Law Firm Landlord – 5 strategies to keep the rent money and avoid the liability risk – Part I

It is very common for a law firm to sublease its extra space to a smaller law firm or solo practitioner.  While it is tempting to receive the rental income, you must follow certain steps to insure that you are not exposing your firm to additional costs and liability.  From a risk management perspective, there are two main areas of concern:  professional liability risk and general liability risk.  In this post, we will deal with the professional liability risk and our next post will deal with the general liability risks.

When your tenant gets sued for malpractice, it is common for the plaintiff (the one suing your tenant) to include you in the suit.  Since you are usually the larger firm, the plaintiff (the one suing your tenant) will assume that you have more assets and more insurance coverage.  The courts have viewed these issues from the perspective of the expectations the client had at the time the services were performed.  That is, did the client think that your lawyer tenant was part of your firm?  If yes, he may have a valid claim that in fact your firm was representing him, and you might be held liable under an apparent agency theory.

While the good news is that the law firm landlord usually gets out of these cases eventually without a finding of liability, your goal is to get out of the case earlier and cheaper in the lawsuit process.  There are five easy to implement strategies that you can employ to lessen the impact of this risk:

1)  Physically demonstrate where one firm ends and the other firm starts.  Tenants should have their own office area, staff, equipment, phone lines, web domains, email addresses, etc.  Behind the scenes technology (i.e. internet provider) sharing can be okay.

2)  Avoid any possible confusion by clients.  Tenants must make it verbally clear to any potential and actual clients that they are not part of your firm.

3)  If the client has retained both you and your tenant for a related transaction or problem, you must have an extra clear engagement letter detailing the work to be done.

4)  Never share letterhead with your tenant.  If you do this, you can bet your deductible that this will be Exhibit A against you in a professional liability claim.

5)  Insurance Requirement:  In your sublease, require your tenant to maintain a certain amount of professional liability insurance.  Though it might not be entirely practical if the tenant is a much smaller firm, it is a good idea to require the same limits of coverage that you have on your policy.  If the tenant has adequate insurance, it lessens the likelihood that the plaintiff will try to reach your policy.  Don’t accept copies of their declarations page to prove coverage, ask for a certificate of coverage.

These tips will help your firm collect the rent without collecting the lawsuits.  Our next post will cover what you need to do to protect your firm from the general liability risks involved in being a Law Firm Landlord.

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