Indiana Lease-Option Laws

Posted on | December 11, 2009 | 1 Comment

A question from one of Matt’s readers-

Matt,  we are new members of CIREIA (www.cireia.org).  I read your q&a regarding landlords now being required to maintain heat/air etc… even when a lease option is in place.  Our question relates to this in that we have a property that needs rehabbed.  We have potential buyers who want terms.  We were considering doing a 6 month lease with option so they would have time to make the necessary repairs so they can finance the house.  I am now concerned that we would be required to fix all the plumbing, electrical, hvac and so on if we go through with the LTO.  What are our options?  Am I right that if we sell on contract and they default that we would have to foreclose instead of evict?  Same with seller financing?

Matt’s answer-

You got it.  You understand the law very well.  If you are a landlord, you have to honor the statute that requires you provide certain features of housing.  I have included that statute in this earlier blog: http://www.askmattonline.com/uncategorized/indianas-implied-warranty-of-habitability/

If you sell by land contract, you risk long delays and unfavorable treatment through the foreclosure and possibly bankruptcy processes.

If you’d like to discuss the matter in detail, please call me for a private consultation.

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Matthew A. Griffith is an attorney, business performance coach, mentor and entrepreneur.  He coaches, advises and guides business owners, entrepreneurs, inventors, property managers, investors and real estate professionals.  Matt has nearly two decades of experience helping businesses grow.

Indiana’s Implied Warranty of Habitability

Posted on | December 8, 2009 | 1 Comment

Question:     

“Matt, we have one of your old leases that contains a waiver of implied warranty of habitability.  Is that still good law or can we delete that section?”

Matt’s Answer:       

 Leave that provision in your lease.

The law concerning the implied warranty of habitability has changed over the years and the state of the law is a bit confusing.  In a technical sense, there is no implied warranty of habitability in Indiana rental property law.  An implied warranty is a contractual concept.  The theory is that the courts through common law or a legislative body such as the Indiana General Assembly can impose upon the parties certain contractual terms.  A warranty of habitability implies that the landlord guarantees that a house is habitable.  If a rental unit is not habitable, the tenant is incapable of living in the property.  Under those conditions, the tenant can terminate the lease under what is referred to as a “constructive eviction.”  Again, in theory, the landlord has breached a basic contract provision to provide a safe and habitable home.  In reality, very few rental properties are uninhabitable. 

Over the years, the Indiana General Assembly and even the courts have added duties to a landlord.  While those duties have never been classified as a warranty of habitability, the effect is essentially the same. 

Back in 1992, the Indiana Court of Appeals issued a well-reasoned opinion called Zimmerman v. Moore.  In Zimmerman, the court rejected the existence of an implied warranty of habitability except in those cases where a local housing code established such a warranty.  The court did a great job of explaining the law of warranties for new houses versus older homes, and compared homes to other forms of property governed by other rules.  In the end, the court held that tenants are adequately protected by traditional tort law, which does pose certain duties on a landlord.  Then, in 1999, the Indiana Supreme Court held, in a case called Johnson v. Scandia Associates, that the implied warranty of habitability can arise under certain circumstances.  The Supreme Court stated: “Plainly, a warranty of habitability, whether in the sale or lease of residential dwellings, has developed in the common law of Indiana, and its roots are in the law of contract.”  The Court then established a vague rule of law suggesting that the warranty might arise by the lease agreement, by the conduct of the landlord and tenant or by local law.

So, now we have to look both at contract law, legislation and traditional tort law as it applies to landlords in order to determine liability risks.  In the end, most liability risks will be defined by statute and tort law concepts.

Under traditional tort law, a landlord can be held liable for known defects that the landlord has a duty to repair and fails to repair.  The theory is that a landlord can and should repair defects to a property that are brought to the landlord’s attention.  Accordingly, if a tenant is aware of a dangerous condition in the property and the landlord is unaware, the landlord would have no duty to make the repair.  If the tenant notifies the landlord and the landlord fails to make the repair in a reasonable amount of time, then the landlord could be held liable. 

Similarly, where there is a hidden defect or concealed danger known by the landlord and kept hidden from the tenant, the landlord could be held liable.  However, what about defects unknown to the landlord and the tenant?  Obviously, a landlord cannot make a repair unless the landlord knows the repair is required.  Unknown by both the landlord and the tenant, the tenant bears the risk, because the tenant is in possession and control of the property and is in a better position to know about defects.  This becomes even more so under the new laws restricting a landlord’s ability to make random inspections without notice.  The tenant has more rights to possess and control the rental property today than ever before, which should transfer more responsibility from landlords to tenants. 

It is important to understand local law as well as state law.  While not technically an implied warranty of habitability, be aware of these state law requirements:

A landlord shall do the following:

(1) Deliver the rental premises to a tenant in compliance with the rental agreement, and in a safe, clean, and habitable condition.
(2) Comply with all health and housing codes applicable to the rental premises.
(3) Make all reasonable efforts to keep common areas of a rental premises in a clean and proper condition.
(4) Provide and maintain the following items in a rental premises in good and safe working condition, if provided on the premises at the time the rental agreement is entered into:

(A) Electrical systems.

(B) Plumbing systems sufficient to accommodate a reasonable supply of hot and cold running water at all times.

(C) Sanitary systems.

(D) Heating, ventilating, and air conditioning systems. A heating system must be sufficient to adequately supply heat at all times.

(E) Elevators, if provided.

(F) Appliances supplied as an inducement to the rental agreement.

In a sense, the law is even more complicated today than prior to the 1992, and 1999 court cases.  The waiver you have in my old lease form provides a certain buffer, in the event the courts start creating the implied warranty of habitability.  The impact of that warranty could well exceed current tort law concepts.  The warranty is contract law, while current landlord duties are rooted mostly in tort law.  So, the waiver I wrote might prevent certain claims rooted in contract law.  Said more plainly, the waiver could only help you, not harm you.  Leave the waiver in place.  However, supplement the waiver with other important waivers concerning tort law concepts.

 If you have questions or concerns about the topics covered in this article, your business structure, business planning or your real estate investments in general, please feel to contact this author for a consultation.

WHAT IS THE “E” GAP?

Posted on | December 8, 2009 | 3 Comments

How will we recover from this recession?  This “GREAT RECESSION?”

How will we recreate the 8.2 Million lost jobs?

If you think the Congress or President Obama or the Federal Reserve is going to be part of the solution, then this article is not for you.  You are simply not in the right starting place fully to appreciate this blog.

The solution will not be big government or even big business.  Government does not save jobs or even create jobs.  Government can hinder or facilitate the business community in its natural endeavor of generating profits, which requires manpower which translates to jobs.  So, starting from that point, why won’t an economic recovery immediately generate more jobs?

I assume that the overwhelming majority of economists are correct that this will be a “jobless recovery.”  Here’s what that looks like visually:

The “E” Gap

The difference between economic growth and job creation is what I call the “E” Gap.  As explained below, the “E” Gap represents a void that will trigger the greatest wave of entrepreneurship we have witnessed since the end of World War II.

The precise numbers in the chart above are irrelevant, so please do not focus on the values that I have assigned here or the rates of GDP growth versus the rate of job creation.  Those are not the issues here.

If you start with the proposition that GDP or economic growth will out-pace job creation, then you must accept that there will be a “jobless recovery.”  That will be true, at least, in the sense that economic activity will increase faster than net job creation will grow.  I do not believe that those 8.2 million jobs will return in the same form as existed before the Great Recession started.  Here’s why:

1. Employers were extremely confident prior to the recession.  Employment is a measure of confidence in the economy.  If an employer is confident in the future, it will hire more employees in anticipation of future growth.  There are no indications that employers will exhibit the high levels of confidence that predated the recession.
2. Taxes, particularly employment taxes, healthcare costs, etc. will surely increase in future years.  These pressures will increase the costs of labor, which will cause the demand for labor (employment) to drop or at least not grow as quickly.
3. Employers will innovate in ways that will reduce the demand for employees.  Some of the best innovations result from the necessities created during difficult times-  RECESSIONS!  Unfortunately, innovation often means less need on labor.  Machines, computers, new devices, software, processes, etc. are being created right now, all in an effort to reduce costs.  Labor happens to be one of business’ largest costs.  Do the math.  Jobs will be lost forever.
4. Many manufacturing jobs have been lost forever.  Take our two largest job-producing industries: automobiles and homes. 
5. Employees seemingly distrust employers more today than in many decades.  The level of employer-employee and employee-employer disloyalty may have never been higher.
6. The Baby Boomers will be working longer, because they are living healthier lives for longer periods of time, and they have lost their retirement savings.  They can, want and must work longer, which will increase the supply of labor.

The bottom line:   SOME JOBS HAVE BEEN LOST FOREVER.

But, people have to eat, you say.  I agree.  In fact, I think that people want more than just food to eat.  I think people like to wear clothes, sleep in nice homes, drive cars, go to the movies, buy mp3 players, etc.  The unemployed will, sooner than later, find a way to earn a living.  And, businesses will still need services, innovation, talent, experience, etc.  While these needs normally translate into job creation, all indications are that jobs will trail economic growth.

If you can’t find a job, you create one!  I challenge anyone to disprove that proposition.  Even during the Great Depression, people found ways to survive.  Odd jobs eventually became services which grew into companies, which employed other people, and so on. 

Entrepreneurs will create their own jobs, build new enterprises and, in turn, create even more jobs.  AND THAT’S CALLED ENTREPRENEURSHIP.  Employers won’t hire back the 1,000,000’s of unemployed.  The unemployed will start small businesses, form partnerships, or work for a start-up or emerging company.  Job creation will start with the small venture and grow from there.  Don’t expect Uncle Sam or even Uncle Sam Walton (Wal-Mart) to create tomorrow’s jobs.  Look at today’s unemployed, highly skilled, experienced and hungry worker, middle manager or recent MBA graduate.  Those are tomorrow’s entrepreneurs who will restart the job market and create the economic recovery that will generate jobs and better wages.

More on entrepreneurship and the economy in years to come in a future blog.  Here, I wanted to cover the basic concepts that will create the “E” Gap.

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Matthew A. Griffith is a business and real estate attorney, entrepreneur, business success coach and investor.  He guides small business owners, management teams, inventors and investors to profitability using both time-tested and innovative business ideas, methods, tools and techniques.  For a consultation, contact him via email-  griffith@indiana-attorneys.com