I had a terrible, horrible, no good, very bad day a couple of weeks ago. And while it’s a bit painful to talk about it publicly, it’s also something that everyone can learn from, so I figure I should use this platform to help people out and learn from my mistakes.
Property management is a hotbed of litigation. Some research has shown that the overwhelming majority of lawsuits in real estate don’t come from property sales, but from property management, despite sales encompassing far more transactions. This is why many brokerages refuse to allow their agents to practice property management, and why E&O insurance is so crazy expensive for those who do property management. The relationship nature of our industry as opposed to real estate sales really contributes to this. A sales listing is a transaction. If a seller or buyer is unhappy, they can typically just walk away and find another agent pretty easily. But the world of property management is a little different. This is a long-term relationship, usually lasting years at a time, both on the tenant and the owner side. And just like you end up in bigger fights with close friends and relatives than you ever do with near strangers, the same happens here. As the saying goes, the line between love and hate is thin, and someone who loved you a week ago can think you’re the worst person on earth today.
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Such a situation led to my very bad day. And this situation also was directly connected to automation, one of my areas of expertise in our industry, so even more important for me to cover this so you can benefit from my hard lesson.
How a Settlement Became a Liability
This situation all went back to an acquisition that occurred years ago. My PM company acquired another company’s book of business several years ago. As is usually the case with these acquisitions, you end up with a group of owners who are mad that their contract was sold to another company without their permission. Someone “moved their cheese,” and even if the new company is better than the old, some people are just going to be upset that they had no say in the matter. Such was the case with this specific owner. She wanted to terminate. The termination clause in her management agreement from the prior company had some very specific provisions in it for termination, namely that termination could not happen unless a bunch of management fees were paid. Needless to say, despite signing on the dotted line on that contract, she did NOT want to abide by that provision. So she filed a lawsuit. Yes, I agree, that seems like jumping the gun pretty quickly when settlement discussions would have made more sense, but you know how some people are.
After the lawsuit was filed, our attorneys started talking with her attorney to try to get it settled. Obviously it doesn’t make sense to spend tens of thousands of dollars on litigation over a simple contract termination, so even though the contract was very clear what termination required, it just made more sense to try to work it out. After some very contention negotiations, a settlement was worked out that allowed for immediate termination. However, the owner’s attorney included a provision in the settlement agreement that prohibited any communications from us after the settlement was reached. Not thinking much of this (after all, why would we want to contact them then?), and the rest of the settlement being pretty normal, we agreed.
Flash forward about a year. We discover that one of the software platforms that we use has had a pretty big glitch. For some reason, it thinks a bunch of deactivated leases are active again, and it starts firing off some late rent emails to these former tenants who moved out owing money. Well, guess whose tenant owed money when the PMA was terminated? We didn’t even realize this had happened right away. We knew that some old leases for some reason had suddenly popped back up as active, but we got them closed back out and thought that was it. Then the demand letter came.
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The settlement owner’s tenant had forwarded the messages they received as a result of the software glitch to her, and she immediately had her attorney send over a letter demanding that we pay her “damages” for these messages. I thought it was absolutely absurd, so I just told her attorney to talk to our attorney so they could work it out. Rather than talking it out between attorneys, a new lawsuit was immediately filed by her attorney, this time to enforce the settlement agreement clause that prohibited any communications.
We thought this case would be a non-event. A few automated emails that we didn’t intend to send caused by a software glitch? No real damages to speak of at all? Surely any judge in his right mind would throw this out on summary judgment. So our attorney filed a motion to dismiss the case on summary judgment (summary judgment basically means that the judge just assumes that every fact that the opposing party claims is true, and if he still thinks they have no case as a matter of law, he can throw it out without trial). Of course, opposing counsel filed their own motion to rule in their favor on summary judgment. After the arguments in the briefings and a pre-trial hearing with the judge for questions and comments, we were feeling pretty good that this thing would be done.
A year goes by before we finally get the judge’s decision. I don’t know whether the judge simply forgot the arguments in this case over the course of that year, or if he had some newbie clerk write the opinion for him, or if he has a relative who got evicted by us years ago that we don’t know of and he wanted revenge, but for whatever reason, he threw the book at us. Didn’t even go to trial, just ruled in favor of the owner’s motion for summary judgment against us. He ordered us to mediation to work out what would be paid as damages and attorneys’ fees. At that point, we only had two options: work out a settlement, or appeal the case. We decided to settle, and the settlement was painful (although not as much as they were seeking). We had very little leverage at that point, and a favorable settlement to us just wasn’t going to happen. It was either settle on painful terms, or go to a jury trial on the damages and then appeal to the higher court, all of which would have cost tens of thousands in legal fees, and while we felt confident we would win the appeal, it’s never certain, and we could have still ended up losing.
So, my terrible day was a day in mediation working out this settlement agreement and signing away a significant amount of money to make this case die. As with all things, though, we can’t just wallow in misery. When bad things happen, we need to figure out if there are any lessons to be learned and anything we can do to avoid these situations in the future. So here are those lessons, given to you for free, that I paid quite a lot to learn.
Lesson One - Be Very Suspicious of Proposed Clauses in Settlement Agreements
The first big lesson to be learned here is that seemingly benign clauses in a contract can carry big liability risk. This was a very basic clause that we didn’t really think much about. After all, why would we want to email someone from a property we no longer manage and we no longer have any responsibility for? You propose a clause that says don’t email us or our tenant again? Cool. We don’t want to, so why would we object?
The only real discussion that took place over this clause was related to needing some time to close out the lease and the owner’s account in our system so that any automated emails or bulk emails that go out to all owners or tenants don’t go to them, so we had that language added and didn’t think much of it besides that.
But it turns out that that very basic clause wasn’t so basic. It created a giant loophole that turned a settlement agreement that was supposed to end a business relationship entirely and put a lawsuit to bed into a much better opportunity for her to be successful in court. Had we stuck to our guns and refused to terminate originally, we might have prevailed in that case (of course, we might not have, but the contract was pretty clear). But by creating this brand new agreement to settle that case that had new language in it that created potential liability events in the future, we opened up a can of worms without even realizing it. And the worms didn’t even explode out of the can for a full year when this owner was a distant memory.
There will never be another settlement agreement that I sign that I don’t look at each provision as if it’s a direct attempt to find a loophole to screw us over later on down the road. My advice is extreme suspicion. Whatever language they propose, assume it’s a “gotcha” attempt. Try to figure out any way possible that their proposed language can be used against you, even years down the road. Had I looked at their proposal with that degree of suspicion, I never would have agreed to it.
One of my biggest pieces of advice is something I used to advocate in labor contract negotiations: “always control the paper.” While I never like to make the first proposal on monetary items, I always want to make the first proposal on contract language. If I’m controlling the paper (the contract language), then it’s much easier for me to see what the opposing party is trying to do with their proposed changes. For example, in this case, if we had made the first draft on the original settlement language and they came back with an amendment that inserted this communications clause, that would have likely triggered a red flag in mind. Why do they want this provision? Why would they think we’d be contacting them anyway? How hard do they push back if I question them on it, and what does that tell me? But since the original proposal came from them and this wasn’t a provision shoehorned into it later, it didn’t raise those red flags. Always control the paper.
Lesson Two - Don’t Underestimate Frivolous Lawsuits or Demands
This case involved what were obviously frivolous claims, and not just to my layman’s eye, but to our extremely experienced legal counsel, also. Both the original lawsuit and the suit to enforce the settlement were absolutely outside the realm of anything reasonable. In both cases, we were extremely confident that we would prevail if it made it to trial. And yet…
Seemingly frivolous claims can sometimes not go the way you expect. Think about this: you know that the earth is round. Every rational person on earth knows this and has known it for many centuries at this point. But guess what? Polling data shows that 10% of U.S. adults believe that the earth is flat. Roughly 6,000 people will read this article if history of our distribution is any predictor. That means that somewhere around 600 of you reading this will disagree with my statement that the earth is round, and if one of those 600 people was judging a debate between myself and a flat earther, I would lose that debate. It doesn’t matter what the facts are. It doesn’t matter what evidence I present. This person judging is simply predisposed to decide that I’m losing that debate. So despite this being one of the most objectively factual claims that a person can make, I would still lose that debate 10% of the time I participated in it.
Now, how many lawsuits do you think are filed that are as blatantly obvious as to who is in the right as the question of whether the earth is round or flat? I’m guessing not many. So when we think that a lawsuit is “frivolous,” what we’re really doing is judging it by what we would consider broad consensus to be. The problem is that consensus doesn’t decide lawsuits. Judges do. Specifically, an individual judge. One person. And you don’t get any say in who that person is. It’s luck of the draw. You don’t know what biases that person has, how contemplative they’ll be, what might be going on in the personal life, etc. In fact, here’s something frightening: widely peer reviewed research found that judges who have eaten a meal or a snack shortly before rendering a decision on parole granted the parole about 65% of the time, but if they hadn’t eaten or taken a break in several hours, that number dropped to near 0%. Then, after they took a break and had a meal or snack and returned to issue more decisions, the number jumped back up to 65% again. People are literally spending extra years in jail because the people making their parole decisions are hungry. You think the lawsuit against you is frivolous and will be thrown out? Well, maybe, or maybe the judge is hangry and you’re screwed.
The point here is that a lawsuit can be both frivolous and extremely risky at the same time. At best, you have a 90% chance of success in even the most frivolous of cases against you. If someone had a 10-sided die and asked you to roll it, and if you roll a 1-9 you pay nothing, but if you roll a 10 you have to pay them an enormous sum of money, are you rolling that die voluntarily? Of course not. There is no upside to you, and an enormous amount of downside. We don’t think about it this way, but that’s exactly what most litigation comes down to for businesses. When someone is suing you, no matter how frivolous it is, your best case scenario is typically coming out even. The person who filed the suit gets nothing, and they have to pay your legal fees. But the worst case scenario is that they win and get a bunch of money from you. This is a no-win scenario. It’s not a certain loser, but it is a no-win. There is no circumstance here where you come out as a big winner with a bunch of new money in your pocket (barring those rare situations where you’re counter-suing for breaches on the other side, of course).
So, long story short, don’t underestimate how dangerous that frivolous lawsuit or even demand letter may be. Yeah, it seems absolutely crazy, but you don’t know what the outcome might be. Litigation is never certain. Never.
Lesson Three - Protect Yourself from Software Glitches
Readers of this publication know that I love me some technology and automation. And despite technology doing me wrong in this case, I remain an advocate of it in our industry.
I frequently say when I give presentations on automation that “computers don’t make mistakes.” And that’s true. A computer that is properly programmed is never going to incorrectly calculate the answer to 56 x 975. A human, on the other hand, frequently will. Research shows that average people (not mathematicians) doing complex multiplication will have error rates of 30-70% (depending upon how many digits are being multiplied). Even when dealing with advanced mathematics students in a formal education environment like a university who have access to calculators you will still see error rates of around 5%, simply because they punch buttons wrong or read the problem wrong. And professional mathematicians still have 1% error rates when not under stress or time pressures. While 1% doesn’t seem like much, it’s a hell of a lot more than 0%. So yes, relying upon automation to do complex things is still the best policy.
That said, while computers don’t make mistakes, they do glitch. Usually after a software update, but not necessarily. A computer isn’t going to suddenly forget how to do multiplication, but it might just crash completely and not do anything, or it might glitch out and just start doing crazy random things. So while your automation isn’t likely to incorrectly calculate a rent increase, it just may randomly glitch and delete that lease entirely.
What we need to do as users of automation is to protect ourselves from these possibilities of glitches. First, we should advocate for software providers to put safeguards in systems to prevent things from happening as a result of glitches. In the legal case that I had, for example, it would have been helpful to be able to select a toggle switch in our software that would just completely deactivate any communications to a specific contact. That way, if the system glitched (as it did) and reactivated an old contact, it still wouldn’t send any communications that it would normally send. But we didn’t have that option. The only way we could fully prevent it would be to completely remove the contact information for that person in our systems, but then there would be new legal questions about whether we are even able to do that, as the law requires us to maintain all records related to real estate transactions for seven years in our state. I wouldn’t want to explain to an auditor why I have no idea how to contact a former tenant because we straight up deleted all ways to contact them. That’s just not a real solution.
Another thing you can do is beef up your liability protections in your contracts. We all have generic hold harmless and indemnification clauses in our leases and PMAs (or at least I hope you do), but these aren’t designed to cover for everything. I recommend putting a clause in your contracts that specifically protects you from inadvertent technical glitches. Not just when it comes to communications, but from technical glitches in general. We are all using third-party software packages that we are not in control of, and most of these software providers have their own indemnification clauses in their contracts that shield them from liability, so you need to shield yourself from any glitches that they may have. Especially in a world of SaaS where our software platforms are all living in “the cloud” and constantly getting updated, we never know what might happen. Be prepared for it ahead of time.
Lawsuits are a Business Decision
As a business owner or major decision maker for a business, lawsuits should purely be a business decision. You need to completely divorce any personal feelings from it and make a decision purely on the basis of what makes financial sense for the business, and what is in the overall best interests of all stakeholders in the business. I sometimes hear people say “it’s the principle of the matter,” and believe me, I get that. Sometimes you don’t want to back down purely because you know that you’re in the right and you don’t want to let someone get away with fleecing you. But the problem is, that won’t necessarily result in the best outcome for you or any other stakeholder in the business.
By nature, I am extremely litigious. To me, it’s a moral matter to hold people accountable for the contracts that they sign. That’s how I felt as a labor union leader holding the companies accountable for the labor contracts that they signed, and it’s how I feel as a PM company owner holding tenants and owners accountable. But there comes a point where the juice is just not worth the squeeze. The ironic thing in this case is that I recognized that at the very beginning and made the wise decision to settle the original lawsuit. That was the best decision for the business, even though the owner was not in the right according to the terms of the contract. But it still managed to come back and bite me later. Where I made the wrong decision was on failing to settle the second case because I thought it was so frivolous (and it was). I didn’t make the right business decision there. I looked at it as a matter of principle, not allowing someone to take a second bite at the apple after we already reached a settlement agreement originally, when I should have looked at it as simply a business matter and done the arithmetic. Had I looked at it that way, I’d have thrown her a few thousand dollars to make her go away again. Instead, I paid a lot more than that just in legal fees, not to mention the ultimate settlement. It was a poor business decision, and I own that, even though I still believe I was in the right. Being right doesn’t pad your bank account. Making smart business decisions does. Remember that. Learning from my mistakes is a lot easier and less expensive than learning from your own.
A Note About Our Sponsor
Today’s issue is sponsored by Enterprise Bank & Trust, and as a long-term customer, I wanted to make sure I threw in my own personal endorsement, because this is one of the biggest game-changers that exists in the property management business. Every year, MANY THOUSANDS OF DOLLARS of my PM company’s expenses are paid by Enterprise’s credit system. Essentially, they pay accounting and accounted-related invoices such as PMW and LeadSimple from credits we earn just for keeping our money with them. On top of this, the customer service is phenomenal, and they are the only bank in the country that I truly trust to make sure that our accounts are compliant with trust account laws. Talk to them. You’re crazy not to. I know that switching banks isn’t the most fun thing to do, but you’re literally throwing massive amounts of money in the trash by not doing so. This is one of the first things I always get my one-on-one consulting clients to do. Consider this free consulting advice.
Open to Work
In this edition we’re starting to advertise people looking for new work opportunities, and also companies looking for top industry talent. We will only feature people and companies here who are relevant to the PM industry (either PM or PM vendor). This won’t be just new RTMs from the Philippines looking for a first gig, if someone is listed here, they have a lot of PM industry experience. If you would like to feature yourself or your company here, send me an email. For now, it’s free! If we get a lot of demand, we might start charging a nominal rate to whittle down the submissions. Click on the name for their LinkedIn profile.
Leader in the property management industry with a proven track record of driving business growth, innovation and success. Specializes in brand development, strategic marketing, and efficient team management. Expertise includes creating successful marketing campaigns, developing groundbreaking customer programs, and creating operational processes. Possesses a unique ability to define clear objectives and lead teams effectively ensuring the achievement of remarkable results.
Experienced PM executive
Former VP of Residential at PMI
Former Owner/CEO of RPM franchise
Business Coach
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Debate Me
Disagree with my take here? Have a different perspective? There’s nothing I love more than a good debate or even just an intelligent conversation. If you’d like to jump on a podcast recording with me to discuss this topic, please let me know!
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