Limiting Landlord Liability and Deeding to LLCs/LPs, etc

Since many of our clients live and work (and sometimes own rental property) in far more litigious environments (such as the People´s Republic of Berkeley <grin>), they often pepper us with questions about potential liability issues, lawsuits, torts, and other ways in which their income or net worth might be threatened by owning property in the Central Texas area.

In addition to hiring responsible property management and getting adequate property insurance (including liability and CGL – mentioned earlier on this page), buyers may also consider the practice of holding their properties in an LLC (Limited Liability Corporation), a Land Trust, an LP, or other such ostensibly liability-shielding vehicle.

Though we certainly do not discourage such a practice and encourage our clients to speak with attorneys regarding this practice to understand all of the ins and outs, we can tell you there are several challenges that you must comprehend before moving forward:

• The "Due on Sale" Clause – the oft-discussed, but never actually seen executed concept of a mortgage company being able to "call due" a note on a property in which the owner has deeded the title to an entity other than his or her name. Though we haven´t heard of it happening, the gravity of such an event occurring prevents us from deeding properties out of our own name
• Cost Prohibitive Insurance – insuring a property in an organization other than a person´s name is at least 50% or more expensive. This is because private insurers are required and they are less competitive, therefore even if you get around the due on sale clause, expect to pay significantly higher insurance premiums