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Defining a Property Management Agreement

This article will serve as a guide to what is needed in a Property Management Agreement to avoid potential real estate disputes between owners and property managers.

What is a Property Management Agreement?

With the known volatility in the stock market since the “Dot-com Bubble” in the late 1990’s the Financial Crisis spanning 2007 to 2009, and even today’s global market crash arising from the COVID-19 Pandemic, people have looked to invest in options such as real estate that have proven to be more stable than the fluctuating and uncertain stock market.

Today, more than ever, people have recognized the benefits in real estate and diversified their investments to include the ownership of residential or commercial property.  This has grown to become a lucrative source of income. 

Often, owners who may not have the time, professional skills, or experience to successfully manage an investment in commercial or residential property will delegate the task to a third party.  The result is a bustling and booming market of professionals vying to provide the best services in managing real estate on behalf of owners.  In California, a property manager is required to be licensed through the California Department of Real Estate.

A property manager takes care of many aspects of owning commercial or residential properties, such as ensuring the property is rented/occupied, handling maintenance and repairs, managing the appearance of the property, collection of rent, interacting with the tenants, and fielding disputes or complaints from tenants.  But not every property manager is the same and not every property manager provides the same services.

So, how does an owner know what duties a property manager will perform?  How does an owner protect themselves from liability in the event a property manager makes a mistake, causes injury or damage, fails to perform the services required, or fails to meet expectations?  Enter the Property Management Agreement. 

A Property Management Agreement is a contract between a property owner and the company or person hired to manage the property.  This contract covers all of the responsibilities that a management company is taking on for the owner.

Why Do You Need a Property Management Agreement?

As a legally binding contract, a Property Management Agreement supersedes anything that was agreed to verbally. Therefore, if an owner wants the property manager to enforce compliance of a specific responsibility or duty, it must be included in the Property Management Agreement.

Further, a Property Management Agreement states in writing the understanding and expectations of the owner and the manager.  It delineates and confirms the respective responsibilities of the owner and the manager and outlines the liabilities of each as well.  Essentially, everything the owner and property manager expect of each other should be covered in writing through the Property Management Agreement.

Potential provisions in a Property Management Agreement include, but are not limited to:

  • Advertising duties;
  • Rental/leasing duties;
  • Repairs and maintenance;
  • Reports, notices, and signs;
  • Contracting/hiring for performance of services;
  • Payments of expenses;
  • Handling security deposits and payments;
  • Periodic reports to the owner;
  • The owner’s responsibilities;
  • The relationship between the owner and the property manager; and
  • Available dispute resolution options.

However, not all real property is the same, not all owners are the same, and not all property managers are the same.  For example, a Property Management Agreement for a commercial building with multiple business tenants will need specific provisions for the businesses’ operations while a residential property needs considerations for compliance with California’s fair housing laws.  Every Property Management Agreement should be designed to best fit the particular owner and property manager and the unique circumstances of the property itself.

What is included in an effective Property Management Agreement?

Again, every property is unique, and every Property Management Agreement should be drafted to take into consideration all aspects in play between the owner, the property manager, and the property.  A well drafted Property Management Agreement may include the following more specific provisions:

  • insurance coverage required by the owner;
  • separate professional liability insurance required of the property manager;
  • whether the owner or property manager is responsible for background, credit, and reference checks for prospective tenants;
  • who can accept or reject prospective tenants;
  • eviction procedures;
  • the compensation owed by the owner to the property manager;
  • how the property manager is to be paid;
  • whether and how the owner or property manager is to market the property to the public;
  • authority for incurring expenses on behalf of the owner;
  • maximum time allowed for reasonable maintenance;
  • exceptions for emergency repairs/maintenance;
  • the form of documentation of expenses and income generated;
  • limitations on the owner’s rights to enter property occupied by a tenant;
  • a provision that the property manager will conform and adhere to all local, state, and federal laws;
  • the agreed basis for termination between the owner and the property manager;
  • duties upon termination;
  • written notice requirements for the owner and property manager;
  • a definite duration for the Property Management Agreement; and
  • options to renew or re-negotiate the terms of the Property Management Agreement upon expiration.

Important Property Management Agreement Provisions:

Of the provisions needed in an effective Property Management Agreement, the following is a brief snapshot of some of the main issues that commonly result in disputes when the Property Management Agreement neglects to address them:

Excluded Duties:

A thorough Property Management Agreement should identify and explain duties that will not be performed by the owner or the property manager.  For example, common exclusions of the duties of a property manager include refinancing the property or conducting extensive remodeling. 

If an owner wishes to exclude certain duties/actions by the property manager, it should be addressed in the Property Management Agreement.  Make sure to include and emphasize which “services will not be performed under any circumstance” and which services may be undertaken under an exigent or emergency situation.

Responsibilities and Limitations of the Property Owner:

It is important to define what the owner is obligated to do and what the owner is prevented from doing.  Usually, the owner is responsible for setting up and maintaining a reserve fund with a specific amount of money the property manager can use for daily obligations, maintenance, repairs, or emergencies.  The owner must ensure that the funds never fall below a specific amount stated in the Property Management Agreement.

In addition, a Property Management Agreement specifies the type and scope of insurance the owner is required to maintain.  Further, the property manager is usually required to be endorsed as an additional insured under the policy.   

Limitations of Liability of the Property Manager:

A Property Management Agreement can be used to limit liability.  Typically, a “hold harmless clause” is used to limit the liability of the property manager except in cases where the property manager was negligent. 

Generally, property managers are not liable for the negligence of third parties they hire.  A well drafted Property Management Agreement will include a “reasonable care” clause which mandates that a property manager will conduct proper due diligence in making decisions when hiring third parties (i.e. checking the agent’s history, reported complaints, track record, etc.).

If the property manager does not use reasonable care the owner can pursue a claim for breach of contract against the property manager.

Contract Length & Termination:

A customary Property Management Agreement runs for one year.  Obviously, this varies, but good practice is to review the Property Management Agreement annually to assess whether new provisions need to be added or if provisions need to be amended/adjusted. 

Fees usually do not remain constant and will increase over time.  Annual reviews of the Property Management Agreement will ensure that the fees an owner is agreeing to pay match with the services being rendered by the property manager.

Always include a termination clause.  This protects the owner and the property manager in the event the relationship is no longer mutually beneficial.  Property managers usually include additional fees for early termination without an agreed upon basis.  A clear outline of what circumstances or situations warrant termination will allow for a termination without any additional fees or costs.  Further, a termination clause will outline the procedure for providing proper notice of termination to the owner and property manager.

Fee Schedule:

Last, but certainly not least, the fees of a property manager must be included in the Property Management Agreement.  Fees differ based on geography/area, the type of property being managed, the type of tenants, and the specific services being performed. 

For example, some property manage agencies may charge a percentage of monthly rental income, ranging from 4% to as high as 12%; while some individual property managers may charge separately for each task performed.  Others may charge a seemingly simple flat fee paid every month based on the size of the property, number of tenants, and services provided.

Conclusion:

A Property Management Agreement is essential in all situations in which property will be managed by a third party. The benefits extend not only to the owner and the property manager, but also to the tenants who will be using the property.

The experienced attorneys at Bremer, Whyte, Brown, & O’Meara LLP can help you navigate the drafting of a thorough and effective Property Management Agreement.  Feel free to contact us today.

 

By: JohnPaul N. Salem