Introduction to Presentation

Greetings. Robert Locke here. Thanks for taking the time to join us for this presentation. About five years ago, I was sitting in my home doodling on a yellow scratch pad and trying to get up to the 30,000-foot level and ask myself some questions about the business. One of the things I wrote down was, why is the property management business so full of tension, stress, conflict, and ultimately, litigation?

And that was something I've never heard anybody address before. And just over the period of a year, year and a half, two years, I made more notes on that yellow scratch pad and came up with a whole sense of balance of power that makes property management so difficult to deal with. And so I appreciate you joining me today.

Addressing Tension in Property Management

This presentation has to do with balance of power, and it answers the question, why is property management so full of tension and chaos and litigation? Okay. So here we go. Okay, so the question we're trying to answer today is this. Is the why is the landlord-tenant relationship so tense?

Why is it so full of conflict? Why is there so much combativeness, and ultimately why is there so much litigation? And if we can kind of figure that out, I think it'll go a long way to helping us take out some of that tension if we understand where it's coming from and how we as professional property managers can deal with it. So before we actually jump into the main part of the conversation, I've got to take a little bit of a side trip and have a little conversation about a myth that we need to kind of destruct, put out, put aside in the property management business.

And you may have seen this in one of our other slide programs, but recognize that just because you've seen this part of it doesn't mean you shouldn't watch the rest of it. I just need to take a side trip here, and we need to talk about a myth.

Myth of Enforceable Contracts

And I think that one of the number one myths of property management is two adults can sign a contract and expect it to be enforceable. And many people say, "Well, what do you mean? Why shouldn't it be enforceable?" And owners constantly say, "Well, it's in the lease, then it should be enforceable." And we find when we get in front of judges sometimes they just wipe out certain parts of our lease. We can't always understand why that happens. But the question is: Are all contracts enforceable?

And the answer really is no. And one of the reasons is the idea of what's called an adhesion contract. An adhesion contract. Now, an adhesion contract is a new idea to me. I've only been in the business 35 years, so I'm still learning.

An adhesion contract is a contract between two parties with vastly different bargaining power. Vastly different bargaining power. In other words, most of the time contracts are between two adults of competent mind with no discrimination. Nobody's holding a gun to anybody's head, and they're equals, and they negotiate a contract. Generally, those are enforceable.

But in an adhesion contract, there is something very out of balance in terms of the competency and the power of the two parties.

Characteristics of Adhesion Contracts

So let's talk through this a little bit. Here are four characteristics of an adhesion contract. Okay. Number one, it's a standard form boilerplate contract. Number two, it is written and controlled by one party.

Number three, there's no opportunity to negotiate. And number four, the customer has to take it or leave it.

Examples of Adhesion Contracts

Now, I'll give you some examples just so we can fit this into context. When you sit at a closing table and buying a house, you're going to sign a note and a mortgage. There's very little negotiating going on. You don't read that note and cross through phrases you don't like. There's no way you can read that mortgage and carve out paragraphs and initial it.

This is a standard boilerplate contract. One person has all the power. There's no negotiating, and you either have to get up from the table and walk away, or you have to accept the terms of it. So a mortgage is a perfect example of an adhesion contract. If you go to rent a car, they're going to have you sign a car rental agreement.

That's an adhesion contract. You don't have any opportunity to negotiate it. You don't have a chance to mark it up. You just sign it or you walk away. A life insurance contract is a take it or leave it contract.

Your utilities contract, your contract for your phone, your contract for your computer service, all of these are standard form boilerplate. Nobody can negotiate. You got to get up and walk away type of contracts. Now, our economy's full of them. Our society uses them all the time, and there's 100 different examples out there of situations we get into where we sign a contract without reading it or having an opportunity to negotiate it.

Consumer Protection Laws

Now, knowing that's true, in the late '60s and early '70s, our society began developing consumer protection laws to protect the person on the short end of the stick in adhesion contract situations. Those consumer protection laws, they were written to prevent abuses. Written to prevent abuses because when one person has all the power, they'll put things in a contract that are really abusive and going overboard. Number two, the court scrutinized them to prevent oppressive or unconscionable terms. You ever wonder why a judge can kind of just wipe out a part of your lease?

Because it's an adhesion contract. He knows that the landlord or the property manager or both took advantage of the tenant by putting things in the lease that were illegal, unethical, outside the law A completely unconscionable, and many times the people in power over-negotiate their position and consumer protection laws are there to protect the consumer from those kinds of abuses. The third one is enforceability is questionable. So one of the things you find with why can't two adults sign a contract and find it enforceable, because too many times they're way out of balance in their

power, it becomes an adhesion contract, and the courts are very skeptical about the enforcement side of it. Now, as we're talking through this, what agreement do you think might fall into an adhesion contract?

Rental Agreements as Adhesion Contracts

Yeah, a rental agreement. So clearly a rental agreement is an adhesion contract. You do not sit down with a tenant and give him an opportunity to change the rent due date, and the late fee, and the term of the lease, and what protections are in there. Tenants don't carve up leases. We, in fact, most of us send it to them in a DocuSign or come some kind of digital format.

They have to either walk away or sign it. They don't really have any chance to do much negotiating. And if you're managing 300, 500, 1,000, all your leases have to read the same. So we don't give any chance for a tenant to carve it up and change the terms of the lease. So a lease clearly is an adhesion contract.

And now we're going to-- Let me go back. Now we're done with that little side trip. We're back to our discussion about why is property management so litigious, and so chaotic, and so much stress and conflict. Okay? So adhesion contract, just put that in the back of your mind.

We'll talk about that a little later.

Balance of Power in Sales

Now in this balance of power thing, where I'm going to start is in a sales situation. Most of us in the business know a little bit about selling and listing and selling houses. And so I'm going to use that to start out because it's a great segue into what we're going to talk about where the leasing and property management game is out of power, out of balance. Okay? So follow me.

In a sales situation, there is perfect balance of power. What I mean is this, you got a seller on one side and a buyer on the other. If you're selling a $500,000 home and a buyer is buying a $500,000 home, guess what?

Financial Equality in Real Estate

There's financial equality. If I'm going to buy a $500,000 home, I have kind of the same financial prowess, the same financial capability as the person who is selling that home. So we are kind of equals in terms of financial issues. Okay?

Balance and Disclosure

The second thing is the seller has a licensed agent with him. The buyer has a licensed agent in most real estate sales, and so we have equally represented. So both parties have an agent to explain things to them and talk them through the issues. So they're equally represented. Number three, the buyer goes out and gets a home inspection, and in getting that home inspection, there is therefore full disclosure.

Now, tenants don't go out and get home inspections, do they? No. Buyers have the opportunity to have a home inspector go thoroughly through the house. When they come to the closing table, they know exactly what they're getting, and so there is full disclosure. The parties are in balance.

They are equal. Okay?

Closing Attorney's Role

The last feature is there is a closing attorney involved in this relationship. The closing attorney is going to make sure all the details are covered just right, going to make sure that everything is done above board and by the book, and going to take that contract and close it exactly the way the parties wrote it up. So there's a closing attorney involved. So this whole relationship in a sales situation is full of equality.

Everybody's on the same page. Everybody's equally represented. They are at equal financial positions. They have full disclosure, and there's a closing attorney to make sure it's all tied up in a bow and everybody walks away feeling like it was fair. So characteristics are everybody feels it's fair, no one taking advantage of the other person, very little litigation, and very limited government intervention.

Now, let's take those same criteria and look at the landlord-tenant relationship and see if there's any balance of power.

Landlord-Tenant Imbalance

So we start here with a landlord on one side, tenant on the other. Let's talk about balance of power in a rental situation. Number one, it's out of balance from day one because the owner is a wealthy real estate baron. Now, what I mean by that is he has more houses than he can live in. So day one, we have somebody with financial prowess, experience, a wealthy real estate baron.

And the tenant, in the court's mind, is about one step away from being homeless. That isn't true. You and I know that isn't true. But when you're getting in front of the judge, the judge says, day one, got a wealthy real estate baron going up against an innocent, naive, inexperienced tenant, and they are one step from being homeless. Now, I've got to stop and take a drink.

So we're going to have about a five-second break. Don't go anywhere