know your local laws, but knowing that the property is unsafe could you have a lability issue even with an insurance policy?  Could posting on a public forum weaken your defense?  

[Carol B.]

A hold harmless clause may run afoul of the Tennessee Residential Landlord Tenant Act if the act applies to your locality. I'd definitely check with a local real estate attorney.