From left: Jordana Roubicek Greenman and Michael Lonzana
Business planning can be tricky. One of the trickier parts is choice of entity, especially when advising entrepreneurs who may have unwarranted confidence in their knowledge of such subjects.
Common legal advice from attorneys to investment property owners seeking liability protection is to purchase and own the subject property in a limited liability company (LLC), a “flow-through” entity that provides most, if not all, of the same protections as a corporation. In this article we will explore how ownership rights and duties for landlords are affected by holding property in an LLC, as well as potential traps attendant to such ownership.
As with any business, the owner of investment property in an LLC seeks protection from personal liability. The LLC is often used to protect against catastrophic exposure lying in premises liability, the type that often exceeds the coverage offered in a typical insurance policy. Many landlords convert their property ownership to an LLC out of fear of a catastrophic event that wipes out all or most of their exposed personal wealth, often accumulated after decades of sweat equity.
On the surface, the choice of an LLC is a sound business decision and an adequate vehicle to address such concerns. For the purposes of this article, we will assume the administrative record keeping requirements to maintain corporate protection are in compliance. However, once a real estate investor’s portfolio expands to include many LLCs requiring a complicated structure, alternatives begin to look more and more attractive. For a few thousand dollars annually, one can purchase extensive umbrella insurance coverage. Umbrella coverage can address much of the catastrophic liability protection that served as the original motivation for the LLC. The major drawback to umbrella coverage is that there may be certain coverage exclusions that the client is not comfortable with. For example, damages arising out of lead and/or asbestos poisoning are typically excluded from coverage. Both lead paint and asbestos may lie within buildings in the commonwealth.
The most common issue that clients seeking LLC protection are not aware of is that an LLC landlord must be represented in court by counsel and cannot proceed pro se. Similar to a corporation, with the exception of small claims matters, an LLC cannot be represented in court proceedings by an officer or manager unless the officer or manager is an attorney licensed to practice law in the commonwealth. See Varney Enterprises v. WMF Inc., 402 Mass. 79 (1988). The LLC must be represented by a licensed Massachusetts attorney. The same is true for all types of business ownership, including real estate trusts. This most often presents itself in summary process eviction proceedings, where parties routinely resolve their case through mediation rather than arguing the merits in front of a judge.
In a 2018 case in which a property manager brought a summary process eviction against a tenant on behalf of the owner, the case was dismissed by the Housing Court in light of the property manager’s lack of standing, as the property management company was not the “owner or lessor” and was not an attorney licensed to practice law in the commonwealth of Massachusetts. The Supreme Judicial Court (SJC) upheld this decision, affirming that a property manager does not have standing to prosecute an eviction in its name on behalf of an owner. The SJC ordered that trial courts must dismiss any summary process action in which the plaintiff is not the property owner or lessor and confirmed that anyone who is not licensed as an attorney in Massachusetts, including a property manager or owner of an LLC, cannot sign documents to be filed in court on behalf of property owners or lessors or appear in court on their behalf without engaging in the “unauthorized practice of law.” In the event that an LLC owner or lessor files documents in court without retaining counsel, however, the court may either dismiss the case without prejudice or order that the complaint be dismissed on a specified date unless such owner or lessor retains counsel prior to that date. See Management Services et.al. v Loretta Hatcher, 479 Mass. 542 (2018).
In the opinion of at least one practitioner, the Hatcher case did not affirmatively close the book on the aforementioned issue of representation. The SJC used the terms “owner or lessor” and, to a lesser extent, “true landlord” throughout the case as a condition precedent to standing. The protagonist in Hatcher was a non-lawyer property manager who was admittedly acting as an agent to the landlord in entering and prosecuting the case. Nowhere in the legal discussion does the SJC affirmatively define “owner or lessor” and/or discuss the role entities play in relation to individual ownership in determining who is the “owner or lessor” or “true landlord.” A colorable, though likely losing, argument in this regard would be that the individual behind a single-member LLC is, in fact, the “true landlord.” Nonetheless, the current state of the law in the commonwealth is that no individual who is not a licensed attorney in the commonwealth who is the beneficial owner of a single-member LLC would be engaging in the unauthorized practice of law by representing the entity in court.
While the holding of the Hatcher case should not have come as a surprise, many landlords and property managers were frustrated in light of the fact that many had, in reality, prosecuted eviction cases without legal representation by going through the mediation process with the housing specialists and entering into agreements with tenants in lieu of appearing before a judge. The requirement of retaining counsel, of course, adds an additional expense to a process in which the property owner may already have lost a good deal of money in lost rent. Had he or she retained ownership individually, pro se representation would have remained possible, making this expense possible to avoid.
Whether retaining a lawyer is an expense that can be avoided, it is best practice for landlords to have legal representation for summary process proceedings. Some of the reasons for seeking representation include the attorney’s knowledge of the law and procedure, and the attorney’s familiarity with court staff and customs unique to individual courts. One role of an attorney is to be knowledgeable of the law and court rules, easing the job of the judges and clerks, thereby rendering the process more efficient.
There are many reasons for an investor to choose to own an income-producing property in any number of entities. However, when choosing the appropriate entity, the investor should consider that any ownership structure outside of ownership as an individual carries with it the requirement of an attorney licensed to practice in the commonwealth of Massachusetts for any court proceedings.Jordana Roubicek Greenman, Esq. is an attorney in good standing and a title agent with a solo practice in downtown Boston. Her practice consists of a broad range of real estate-related legal matters, including commercial and residential landlord/tenant disputes, condominium association representation, general real estate litigation, and commercial and residential real estate closings. Greenman has been awarded the “Rising Star” designation in
Super Lawyers magazine. She is also a columnist for
Massachusetts Lawyers Journal and
REBA News.Michael Lonzana, Esq. is a solo practitioner headquartered in Needham whose practice focuses on a wide range of real estate and business matters and disputes throughout the commonwealth of Massachusetts.