Tenant has an Unlicensed Daycare

Member since 2021 · 9 posts · 0 votes

We have a tenant who is running an unlicensed daycare. Do we incur any liability? There is no exclusion in our rental agreement.

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Greg M.

Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes

Depending on your area and number of children being cared for, you may not be able to anything legally.

Yes, there is liability there for you. You have to know that when there is a problem, people sue everyone, especially Mr. Deep Pockets Landlord. Even if a jury rules there is no liability for you, that's after you spent $100K in legal fees to fight it. May want to consider a multi-million dollar umbrella policy that will cover this type operation on your property. It'll be expensive, but better than losing everything in life you've worked for. And make sure your primary policy will protect you against this.

You can try to get them to stop by threatening eviction. You rented the unit as a residence, not a commercial property. If the daycare violates local laws, report them ASAP.

And get a goddamn lease that is done professionally that will protect you in these cases.

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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
4y
You have no exclusion for someone running a business?
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Jason Howard Marden
OP
Member since 2021 · 9 posts · 0 votes
4y
Correct. We are concerned about any liability that may be attributed to us
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Greg M.
Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
4y
Depending on your area and number of children being cared for, you may not be able to anything legally.
Yes, there is liability there for you. You have to know that when there is a problem, people sue everyone, especially Mr. Deep Pockets Landlord. Even if a jury rules there is no liability for you, that's after you spent $100K in legal fees to fight it. May want to consider a multi-million dollar umbrella policy that will cover this type operation on your property. It'll be expensive, but better than losing everything in life you've worked for. And make sure your primary policy will protect you against this.
You can try to get them to stop by threatening eviction. You rented the unit as a residence, not a commercial property. If the daycare violates local laws, report them ASAP.
And get a goddamn lease that is done professionally that will protect you in these cases.
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Julie Hartman
Property Manager · Denver, CO · Member since 2021 · 667 posts · 587 votes
4y
@Jason Howard Marden You didn't specify if this is a SFH or not. If it is located within an HOA, some have exclusions on operating businesses out of the home; even if your lease doesn't cover it. Either way, you are taking on a risk by allowing the tenant to have this business. As soon as you possibly can, I would amend your lease to prohibit operating a business out of your property.
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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y
I don’t know how you would know it’s unlicensed. But if it is. I assume there’s a government department in charge of collecting these fees, why else would they require licensing. Simply call and report them. Maybe it will end up in them becoming licensed and properly insured.
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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4y
First and foremost, you need to update your lease. Tenants should know up front that businesses are not allowed on the property - even if zoning allows for it - without prior written approval by you.
Second, if you do allow businesses, you should have a list of requirements like verification zoning allows the business and proof they are properly licensed, registered, and insured.
Third, if you know it's unlicensed then you should give them written notice immediately and demand they stop or vacate. I would give them 72 hours to stop the daycare operation, no more. Then inspect to verify and keep checking up on them. If they violate this, report them to the City/State governing authority and get them shut down.
My personal opinion? I don't want anyone else making money off my property unless they're giving me a cut. If they use my property to run a business and earn $5,000 a month, then I expect a cut of that profit. If they disagree with that, they can rent somewhere else.
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
4y
@Jason Howard Marden who wrote your lease? I would be very shocked if there was not an exclusion for running a business in your lease. That is pretty common in most any lease I have seen. Does your lease have a clause about "crime free" that requires the tenant to follow the law? That could be another clause to cite them due to not being licensed.
Most cities allow in home day care with certain limitations. They do require licensing, sometimes training and often inspection. In this case, I would argue that licensing is immaterial. Even if they get a license (and they must) you still don't want a day care. Even worse if they they are not licensed, they are unlikely to have insurance. That means if a child is hurt or killed, your insurance will be who the family goes after. Odds are good your insurance doesn't allow tenants to operate a day care, which means YOU are then personally liable or it could be cancelled. Call your insurance agent right away.
I would immediately tell them to cease operation of the day care. There has to be some clause in the lease you can use. Beyond the liability there is extra wear on the property. A faucet is or toilet is used 10X as much, more spills on carpet and more damage to walls, etc.

If you find yourself stuck with the day care, they must be licensed and insured. You need to be named on the insurance as additionally covered. I would strongly advise against this.
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Scott Mac
Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
4y
Hi Jason,

I'm not sure just having a licence is enough to protect you from being named in a suit.

As @Greg M. said above get a professionally done lease "A Commercial Lease if this is a business" (does zoneing allow this (???)).

But still, a Licence (and a commercial lease) does not guarantee against major mess ups:

Given Windshield Wiper Fluid to drink: https://www.findlaw.com/legalblogs/consumer-protection/ten-arkansas-daycare-kids-poisoned-after-drinking-windshield-wiper-fluid-koolaid-are-your-children-s/

Given Antifreeze to drink: https://www.idahostatejournal.com/news/local/pocatello-toddler-ok-after-accidentally-being-given-sippy-cup-full-of-antifreeze/article_bc78fc64-2f57-582d-8d3d-6b92f3b1bfdd.html

Good Luck!

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Bo Bond
Insurance Agent · Plano, TX · Member since 2021 · 127 posts · 94 votes
4y
Great help above if you are able to get them to cease this operation through contract, local laws, or code enforcement, etc.
However, if for any reason you "can't" legally cease the daycare activity, but you can require them to have daycare-liability specific insurance, then make sure you or your LLC is listed on their policy as an additional insured. Being listed as a "certificate holder" is not the same as being added to their policy as an additional insured. Being an AI means that their liability policy would respond first in the event anything awful happened. I'd suggest at least $1MM/$2MM in liability limits. Depending on how litigious your area/state is, you may also require them to purchase an umbrella policy for excess limits of liability.
It's sad to say, but most death claims typically pay out around $1MM, but if a child is severely injured and will deal with certain trauma or issues for the rest of their life, that type of claim could jump into the multimillions simply because of the years of special care that child would need for the rest of their life. This is not meant to scare you, but provide some reality on how scary this situation can be without proper insurance coverage and adequate limits.
If you are forced to go this route, get a copy of their "full" policy to ensure that there are no daycare specific exclusions. From a risk management point of view, do everything you legally can to check in on the daycare, observe the facilities, keep the outside of the premises clear of hazards, etc. Anything you can legally do to help ensure the inside and outside of the facility is in top shape, only lessens your liability/risks. Sorry for this difficult situation. I hope this helps.
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John Clark
Member since 2018 · 1k+ posts · 1k+ votes
4y
Shut them down immediately, AND report them to the appropriate state and local authorities for an unlicensed day care.
Look at your lease. Does it say that unlawful activities are forbidden and grounds for eviction? Activities that increase risk to the landlord are forbidden and grounds for eviction? I bet it does.
States and localities do not take kindly to children being put at risk, especially by landlords who tolerate tenants doing improper activities risking children, as that just shows the landlord wanted to make sure he was paid, even if that meant risking the health, safety, and welfare, of children.
Shut them down immediately if not sooner, and report to the appropriate authorities.
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Jason BottPro Member
Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
4y
@Jason Howard Marden If all of the above comments didn't make it clear enough, this situation definitely opens you up to a large amount of Liability.
Whether or not the operation is licensed or insured, as the property owner, any lawyer will bring you into a suit if possible. You and your insurance carrier represent larger pockets for the claimant.
If you decide they can stay, and you want to make sure they have the proper coverage in place to protect your interests, make the following insurance requirements as part of your lease;
1) General Liability for $1M
2) Umbrella $1M-$5M depending on your comfort level
3) Hired and non-owned auto coverage
4) Workers Compensation
5) Add the entity holding title as an Additional Insured
***Get the proof of coverage directly from their agent. Unfortunately people do falsify insurance documents to avoid paying the premiums.
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Colleen F.Pro Member
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
4y
@Jason Howard Marden not sure if you are talking kids or 2 but one thing you should look at immediately is if there is hazardous play ground equipment and send a notification addressing that too. So if there is say a trampoline ask for immediate removal. They may not cease immediately so you need to protect yourself.
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Jason Howard Marden
OP
Member since 2021 · 9 posts · 0 votes
4y
I wanted to thank everyone for the valuable advice and insight. We have a path to follow now.
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John Mocker
Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes
4y
Jason,
Let me add to Jason Bott's post:
1. be sure your agent is aware of the daycare and that your current policy covers you. Get that in writing that the company is aware of it and that there is no exclusions that would reduce your coverage
2. See if your lease includes a clause that requires the tenant to pay for an increase in the cost of your insurance, etc if something they do within the unit causes you to incur higher insurance, utilities, etc. That used to be standard wording in a lot of contracts.
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Bud Gaffney
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
4y
@Jason Howard Marden EVICTION.
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Russ B.
Investor · Cleveland, OH · Member since 2017 · 319 posts · 330 votes
4y
I'm actually a managing partner in a daycare business (a regular commercial one).
There's a lot we do to ensure compliance and protect ourselves from lawsuits - from heavy duty insurance policies to video recording in every room and badge locks on the doors, to having an extremely solid legal team (thankfully, we've only ever had to call them to write up deals and fight with the occasional bad contractor).

You'd be at risk for anything that happens there that some lawyer (the kind that advertise on TV) could try to pin on the property, especially if you're the only person in the picture worth suing. They may also just name you for fun, to see if you'll throw em a few bucks.

If it's really unlicensed, the solution could be as simple as calling up the state daycare inspector for your area. The problem could take care of itself pretty quickly.
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