Lower risk of being targetted for lawsuit in commercial RE

Commercial Real Estate Investing
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Lower risk of being targetted for lawsuit in commercial RE

Howard Yang
Rental Property Investor · SF Bay Area · Member since 2018 · 19 posts · 2 votes

Trying to evaluate the benefits of NNN single tenant investments so have a few questions:

1. Are landlords of commercial real estate (especially single tenant NNN lease) less likely to be a target of lawsuits? I'm guessing since the tenant profile are completely different (corporate/businesses vs regular residents) can one assume it's a lower risk in general?

2. Related but different topic, say you bought a property and rented out (NNN) to KFC. If a KFC customer slipped on the property and wanted to sue everyone, would the landlord be just as vulnerable to be judged at fault vs if the property is a multi-family instead (assuming the same cause of injury)? Would the injured customer's attorney try to target KFC first since that's where they can extract the most benefits?

Thanks in advance!

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Jessica Zolotorofe
Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
7y

1) no one is immune from lawsuits, sadly, but there is usually a waiver of subrogation and an indemnification provision in true NNN leases so that the landlord's costs and defense are handled by the tenant. If it's not a NNN property, or the landlord has any common area maintenance obligations, they obviously have liability for insuring and maintaining those areas, so any injury that happens on the common area is the landlord's issue.

2) Same answer, really. Depends on who in the lease is responsible for the maintenance of the property. In a KFC lease, tenant most likely is responsible for sidewalks and parking lots, etc. in a multifamily, you are likely liable for anything that happens in the common areas. 

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  • Jessica Zolotorofe
    Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
    7y

    1) no one is immune from lawsuits, sadly, but there is usually a waiver of subrogation and an indemnification provision in true NNN leases so that the landlord's costs and defense are handled by the tenant. If it's not a NNN property, or the landlord has any common area maintenance obligations, they obviously have liability for insuring and maintaining those areas, so any injury that happens on the common area is the landlord's issue.

    2) Same answer, really. Depends on who in the lease is responsible for the maintenance of the property. In a KFC lease, tenant most likely is responsible for sidewalks and parking lots, etc. in a multifamily, you are likely liable for anything that happens in the common areas. 

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  • Howard Yang
    OP
    Rental Property Investor · SF Bay Area · Member since 2018 · 19 posts · 2 votes
    7y

    @Jessica Zolotorofe Thanks for the response. Essentially in NNN leases there can be (and usually) an extra layer of protection from the waiver and an indemnification provision compared to multifamily.

    New question: In the case of multifamily, say a landlord gave property manager clear instructions/guideline and authority to properly maintain the sidewalk/parking lot but due to negligent of the property manager someone still got injured on the sidewalk. How much at fault would the landlord be responsible for?

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  • Jessica Zolotorofe
    Attorney · NJ · Member since 2016 · 1k+ posts · 794 votes
    7y

    Well, the owner would definitely be sued, again the management agreement should have that indemnity provision in it, and of course the landlord should be insured, but it's a valid defense, at least, that the manager had the obligation to maintain. 

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  • Howard Yang
    OP
    Rental Property Investor · SF Bay Area · Member since 2018 · 19 posts · 2 votes
    7y

    Thanks again for the reply. I'm guessing the key would be the agreement and making sure there is proper coverage. 

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  • Stanley Bronstein
    Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
    7y

    @Howard Yang  As @Jessica Zolotorofe says, no one is immune from lawsuits. My experience on NNN properties is that if someone gets hurt and they file a lawsuit, everyone will get named (including the landlord). The landlord might then be able to get out of the lawsuit, but there is no immunity.

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  • Howard Yang
    OP
    Rental Property Investor · SF Bay Area · Member since 2018 · 19 posts · 2 votes
    7y

    @Stanley Bronstein Agreed, completely understand that no one can be immune. The questions I'm asking are to learn more about risk management and best practices instead. The purpose wouldn't be to avoid responsibilities so one can be more negligent but to understand better the laws to have proper and appropriate protections.

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    Yes the risk of being sued is less simply because there are less things you can be sued for.  You are not providing housing to someone, so you cant then be sued for Fair Housing violations.

    The liability risk being lower is one of the prime reasons that commercial real estate is considered to be a lower risk asset than a residential property.

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  • Howard Yang
    OP
    Rental Property Investor · SF Bay Area · Member since 2018 · 19 posts · 2 votes
    7y

    @Russell Brazil Make sense. Thank you for responding to my questions.

    This will be the main reason why I may put most of my portfolio in Commercial instead of residential.

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  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    7y

    @Howard Yang just curious, why are you so concerned about liability? Wouldn't the usual factors like rate of return, risk of vacancy, capital costs, appreciation, management type, quality of location, etc., etc. be more pressing in deciding between multi family vs NNN investing. In general I believe that good insurance, operating ethically (avoiding bone headed moves to save a buck), and decent management (your own or hired out) should keep you out of most personal liability situations. Worse case, your insurer has to get involved.

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  • Stanley Bronstein
    Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
    7y

    @Amit M. While I agree with pretty much everything you said, one can almost never been too cautious about being concerned about liability in today's overly litigious society. That's why I think @Howard Yang is concerned about potential liability issues connected with commercial real estate.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    Howard,

    The reality is litigation attorney business or commercial are very expensive and tend to not do pro-bono work. Also depending on the state and laws on the books even if someone slips and falls it can be very hard to file a claim. Generally if there is a claim most settle out of court because of cost and time involved.

    In the NNN lease the tenant usually has to carry a high amount insurance policy in the millions with a cap per occurrence rated an A rated insurance company or higher. Landlord is generally named additional insured. The insurance companies investigate any claim and look into the filers background and credibility for statements and accuracy. The entity set up for each property bought can make it a separate shielding from asset recovery against the investor who owns many properties. If attorneys have to WORK with time and money to chase assets and their client has little to no money then it can be a no go.

    If you have ever seen the (ambulance chaser) attorney types they look for easy money. The person filing the claim often lives hand to mouth. So what usually happens is plaintiff wants XX money and then insurance offers a tiny amount. Plaintiff balks and their attorney tells them insurance can drag out for very long time as they have attorneys on retainer for set amounts. So they can take their chances in court or propose one last amount to settle out of court. Since plaintiff needs money so bad they take the settlement now to pay bills. It is usually small in the thousands to maybe sometimes over 10k. It is very rare for cases to go into large amounts and even then those are appealed and reduced in the courts many times before final settlement is reached. It is not like there will be a huge claim all at once to wipe you out. I know you are just planning and thinking (end of the world) type stuff. There are also usually cameras at all of these businesses to catch if someone is trying to file a fraudulent claim etc.

    No legal advice given. 

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  • Howard Yang
    OP
    Rental Property Investor · SF Bay Area · Member since 2018 · 19 posts · 2 votes
    7y

    @Amit M. It's really the strategy that's the best fit for our current situation. The key drivers for decision making for us are evolving over time and at the moment, liability risk are coming up near the top. But of course, everything you have listed are absolutely important as well.

    @Joel Owens As always, thank you for the context! Very helpful. Makes a lot of sense. So glad I asked the question here on this forum.

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  • Jeff Kehl
    Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
    7y

    @Howard Yang interesting questions for sure. But you shouldn't let liability concerns affect your investment decisions. You can easily solve most of these problems with the proper corporate structure. Hold the MF or commercial property in its own LLC.

    If that LLC gets sued you can declare bankruptcy and fold it. I'm saying this from the prospective of an owner not an attorney so I'd recommend you talk to a good asset protection attorney not me but hopefully this is helpful.

    1Reply
  • Howard Yang
    OP
    Rental Property Investor · SF Bay Area · Member since 2018 · 19 posts · 2 votes
    7y

    @Jeff Kehl Absolutely, been talking to attorney so will probably end up doing combo of LLC/Trust/Insurance for asset protection and anonymity regardless of what asset type I'm buying.

    Thanks everyone for the inputs and comments. Super helpful as always.

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