Successor liability is the theory and legal consequence of a buyer inadvertently inheriting potential liabilities (i.e. debts and obligations) of a seller after the close of a transaction. In the context of a buyer of multi-family real estate in California (the new landlord), alongside the acquisition of the apartment complex itself, shall mean the new landlord inheriting some the seller’s liabilities for their prior violations of law, which can include being responsible to pay for those violations. An example of a common successor liability is the inheritance of a prior landlord’s damages for overcharging its tenants during prior landlord’s period of ownership. If the new landlord did not conduct a diligent due diligence review and the included carveout language in its purchase agreement, they could inherit such responsibilities.
As an example, both the City of Los Angeles (LAMC Ch. XV, Art. 1, §151.10(A)) and the state of California (Cal. Civ. Code §1947.11) provide for a treble (3x) damages remedy for the excessive amounts charged in the rent received on rent-controlled apartment units. In addition, in accordance with Cal. Civ. Code §1947.11, the prevailing party must be awarded their attorney’s fees and costs of suit. “Landlord” as defined under the Los Angeles Municipal Code expressly includes “successor(s)” (LAMC 151.02), which opens potential buyers to responsibility for prior landlord’s tenant overcharges, amongst others. In accordance, California courts have ruled in favor of successor landlord liability including that those current owners can be held liable for rent overpayments relating back to the ownership period of the prior owner. (see Baychester Shopping Ctr., Inc. v. San Francisco Residential Rent Stabilization & Arb. Bd. of City & Cty. of San Francisco, 165 Cal. App. 4th 1000).
Successor liability is not only limited to prior landlord’s legal violations but may also include contracts previously entered by the selling landlord. Some contracts expressly provide for a selling landlord to provide notice when selling the property (typically vendor contracts) and may also include express assumption of liability by successors of the seller. Without a careful due diligence review, some new landlords may have inadvertently accepted contracts that they never agreed to enter into.
Solutions
First, it is important for buyers of multi-family real estate (and all buyers in general) to retain experienced counsel at the inception of negotiations and having such counsel draft appropriate language in purchase agreements and conducting a thorough and incisive due diligence review.
Through due diligence review, buyer’s counsel should request and analyze rent rolls, tenant files, and vendors contracts, amongst many others, and draft appropriate language warranting the accuracy of all similar documents. Likewise, buyers would be wise to have their counsel consider obtaining representations & warranties from sellers that cover such risks and indemnities and deposit holdbacks that would offer some forms of insurance against the risks mentioned. Finally, it is always good practice for buyers to always obtain estoppel certificates from all tenants relating to all of the risks aforementioned.
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KAY GHAD LLP represents a diverse set of buyers and sellers in the acquisition and disposition of various real estate asset types, including in the multi-family and healthcare sphere. Please contact us today for your legal needs. For more information, please reach out to [email protected] or (213) 529-2900.
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