Jonathan Christianson
Ownership of real property consists of a bundle of rights and a bundle of obligations. Anyone who owns a residence knows the basic truth of this statement when, from the comfort of their living room, they sign the property tax or casualty insurance check.
In this increasingly complicated world, most individual investors continue to hold title to investment property in their individual names. Apart from paying for the property, the owner’s obligations include maintaining the property and ensuring the property is not a nuisance, paying property taxes and assessments, regulating access to the property, preparing and executing leases, collecting rents, managing tenant deposits, paying for tenant improvements, ensuring that tenants maintain adequate liability and casualty insurance, servicing mortgage debt, participating in the activities of local government and sometimes prosecuting or defending legal actions arising out of the sale, transfer use or occupancy of the property.
Of course, few property owners handle all of these tasks personally. An owner will usually employ a variety of professionals to manage the day-to-day operations. Even though many tasks may be delegated, a significant failure on the part of the owner to continue to meet these obligations or to adequately respond to potential liability relating to the property could mean the loss of the property. Accordingly, an owner must be in a position to respond to changing circumstances. Given the stakes, a prudent investor will maintain a level of involvement with the property manager and tenants necessary to ensure that operations continue as planned.
So, how could things go wrong? They might go wrong if the owner leaves the country and is unable to respond to an unexpected event, such as the departure of a major tenant, a lawsuit or a property manager’s theft. The same result follows from the owner’s unexpected death or the onset of mental incompetence resulting from age or serious illness. Is there any way to protect the owner and the asset under these circumstances? Granting a power of attorney is a good way to ensure that management continues uninterrupted during the owner’s absence or disability.
The simplest and most common method used to provide for continuity of management authority is to authorize someone to act in the owner’s place under a power of attorney. Depending on how it is drafted, the management authority delegated can be effective immediately, which is useful if the owner is leaving the country for an extended period. It can also spring into effect upon the future incapacitation of the principal.
Authority delegated to an agent under a power of attorney generally ceases upon the incapacity of the principal but with proper drafting, a durable power of attorney will continue in force after the onset of the principal’s incapacity. This method effectively delegates authority to an agent on the principal’s incapacity and continues during the period in which he is incapacitated. Given the obvious advantages, a competent estate attorney will generally prepare a springing durable power of attorney for a client that owns investment property in order to mitigate management risks arising out of the owner’s incapacity. While it may never be used, the management authority conferred might just save the client’s estate if something serious goes wrong. In all cases, however, powers delegated under a power of attorney, whether general, special, durable or otherwise, cease on the death of the principal. A competent estate plan should address the ultimate interruption of management authority that occurs at death.
— Jonathan Christianson is vice president/corporate counsel at Asset Preservation, Inc.