Creating a Safety Net for Landlords

Ownership of real estate carries with it the threat of litigation from tenants, guests or even passers-by. In 2002, New York City changed its law, increasing property owner liability for injuries sustained on sidewalks (notwithstanding that the City owns the sidewalks). Moreover, property owners also face liability based upon lead paint, mold and other environmental risks. Now an additional threat exists based upon a newly strengthened New York State “scaffold law.”

“Scaffold Law” Increases Property Owner Liability

For years, property owners have known that Labor Law § 240(1), more commonly known as the “scaffold law,” imposes liability on a property owner for elevation-related injuries to a worker on the property. Elevation-related injuries are defined by the “scaffold law” as those involving the use of scaffolding, hoists, stays, ladders, slings, hangers, blocks, pulleys, braces and ropes. The most common injuries covered by Labor Law § 240(1) are falls from scaffolding or ladders, or when a worker is injured by a falling object. Because most multi-family buildings must utilize scaffolding and ladders, this law has broad reach. Most importantly, this liability is absolute; i.e., the owner is liable even if he did nothing wrong!

Further, the duty created by this statute to provide safe working conditions is nondelegable. When a duty is nondelegable, a person may not transfer that obligation to another party to avoid responsibility. Thus, under the “scaffold law,” the property owner may not transfer the responsibility to provide safe working conditions on his property to, for example, a contractor. Therefore, the property owner himself is held liable for injuries covered by the law even though the work was performed by an independent contractor over which the property owner exercised no control. For example, if a managing agent hires a painting contractor as part of a renovation project and the painter’s employee falls from a ladder and is injured, the injured worker can seek recovery from the property owner under Labor Law § 240(1), irrespective of the painter’s workers’ compensation insurance or even the owner’s lack of wrongdoing.

A recent New York State Court of Appeals decision, Sanatass v. Consolidated Investing Company, 10 N.Y.3d 333, 858 N.Y.S.2d 67 (2008), expanded the scope of the “scaffold law.” That case held that a property owner was liable even when the contractor was hired by a tenant in direct disregard of a lease provision prohibiting the tenant from altering the premises without the property owner’s permission. The lease provision in Sanatass required the tenant to obtain written permission from the property owner before the tenant performed any alterations to the property. The tenant employed a contractor without permission from the property owner. An employee of the contractor was injured when an air conditioning unit, which was being hoisted to the ceiling, fell on top of him. The employee won a judgment against the property owner, notwithstanding the tenant’s breach and notwithstanding that the property owner was not even aware that the contractor was performing work on the property.

The result after Sanatass effectively treats property owners as insurers and will translate into more expensive insurance premiums and a significant increase in the potential for lawsuits. In Sanatass, the Court made it clear that even the lack of ability by the property owner to ensure compliance with the “scaffold law” is irrelevant to his liability. In Sanatass, even though the property owner did not know that the tenant hired a contractor, and even though the work was performed in direct violation of the lease, the property owner was still strictly liable for the injury to the worker.

With the new interpretation of Labor Law § 240(1), owners of real property can expect more lawsuits resulting from elevation-related injuries on their property. This expansion of property owner liability comes at a time when property owners are already facing significant legal challenges, such as lawsuits resulting from slips and falls, and from the presence of lead paint, mold and other toxic substances.

Considering the litigation risks and changes in the interpretations of the law, it is clear that property owners must take steps to protect their assets from potential plaintiffs. Property owners can protect their real estate holdings, as well as their personal assets, by employing various asset protection strategies.

Domestic and International Asset Protection Strategies

Perhaps the best way to discourage a plaintiff from bringing a lawsuit in the first place is to ensure that the property owner has no attachable assets. The sooner a potential claimant learns that a property owner has no attachable assets, the sooner the claimant will forego his plans to initiate a lawsuit and agree to an insurance settlement. This process brings insurance back to doing what it is supposed to do — cover the property owner rather than invite a lawsuit.

Domestic asset protection will, if properly established and maintained, be 100% effective against all future claims. For example, ownership of real estate within a family limited partnership (FLP) should discourage future lawsuits and give property owners significant leverage to force favorable settlements within the limits of their insurance coverage. However, it is imperative that property owners engage in asset protection before the injury occurs and a lawsuit is commenced.

The Revised Uniform Limited Partnership Act (RULPA), which is the law in all fifty states, provides that property owned by a limited partnership is not owned by the individual partners. If a property owner transfers property to an FLP, the property is no longer owned by that person (although the former owner, as General Partner of the FLP, still controls the property). A creditor with a judgment against the property owner may not attach FLP assets to satisfy the judgment. In most cases, each parcel of real property should be placed into a separate FLP to isolate the litigation exposure of each asset. If all of the owner’s assets are held in FLPs, a claimant can do nothing more than settle with the insurance company.

In cases where a property owner is faced with pre-existing claimants, domestic asset protection may not be completely effective. However, international asset protection strategies can be effective in such situations. Although it is impossible to transfer real estate to a foreign jurisdiction, a property owner may turn the property into cash and transfer the cash offshore. This can be accomplished by either selling or mortgaging the property. The proceeds of the sale or mortgage can then be protected offshore by using strategies such as offshore asset protection trusts or investment in foreign deferred variable annuities. The claimant will be more inclined to settle upon terms favorable to the property owner rather than pursue litigation in a foreign jurisdiction, without contingency fees, where the burden of proof and statute of limitations will be against the claimant.

Conclusion

The increasing risks facing real estate owners are clear and compelling. Now property owners may face claims based upon injuries which, as in Sanatass, they are powerless to prevent. Property owners must give thought to protecting their real estate holdings as well as their personal assets. Proper asset protection strategies offer property owners a viable safety net for their property when faced with inevitable litigation arising from real estate ownership.

[i]. Asher Rubinstein is a partner at Rubinstein & Rubinstein, LLP. His practice concentration is asset protection and wealth preservation. He may be reached at (212) 888-6600 and via www.assetlawyer.com.

[ii]. We discussed changes to the sidewalk law in our article titled Turning Property into a Fortress: The Increasing Need for Property owners to Protect Their Assets.

[iii]. See, e.g., New York Revised Limited Partnership Act §§ 121-701 et. seq.