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Renting out extra space? Set up protective walls to avoid risk

With more law firm employees working from home during the pandemic, a firm may find itself living in too much space—and paying too much rent. One solution is to bring in a tenant. Usually the renter is a solo practitioner or a small firm, and the arrangement is good for everybody, because the firm collects the rent and the renter gets the amenities as well as the appearance of an association with the larger group.

From a risk perspective, however, it’s a cause for concern. The firm has to look past the financial benefits to the danger spots. It has to think like a landlord and get signed documents and insurance policies. And more, it has to set up protections against the disasters specific to a law firm/law firm lease situation.

Risk of public perception

A significant risk is that the rental will create the public perception that the firm is standing shoulder-to-shoulder with the other practice. And it is perception more than reality that creates the problems. Suppose the tenant gets sued for malpractice. If there’s the appearance that the firm is connected with that attorney, it will likely be named a defendant in the suit. And no matter how removed it is from the tenant, it’s going to have to prove that the claim is the problem of another law firm. And by the time it’s over, the firm may have collected $40,000 in rent but spent $80,000 in legal time defending itself.

Some walls to erect

Any firm that sublets space needs some walls between itself and the tenant so there’s no appearance of a relationship and also so the firm has a fast exit should a claimant assert otherwise. One essential wall is a separate phone line for the tenant office. Picture the situation if both use the same line. The receptionist answers the phone with “Smith & Jones,” the caller asks for the Attorney Tenant, and the call gets transferred. There’s a clear implication that the attorney is part of Smith & Jones. There’s nothing wrong with the tenant’s making use of the firm’s receptionist, but make sure the tenant has a separate number and that the receptionist answers the calls for that number with the appropriate name. Or at the very least, the receptionist should answer the phone simply as “law offices” without mentioning the name of either the firm or the tenant.

The tenant must have a separate website, domain name and email address. Online marketing including email messaging from the tenant should not be linked to your office. Technology and technical support may be shared, but the digital presence of the two firms need to be clearly independent.

Another essential wall is separate stationery and business cards. Don’t allow the tenant to use the firm’s stationery, and certainly don’t put the tenant’s name on the letterhead.

And one more: don’t put the tenant’s name on the firm’s door. If the office layout requires that it appear there, the name plate should be designed to make it clear that the tenant is a separate entity from the firm. The best protection, though, is to build a separate entrance to the tenant’s offices. That’s physical proof that the two businesses are not related.

Shared clients = shared risk

Another risk of leasing is client sharing. It is dangerous territory, yet it’s often a natural outcome of the venture. The firm does, say, corporate work and has a client who also needs help with a real estate matter, and the tenant is a real estate firm. So, the referral is good all around. The client gets the convenience of being able to go next door, the tenant gets a new client, and the new revenue is added assurance the firm can collect the rent. But once again, in comes the danger of the public perception that firm and tenant are in business together. The protection is the engagement letter, he says. It should outline exactly who is responsible for each item for the client. When a referral is made, amend the engagement letter to say that the firm is not serving as counsel for any real estate work. There’s no need to name the other practice. Just specify that the firm is not doing that part of the work.

No, we arenʼt a couple

Two other areas need strong protection. They are the lease agreement and the insurance. Include in it a clear statement that the tenant is in no way a part of the firm and cannot present itself as such.

Insurance, and plenty of it

As for insurance, require the renter to have its own coverage. And the amount needs to be equal to what the firm has. That will make the firm less of a target should the renter get sued. Make the insurance requirement part of the lease contract. And because the insurance is essential, don’t rely on the renter’s word that the coverage is in place. Don’t even rely on a copy of the insurance declaration. Go further and require that the renter make the firm a certificate holder of the policy. That way, the insurance company not only has to give the firm proof of the renter’s insurance but also has to notify the firm if the insurance lapses or is canceled. Require the renter to carry two types of insurance. One is business insurance, which is general liability coverage for everything from natural disasters to slip-and-fall accidents. The other is professional liability insurance, or malpractice coverage. If the tenant doesn’t have it and is sued for malpractice, the firm will become the target. Require the tenant to carry as much malpractice coverage as the insurer will allow, and preferably the same amount the firm has.









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