Rent it Right
Q: A few weeks ago, you wrote about a landlord who wondered whether he'd have to tell a prospective manager that the business would soon be up for sale. You seemed to say that he'd need to say something, if the applicant made it clear that he would be taking the job based on his assumption that he'd be working for this owner
I can't believe that a jury would buy that and make the owner pay when the business changed hands and the buyer let the manager go. After all, nothing remains the same forever. --Charles D.
A: Hold your nose, I'm about to explain to you how lawsuits work. It's not an altogether pretty picture, and the end result often has little to do with whether a judge or jury would ultimately find one side or the other responsible.
First, to your point about an owner needing to disclose plans to sell the business when hiring a manager. Sometimes landlords are legally required to disclose certain information, such as the presence of lead paint hazards, or the name of the property owner. These laws specify consequences (fines) for failing to comply. But the kind of disclosure we're talking about usually isn't specifically legislated.
Instead, an owner's failure to be open about his plans to sell, when he knows that information would significantly affect an applicant's decision about taking the job, might expose him to a claim of intentionally withholding important information that the applicant would have wanted to know (fraud). But not every "plan" needs to be disclosed.
At one end of the spectrum, an owner who plans to retire one day and hires a manager who doesn't ask about his long-term plans for continued ownership of the business would probably not be taking much of a risk if he failed to mention that at some point he will sell. But an owner who is an hour away from signing a sales contract when he hires an applicant who has made clear that he's taking the job in order to work for this particular owner would be taking a substantial risk in not coming clean.
Most hiring situations fall between these two extremes. And many of them, it's true, would not result in a judgment for the applicant for millions of dollars. But that's not what realistic landlords should be focusing on. Instead, they need to understand the typical way these claims unfold.
Your disappointed applicant will visit a lawyer, explain what happened, and ask if he has a case. "Well," says the lawyer, "It isn't worth taking to trial, and you're not going to collect big on this one. But there's enough here to warrant filing a lawsuit. You'll collect something (and I'll take a third of whatever we win). Do you want to proceed?"
Many people will say yes, and listen as the lawyer explains, "We'll find out if your landlord has an insurance policy that covers him for the consequences of his employment mistakes. Not telling you about his plans is probably the kind of mistake that his insurance would cover. But that policy has a deductible -- probably $25,000 to $50,000.
"That means that the landlord will pay at least the first $25,000 himself. Even if he digs in and goes all the way to trial, and wins, he'll end up paying the deductible amount in lawyers' fees and court costs. A high deductible is a lot of money for this small operator. If he's a savvy business person, he'll settle before his costs mount up. In short, he can't afford to fight, even if he thinks he's in the right."
So you see, it's not a matter of whether a judge or jury would ultimately side with the applicant. In situations like this, it's whether the claim is "colorable" (the lawyerly term for "passes the smell test"). If it is, and the plaintiff has found a hungry lawyer, the economics of insurance and litigation costs will force all but the most wealthy and righteous landlords to settle.
Smart landlords keep these realities in mind as they run their business. It's all about narrowing the opportunities for lawsuits. It may be a pain, but the fewer "colorable" claims you create, the lower the chances that you will be drawn into a nuisance lawsuit.
Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of "Every Landlord's Legal Guide" and "Every Tenant's Legal Guide." She can be reached at email@example.com.
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