California Code of Civil Procedure Section 116.540 – The Property Manager as Legal Representative in California Small Claims Court!
As a California property manager you have many fiduciary duties owed to your clients (the property owners). In working on their behalf, the property manager and the property owner will have a written agreement between them that spells out what the rights and the duties of each party are, and will spell out compensation terms, for example. But there is one clause I have yet to see in a property management agreement (having represented a good number of real estate brokers/property managers in BRE investigations, trust fund accounting audits, and licensing accusations), THE SMALL CLAIMS REPRESENTATION CLAUSE. This is actually a clause that COULD make you money, if you are so inclined and have a little “Perry Mason” or “Addecus Finch” in you. Interested? Read on.
California Small Claims Court
California small claims court is not “BIG” claims as Plaintiff’s and Defendant’s can slug it out for up to $10,000. That’s right. And small claims court is much FASTER than a traditional civil court case. In the property management context, small claims cases abound in regard to landlord/tenant disputes, and each party, at times, has the legal right and incentive to sue the other. In other words, at any given time a property owner could be a Plaintiff or a Defendant in a small claims case.
Some disputes that might arise include:
- Disputes over security deposits
- Tenant’s who commit waste on the property after eviction
- Damages for constructive eviction
This is just the top three that come to mind.
California Civil Code Section 116.540
There is law currently on the books that allows a property owner to have a property manager represent the land owner in a small claims case. Here is what California Civil Code Section 116.540 says:
116.540. (a) Except as permitted by this section, no individual other than the plaintiff and the defendant may take part in the conduct or defense of a small claims action.
(b) Except as additionally provided in subdivision (i), a corporation may appear and participate in a small claims action only through a regular employee, or a duly appointed or elected officer or director, who is employed, appointed, or elected for purposes other than solely representing the corporation in small claims court.
(c) A party who is not a corporation or a natural person may appear and participate in a small claims action only through a regular employee, or a duly appointed or elected officer or director, or in the case of a partnership, a partner, engaged for purposes other than solely representing the party in small claims court.
(d) If a party is an individual doing business as a sole proprietorship, the party may appear and participate in a small claims action by a representative and without personally appearing if both of the following conditions are met: (1) The claim can be proved or disputed by evidence of an account that constitutes a business record as defined in Section 1271 of the Evidence Code, and there is no other issue of fact in the case. (2) The representative is a regular employee of the party for purposes other than solely representing the party in small claims actions and is qualified to testify to the identity and mode of preparation of the business record.
(e) A plaintiff is not required to personally appear, and may submit declarations to serve as evidence supporting his or her claim or allow another individual to appear and participate on his or her behalf, if (1) the plaintiff is serving on active duty in the United States Armed Forces outside this state, (2) the plaintiff was assigned to his or her duty station after his or her claim arose, (3) the assignment is for more than six months, (4) the representative is serving without compensation, and (5) the representative has appeared in small claims actions on behalf of others no more than four times during the calendar year. The defendant may file a claim in the same action in an amount not to exceed the jurisdictional limits stated in Sections 116.220, 116.221, and 116.231.
(f) A party incarcerated in a county jail, a Department of Corrections and Rehabilitation facility, or a Division of Juvenile Facilities facility is not required to personally appear, and may submit declarations to serve as evidence supporting his or her claim, or may authorize another individual to appear and participate on his or her behalf if that individual is serving without compensation and has appeared in small claims actions on behalf of others no more than four times during the calendar year.
(g) A defendant who is a nonresident owner of real property may defend against a claim relating to that property without personally appearing by (1) submitting written declarations to serve as evidence supporting his or her defense, (2) allowing another individual to appear and participate on his or her behalf if that individual is serving without compensation and has appeared in small claims actions on behalf of others no more than four times during the calendar year, or (3) taking the action described in both (1) and (2).
(h) A party who is an owner of rental real property may appear and participate in a small claims action through a property agent under contract with the owner to manage the rental of that property, if (1) the owner has retained the property agent principally to manage the rental of that property and not principally to represent the owner in small claims court, and (2) the claim relates to the rental property.
(i) A party that is an association created to manage a common interest development, as defined in Section 4100 or in Sections 6528 and 6534 of the Civil Code, may appear and participate in a small claims action through an agent, a management company representative, or bookkeeper who appears on behalf of that association.
Since the statute authorizes you to appear on behalf of a property manager client, it is seriously doubtful there could be any legal argument to be made that you are somehow engaged in the unauthorized practice of law (a misdemeanor in California).
Do broker fiduciary duties apply (ex. the duty of competence and due care)?
An agency establishes a fiduciary relationship. See California Civil Code Sections. All acts done by a real estate agent or salesperson on behalf of a property owner (client) requires the licensee to act in the best interests of the client and to adhere to fiduciary duties of due care and competence. In Kelly v. Steinberg, 148 Cal. App. 2d 211, 217, 306 P.2d 955, 959 (1957) the California court of appeals noted:
Thus, it is important to understand that even though going to small claims court is not something that shows up in real estate audits, or on the real estate exam, there is an argument to be made that failure to properly appear in a case, whether as Plaintiff representative (counterclaims are possible in small claims) or as representative of a defendant landlord, there is liability on the line by virtue of the agency undertaking.
ATTORNEY STEVE LITIGATION TIP: If you are planning of serving as legal counsel on behalf of one or more of your property owners (realizing this can be an excellent source of income depending upon what you charge, which should be fair and reasonable and agreed to in writing in advance) you owe it to yourself to take a few minutes and watch our popular video TIPS ON WINNING YOUR CALIFORNIA SMALL CLAIMS CASE.
As property manager (without formal legal training) are you willing to serve as representative in a civil court case?
Obviously it presents an interesting question of whether or not a property manager would want to get involved in small claims types of cases on behalf of the land owner, or basically just tell the property manager (in the written contract) any legal issues will be referred out to the owner’s general counsel, or words to that effect. In my opinion, having litigated in state and federal courts across California and Arizona, you should not even CONSIDER representing your owner in Court UNLESS:
1. You love to make oral presentations in front of a room full of people
2. You are not intimidated by cross-examining a witness or presenting evidence in front of a judge
3. You have the time and willingness to review the facts of your case, and make an evidence notebook
4. You are not a “closer” in the sense of having the passion to go into small claims court and close the deal (i.e. prove your case by meeting the applicable burdens of proof)
5. You are willing to adhere to your broker fiduciary duties and make sure you properly prepare for the case, perform any required legal research, and ready to create a fully documentable file showing your work and preparation (yes, you could lose the case, and yes, the owner could get upset with damages as high as $10,000).
If you feel up to it after reading this, then a small claims property management lease provision might be in your future.
What should your property management agreement say to provide for this possibility?
While a real estate lawyer should always be consulted before inserting language into your property management contracts, here is some general clause language to consider discussing with your real estate law firm (we are here if you need us and we draft custom property management contracts):
Property manager and owner agree that in the event any legal action arises in regard to the management of the property, for which Broker has been retained, Broker agrees to serve as a small claims representative for Owner upon Owner’s request. In such event, Broker and Owner understand that in pursuing such representation, both are relying on the provision authorizing such as set forth in the California Code of Civil Procedure Section 116.540 which states:
(h) A party who is an owner of rental real property may appear and participate in a small claims action through a property agent under contract with the owner to manage the rental of that property, if: (1) the owner has retained the property agent principally to manage the rental of that property and not principally to represent the owner in small claims court, and (2) the claim relates to the rental property.
Broker discloses and represents that he/she is not a lawyer and does not give legal advice under any circumstances. Broker reserves the right to discuss the small claims case with a real real estate attorney of Broker’s chosing and to have the lawyer review the case for general legal tips, including case preparation, evidence issues, legal reserach, burdens of proof and other elements that may be required. Owner expressly waives any right to confidentiality that may exist, and consents to paying any legal fees not to exceed $500. Broker will seek recovery of any attorney fees in the small claims court, but in the event the Court does not award these fees, Owner agrees to reimburse Broker for such fees.
Owner understands and agrees that there are no guarantees as to any case outcomes, and the service will be provided on a “best efforts” basis. Owner agrees to reimburse owner for all other costs of the legal action. Owner agrees to reasonably cooperate with Broker in preparing and handling of the small claims case. Broker shall be paid the fee of $_____.
This is just a sample, and there may be other or additional clauses that need to be considered. Contact us at (877) 276-5084.
Filing the Declaration
One of the rules set forth in the above cited code section says:
(j) At the hearing of a small claims action, the court shall require any individual who is appearing as a representative of a party under subdivisions (b) to (i), inclusive, to file a declaration stating (1) that the individual is authorized to appear for the party, and (2) the basis for that authorization. If the representative is appearing under subdivision (b), (c), (d), (h), or (i), the declaration also shall state that the individual is not employed solely to represent the party in small claims court. If the representative is appearing under subdivision (e), (f), or (g), the declaration also shall state that the representative is serving without compensation, and has appeared in small claims actions on behalf of others no more than four times during the calendar year.
If you are interested, here is a link to the Declaration to appear in small claims on behalf of the property owner (SC-109).
Contact a California Real Estate Small Claims Advisor
We can help review your case and help provide legal tips to help you achieve victory. This includes tips to prosecuting and defending a civil action, burdens of proof advice, legal research regarding applicable stare decisis case law, and to help you prepare cross-examination questions and winning arguments, creating a trial notebook tips and preparing your evidence. If you are not up to this on your own, you should engage our low cost hourly rate of $125/hour (minimum two hour engagement). Flat rate legal fees are also possible upon request. Call one of our business and real estate attorneys at (877) 276-5084.
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