Contractor's sneaky strategy for limiting liability

Rent it Right

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Apr. 28, 2011

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Rent it Right

Janet Portman
Inman News™

Q: I have a single-family house that I use as a rental. I'm about to do some major renovation work, and was given a contract by the contractor. It's got a clause in it that I've never seen before, which reads, "For any claims related to this contract or the work that are not covered by contractor's insurance, contractor's total liability is limited to and may not exceed three times the amount owner pays to contractor under this contract." Is this legal? --Debra L.

A: That's a new one on me, too. Perhaps the reason neither of us has seen a contract clause like this before is that it's almost certainly unenforceable.

The clause attempts to limit the liability of the contractor for almost anything that could go wrong on the job or after it's completed, including problems that are solely due to the contractor's shoddy work or carelessness. As it reads, if any such claim exceeds the contractor's insurance coverage, the contractor will be limited to three times the contract price, and that's all.

For example, suppose you hire a contractor to remodel the kitchen; he removes a load-bearing wall, and the house falls down. If you have a claim against the contractor that settles for $700,000, but the contractor's insurance policy has a limit of $500,000, normally the contractor would have to make up the balance out of pocket. But this clause changes that rule by limiting his obligation to no more than three times the amount you paid under the contract. If you paid the contractor $50,000, he'd be obligated to pay you only $150,000, leaving you $50,000 short.

As if the above scenario isn't bad enough, there's an even more worrisome one. Though it's unlikely, it's possible that you might experience a loss, injury or damage that isn't even covered by the contractor's insurance policy.

For instance, deliberate actions or extremely reckless behavior is typically not covered by commercial general liability insurance. If you were to suffer harm because the contractor intentionally sabotaged the job or acted recklessly, your claim would supposedly be limited to three times the money you spent on the contract, and no more. In this situation, without any insurance proceeds, you could end up even more limited in your ability to cover your losses.

Fortunately for you, the unsavoriness of these results will strike most judges as unacceptable, too. I don't think most courts would enforce such a clause, because it attempts to limit in advance the liability of someone who negligently, carelessly or even deliberately causes another person harm. In a consumer transaction especially, such efforts are routinely struck down as against public policy, particularly in states that carefully protect consumer rights.

Q: We have a lease in a rent control city that expires in a couple of months. The landlord gave us a renewal lease, but we don't want to sign it, because we're house-hunting and want to be able to leave on 30 days' notice. We want to go month-to-month, but if we refuse to sign a year's lease, can we be evicted? We have been excellent, on-time tenants, and this is a nice place. --Catherine and Eric

A: You'd need to study the rent control ordinance to see whether, first, it has eviction protection; and second, if so, whether refusal to sign a lease is a "just cause" for eviction.

Most, but not all, cities with rent control also restrict a landlord's ability to evict. Known as "just cause" eviction protection, the idea is to prevent landlords from terminating and evicting in order to create vacancies (and seize the opportunity to raise the rent to market levels). Under eviction protection laws, only bad behavior (such as not paying the rent, or causing damage or a nuisance), or the landlord's legitimate business reasons (such as the need to renovate or move in a family member) will justify a termination and, if necessary, an eviction.

If your ordinance provides just cause eviction protection, you'll need to take a look at the law to see whether refusing to sign another lease is grounds, or just cause, to evict.

In San Francisco, for example, it is: The ordinance provides that the landlord may terminate if "(the) tenant, who had an oral or written agreement with the landlord which has terminated, has refused after written request or demand by the landlord to execute a written extension or renewal thereof for a further term of like duration and under such terms which are materially the same as in the previous agreement; provided, that such terms do not conflict with any of the provisions of this Chapter." (Chapter 37, San Francisco Administrative Code, Section 37.9, emphasis added.)

If you are asked only to sign another lease with the same terms (even if the landlord is imposing the allowable rent increase), your refusal to sign would probably bring you within this just cause for termination. But at this point, everyone should step back from the law and look at the practical side of things. If you refuse to sign, and your landlord files to evict you, she will incur some time and expense, and will need to find new tenants fairly soon (tenants who might not be as good as you).

On the other hand, if she lets you go month-to-month, and you give her the required amount of notice, cooperate with her in advertising and showing the apartment, and leave it without damage, she will have the benefit of continued months of good renting from you, after which she'll have to find a new tenant.

Savvy landlords will choose the second option, especially if the unit is attractive and not hard to rent. Why spend time and money on a termination and eviction rather than enjoy the good tenants in place now? In either scenario, the landlord will eventually have to find new tenants; she might as well delay that risky moment as long as possible.

You might consider sending the landlord a letter in which you tell her candidly that you are looking for a house and would like the flexibility of a month-to-month agreement. Assure the landlord that you will give at least the required amount of notice and will assist in her efforts to find replacement residents.

A shortsighted refusal by your landlord will be disappointing. If you sign a lease but have to break it, your state, like many, will likely require the landlord to make reasonable efforts to re-rent, after which your responsibility for rent will end. But if the unit is attractive, it shouldn't take the landlord long to fill the vacancy. If you buy a house and need to break the lease, be sure to keep tabs on her re-rental efforts (check the ads to see if it's listed and ask neighbors to report any showings).

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