Real Estate Management Company Rented to Tenants Who Had no Money, Property Owner Claims

Defendant real estate management company entered into an agreement with plaintiffs to manage their rental property. The defendants rented the plaintiff’s house to a couple after obtaining a credit report and background check. The management company did not disclose to the plaintiffs that the tenants had significant negative financial problems, including tax liens, late payment history and that their prior residence was sold on a short sale. Plaintiffs also allege that the defendants knew of one of the tenant’s criminal record and that their claimed employment and income could not be verified.

Not long after moving in, the tenants reported moisture leaks and mold problems. In the midst of repairs, the management company terminated the management contract. The tenants stopped paying rent.

The plaintiffs sued for breach of contract, breach of fiduciary duty, negligence, and non-disclosure.

Question(s) For Expert Witness

1.) Was the defendant’s conduct a breach of the standard of care?

2.) Did it breach the management contract?

Expert Witness Response

Defendant had a fiduciary duty to the plaintiffs to advocate for them by providing them all relevant information on which to base an informed decision regarding their property. It is normal and customary in the property management industry for the manager to disclose to the owner any adverse material facts known to the manager about the tenant prior to entering into a lease. The information revealed in the tenant screening reports would, in my experience, eliminate them from consideration for most landlords. Their incomplete responses and lack of honesty on the applications is something any landlord would want to know. Failure to disclose this information to the plaintiffs prior to entering into the lease was a breach of defendant's fiduciary duty and a breach of the management contract.

Further, the fact that the defendants had this adverse information and chose, not only to conceal it, but to state that the applicants “are worth keeping” is disturbing. Landlords rely on their managers to be their eyes and ears and to advise them of things they need to be concerned about. If the tenants’ screening information was not a concern to the defendants, then I would question their competency to engage in property management. If it did concern them, then they should have disclosed it.

It is normal and customary in the property management industry for the manager to verify, to the extent possible, the information provided on the rental application. At a minimum, this verification includes verifying income and employment, because if that applicant has no job and no income stream, it is unlikely that anyone will rent to them. Failure to verify income and employment would fall below the standard of exercising reasonable skill and care for the plaintiffs. Defendant’s failure to do so constitutes negligence.

Real estate brokers are not permitted to write leases, unless they are also attorneys. There is no Commission-approved lease form, so preparation of the lease contract by the defendant constitutes the unlicensed practice of law. This conduct falls below the standard of exercising ordinary skill and care for the plaintiffs, and was negligent.

The expert has been a licensed real estate practitioner and realtor for more than 50 years.