Understanding the Supreme Court of North Carolina Case: Terry v. Public Service Company of North Carolina, Inc.
Rental real estate has become an increasingly popular avenue for generating passive income across the United States, with North Carolina being no exception. If you are one of the many North Carolinians exploring the world of rental properties, it’s crucial to approach this investment with informed guidance. The recent North Carolina Supreme Court case of Terry v. Public Service Company of North Carolina, Inc. underscores the importance of being well-prepared and aware of the responsibilities and risks involved in property management and rental home ownership.
In this blog, we delve into the details of this case to highlight potential landlord liabilities and provide practical advice on how to address them. Whether you’re a seasoned landlord or just starting your investment journey, read on to equip yourself with the knowledge necessary for success.
| Summary: Terry v. Public Service Company of North Carolina, Inc. In the case of Terry v. Public Service Company of North Carolina, Inc., a tenant rented a home from landlord from 2005 until 2017. In January of 2017, natural gas was smelled at the tenant’s rented property and the gas company and local fire department responded to the report and determined that there was no gas leak. This occurred on three other occasions from January through March 2017. Finally, in April of that year, the tenant flipped a light switch in the bathroom of the home which immediately ignited a gas explosion that landed him in a coma for the next four months with severe burns and life altering injuries. The tenant sued the landlord for various forms of negligence, violation of the Residential Rental Agreements Act (RRAA) and failing to keep the home in a generally habitable condition as required by law. Key facts of the case include: (1) the explosion was determined to be caused by a gas leak which occurred due to a corroded pipe in the crawl space beneath the home that connected to the gas line; (2) from the beginning of the tenant’s occupancy to the gas explosion, the landlord never inspected the gas lines; and (3) the tenant never notified the landlord about the gas incidents leading up to the explosion or that the pipes were corroded. The case spent years in costly litigation. First, a North Carolina trial court ruled in favor of the landlord because the tenant failed to provide notice to the landlord about the gas smell and corroded pipes, and the court did not find that the landlord had an affirmative duty to inspect the gas lines. The tenant challenged this decision by appealing the case to the North Carolina Court of Appeals. The Court of Appeals reversed the trial court’s decision and held that the RRAA imposed a duty to maintain utilities and that this obligation arose with or without notice of damage. This time the landlord challenged the ruling and appealed the case to the North Carolina Supreme (the highest court and final decision-maker for state court matters). Legal jargon aside, in Terry, North Carolina’s Supreme Court ultimately had to decide whether Court of Appeals was correct in finding that the landlord was responsible for the tenant’s injuries and losses. The Court reversed the Court of Appeals’ decision. It reasoned that under North Carolina common law and the RRAA, a landlord is not obligated to inspect a property or make repairs unless the tenant provides notice, or the landlord has actual knowledge of a hazardous condition. In this case, the tenant did not inform the landlord about the gas smell. Therefore, the landlord could not be held liable for the explosion as he had no knowledge or notice of the dangerous condition. The Supreme Court did not arrive at this holding unanimously. The dissenting minority agreed with the Court of Appeals and argued that there is an affirmative duty under RRAA to maintain the property in good repair and this necessarily means inspecting and performing work on certain items before they fall into substantial disrepair. The dissent felt that the landlord had a duty to conduct an inspection, which would have likely identified the hazard, preventing the explosion and injuries. The dissent emphasized that the landlord’s failure to inspect the property contributed to the dangerous situation. |
So what should you do in light of this legal landscape?
At first glance, the Terry decision may seem like a victory for landlords, but it is essential to consider the lengthy and contentious nature of the lawsuit. The ruling was narrowly decided, and under different circumstances or with a differently composed court, the outcome could have been entirely different. Therefore, landlords should not take away from this decision that courts will consistently rule in favor of landlords in all circumstances. Instead, they should focus on practicing diligent property management to avoid costly litigation and ensure they are well-prepared to the extent possible in the event of legal challenges.
Here are some key takeaways and recommendations for North Carolina landlords:
Understand and Fulfill Your Duties to Tenants
Landlords have specific legal duties to their tenants under North Carolina law, particularly under the Residential Rental Agreements Act (RRAA). Key landlord obligations under the act include:
- Complying with applicable building and housing codes.
- Making all repairs and doing whatever is necessary to put and keep the premises in fit and habitable condition.
- Maintaining in good and safe working order and promptly repairing all electrical, plumbing, sanitary, heating, ventilating, air conditioning, and other facilities and appliances supplied or required to be supplied by the landlord, provided that notification of needed repairs is made to the landlord in writing by the tenant.
- Repairing or remedying any imminently dangerous condition on the premises after acquiring actual knowledge or receiving notice of the condition.
Proactively attending to these duties can help you avoid litigation. To this end, it is crucial that regular inspections of the rental property occur and that any problems identified during an inspection are addressed promptly. You should also diligently document all inspections, maintenance, or repair work performed.
If the management process seems daunting or if you lack the time or expertise to perform the necessary inspections, maintenance, and repair work, then it may be time to consider hiring a professional property management company. As demonstrated in Terry, an ounce of prevention is better than a pound of cure: it would have been far better for the landlord in Terry to incur costs related to routine inspections, maintenance, and repair compared to paying litigation expenses or, even worse, liability expenses on top of litigation expenses. A professional property management company can handle the day-to-day operations of your rental property, ensuring it is well-maintained and compliant with local laws and regulations. Their services generally include: (1) tenant screening and overseeing the leasing process, (2) inspecting, maintaining, and repairing the premises, (3) collecting rent, and (4) ensuring legal compliance.
Outsourcing these duties can save you time and ensure that your property is managed by someone with experience and substantial knowledge of the law and your obligations as landlord.
Hold your property in an LLC
While you can mitigate risks, you can never fully eliminate the possibility that your rental property may be embroiled in litigation. Therefore, it is crucial to separate your rental property’s liability from your personal liability. One of the most effective ways to protect your personal assets from liability is to place your rental property in a limited liability company (LLC).
An LLC creates a legal distinction between your personal assets and those held by the LLC, shielding each from the other in the event of a lawsuit or significant financial losses. You can then further protect yourself, by also managing your property through a separate LLC. In this arrangement, you own your property through one entity and operate it through another. This further shields your personal assets from the operation of the rental business.
If you have not yet purchased your rental property, you can create an LLC before doing so and purchase the property through your LLC (note however, that you will likely have to personally sign as the guarantor for any mortgage associated with the property). If you have already purchased the property in your name, all is not lost. You can still create an LLC and deed your property to the new entity, but there will be additional steps required to address an existing mortgage and any other contracts you may have entered into with respect to the property in your personal name.
It is essential to properly establish and maintain your LLC, as common pitfalls—such as commingling personal and professional assets or not adequately capitalizing the LLC with insurance—can compromise this critical liability shield. Skufca Law can help you navigate this process smoothly to protect yourself in your real estate investment venture.
Maintain Comprehensive Insurance
Finally, obtaining adequate insurance is another critical component of risk management for landlords. A comprehensive insurance policy can cover property damage, liability for tenant injuries, and loss of rental income due to covered events.
Often landlords will obtain a commercial general liability (“CGL”) insurance policy that is designed to cover property damage, loss of rental income, and other liabilities against legal claims if a tenant or visitor is injured on your property, and other casualty insurance. When selecting policy limits, it is important to remember that you will be financially responsible for liabilities in excess of your coverage. Thus, you should consider your risk exposure and risk tolerance and should not simply purchase a policy with the lowest premium. Consider Terry again:if the landlord was ultimately held liable for the tenant’s injuries in losses (an amount that was likely several million dollars at least) and the landlord had a policy with a $1,000,000.00 limit, he would have likely ended up financially ruined.
Managing rental properties involves navigating a complex landscape of legal responsibilities and potential liabilities
By forming an LLC, maintaining comprehensive insurance, and striving to fulfill your legal duties to tenants, you can protect your investment and minimize risks. The Terry v. Public Service Company of North Carolina case serves as a reminder of the importance of diligent property management and the potential consequences of a landlord neglecting their responsibilities. Landlords should prioritize safety and compliance to ensure a successful and trouble-free rental property business.
Contact the attorneys at Skufca Law today at (704) 376-3030 to help you with your investment journey.