What is a Property Management Agreement?
Property management agreements are documents that outline the relationship between a landlord and a property manager. These contracts establish the terms and conditions under which the property manager will operate. The majority of comprehensive management agreements also contain confidentiality clauses that prohibit the disclosure of any listing information by the listing agent.
The property management agreement details the term of the contract, whether it is one year, two years, five years, or more. It also describes the agency agreement for that time period, whether exclusive or non-exclusive.
For example, an exclusive listing means that the property manager shall be considered the sole and exclusive agent for leasing, managing , and supervising the property. A non-exclusive agreement means the property manager will be a co-listing agent.
The property management agreement sets out additional roles and responsibilities of the property manager. These can range from finding qualified tenants to collecting rent. It lays out the responsibilities for maintenance of the buildings to paying insurance on the properties.
The property management agreement protects both parties by updating the compensation schedule for the services provided. The agreement will define the fees that the property manager is entitled to under the terms of the contract.
Key elements typically found in a comprehensive property management agreement may include the following:
- Terms. Describes the duration of the services of the property manager.
- Compensation. Describes the fees associated with the services of the property manager.
- Responsibilities. May describe tenants, property maintenance, rent collection, legal matters, tenant evictions, or other duties.
- Termination of the Agreement. Discusses how the property management agreement can be terminated.
- Confidentiality Clause. Includes nondisclosure agreements for the property manager.
The above list is not exhaustive. The property management agreement will ultimately be based on the jurisdiction and state laws in which the property is located.
Important Provisions of the Property Management Agreement
The key clauses in a property management agreement are generally those that identify the fee structure and duration of the contract. In addition, these clauses set forth the responsibilities of the property owner and the property manager.
Fees
The fee structure is important because it specifies how the property management company will be compensated for it work. A percentage of rent collected is common, but the percentage can vary based on such factors as mortgage payments for the unit, whether maintenance is included in the duty, and the frequency of commission payments. Frequently, a property owner must cover the expense of any maintenance that may be required, but at all times, the property owner is entitled to see an accounting of all expenditures. These fee clauses will be most important when calculating the profit that you receive from the property.
Term of the contract
The term of the contract will set out when the employment of the property manager will take effect and when it will end. It may also specify whether the contract is automatically renewed or requires notice for early termination.
Duties and responsibilities
The duties and responsibilities of the owner and the property manager are important so that each party knows what is expected. In general, the property manager will agree to locate a responsible tenant, collect rent or other fees, handle maintenance requests and emergencies, oversee billing for utilities, and fulfill other duties agreed upon between the parties. In return, the owner usually agrees to pay the property manager and rectify any problems with the unit that are identified.
How to Write a Property Management Agreement
When drafting a property management agreement, several elements must be taken into consideration in order to create the most comprehensive and beneficial agreement for all parties concerned. Below is a list of the key items that must be included in a property management agreement, or as addendums to such an agreement. Whenever possible, it is best to consult an attorney so that the draft of the agreement is in accordance with local laws and regulations.
Even if you are an experienced property manager, it is probable you need help from a real estate lawyer to draft or review property management agreement, especially if what you are doing falls outside standard management practices in your location.
Sample of a Property Management Agreement
When examining a sample property management agreement, it is important to be able to recognize which of the provisions are of crucial importance to an owner. Specifically, an owner should consider the following:
i. Compensation and Exclusivity
ii. Workload and Communication
iii. Responsibilities and Remedies
iv. Termination
Of these, compensation and exclusivity are likely the most important. The owner’s sole reason for hiring a property manager is to be compensated for business activities involving the owner’s property. To help ensure that the owner is adequately compensated for this type of activity it is necessary for the owner to review and understand the compensation terms of the agreement.
In addition to examining how the manager will be compensated, the owner should also examine the exclusivity terms of the agreement. A property manager will be much more likely to "go the extra mile" and provide better service if the agreement states that the manager will be paid for its services on a commission basis. Of course, to be truly exclusive the agreement’s exclusivity terms should generally prohibit the manager from overseeing other properties concurrently with the subject property. In this way, the manager is dependent on the subject property for its salary (as opposed to earning commissions on other properties overseen by the manager). The most comfortable arrangement for the owner, and consequently the most exclusive arrangement for the manager, is for the owner to be the manager’s only client.
Next, the owner should examine the workload and communication terms of the agreement. It is best to set a minimum and maximum workload at the time of entering an agreement. The owner does not want the manager to become overwhelmed by properties under management, nor does the owner want the manager to be underwork and therefore wasteful. By setting a minimum and maximum, the owner ensures that the manager will focus on each assignment and maintain its responsibility to the owner.
Finally, the owner should examine the responsibilities and remedies terms. If the manager fails to perform its duties, what remedies does the owner have? Is the agreement terminable upon default by the manager? What actions may the owner take to recover any loss caused by the manager’s breach of the agreement? If the owner does not reserve the right to recoup its losses, these losses can potentially cripple the owner’s investment.
Samples of property management agreements can typically be found on university or professional organization websites. The Florida Association of Realtors for example has a sample management agreement on its website. This type of sample agreement constitutes a "good faith" effort to capture the most common terms and conditions governing property management agreements.
How to Not Make Mistakes in your Management Agreement
Property owners and managers should be mindful of certain pitfalls when creating or signing a property management agreement. When an unclear, misleading, or incomplete property management contract is presented to the manager or property owner for execution, the terms of the property management agreement may not be upheld. Without a good property management contract, many managers and landlords face litigation and other legal or financial consequences that could have been avoided.
The following are common mistakes made by property owners and managers when creating and executing a property management agreement: Disputes between landlords and managers may arise when the terms of the contract are ambiguous. The usual and most logical effect of an ambiguous agreement is that the courts will interpret it against the party responsible for its drafting. In legal terms, this is known as the doctrine of contra proferentem. However, there are exceptions to this doctrine. A court will consider the intent of the parties when determining if the contract should be construed against the drafter. The drafter’s construction is given effect if the proper interpretation is equally balanced between the parties’ interpretations. A landlord may provide an ambiguous agreement for the manager to sign. If the agreement is poorly written, unclear, or contains loopholes , the agreement may be construed in favor of the tenant. A badly drafted property management contract may or may not favor the manager or property owner. Often times, if one party will be at a disadvantage, it is the property manager. At times, the manager will be negotiating on behalf of the owner based on a verbal understanding. Some owners do not seek advice from a legal professional before executing a management agreement. When a manager is negotiating on behalf of an owner, the customer (owner) must be clearly identified; otherwise, the property owner may not be able to hold the manager to the terms of the agreement. The buyers (managers) should not necessarily rely on anything offered verbally. If any language is added to a contract based on a verbal agreement, it should be in writing. Likewise, if anything is taken out of the agreement based on a verbal agreement, it should be in writing. Badly drafted contracts often include vague language. This may allow either party to place the blame on the other. For example: "agency fees will be paid at the close of escrow." This does not give the manager a clear remedy before the escrow closes should the tenant not pay. Also, the agreement states: "agent may charge a $35 late fee." The contract does not state who may charge the fee and does not address when a late fee is assessed. These mistakes could lead to a manager losing time and money.
Legal Matters and Best Practices
The legal considerations in a property management agreement extend well beyond the identification of the parties and the property, and the provisions of the agreement as to the permitted rents to be collected and the services to be performed. These agreements are subject to a panoply of established laws and regulations. Here are a few areas of importance to consider:
- Fair Housing. Regardless of whether you have just one rental property or 100, fair housing laws generally apply to any unit that is rented out to tenants. Furthermore, the Department of Corrections has even recently advised that housing law extends to every single-family home that is rented out. Are you ready for the potential for inquiries into your past?
- Landlord-Tenant. There are many property management companies that advertise and dispatch individuals to handle postings and turn-overs of residential units. Many of these are not licensed property managers and are actually being classified as "latents" by law enforcement. This erroneously equates with a property manager. The powers of a property manager are often limited by State law and/or local ordinances.
- Rent Control. Many municipalities have extensive laws and ordinances regulating the collection of rent, the payment of rent every month, fees associated with non-payment of rent and perhaps most importantly, the ability of the landlord to raise the rent. Many of these ordinances are difficult to understand and contain other requirements such as disclosure statements and/or notices to tenants. Is there a disclosure ordinance in the municipality where the property is located? Are security deposits restricted and if so, how? Does the municipality have a points system that limits the number of times a landlord may bill for late fees? All of these issues need to be addressed by a property management company in order to comply with the law.
- The Americans with Disabilities Act. There is no question that every type of landlord should be aware of the American Disabilities Act and how it may apply to both commercial and residential tenants. However, it is a far more challenging question whether a professional property management company should be conducting their own assessments of properties or working with the Code Enforcement Officer in the municipality where the properties are located to determine what accommodations are needed.
Reviewing and Amending a Property Management Agreement
Just as the initial drafting of a property management agreement is a critical step, so too is the regular reviewing and updating of the agreement over time. It is easy for property owners to forget about the terms of their landlord-tenant relationship once the agreement is signed; however, the agreement is an important living document that should be revisited from time to time. Failure to revisit it can be costly, especially since the laws governing the landlord-tenant relationship continue to evolve. Some of the many reasons a property owner may need to update its property management agreement include:
- Amendments to federal, state, or local landlord-tenant laws that may affect the types of agreements allowed;
- Changes in desirable lease terms or techniques that can generate increased revenue or reduce costs;
- Changing priorities due to the owner’s revised business strategy, such as getting out of commercial leasing and focusing solely on residential leasing;
- Alterations in the marketplace that necessitate a different management fee structure;
- Bad or changing relations between the property owner and its management company; and
- Frequent requests for alterations to the management agreement by the management company, which can add up to significant liabilities for the property owner over time.
Once a need to update the agreement is identified, implementing those changes should be done carefully and in a manner that does not cause confusion or unintended legal consequences . Both parties should review each proposed change to determine whether it makes good sense. Revisions to a property management agreement intended to save money, for example, could have a negative impact if the change causes the management company to cut services. On the other hand, amending the agreement to clarify the scope of the manager’s authority or to revise the timelines for certain actions may allow the manager to provide more timely and cost-effective service.
It is also important to personally review the updated document and understand its contents. Owners retire all the time and it is important that a new owner understands any and all rights and obligations under the property management agreement. I have also had many clients come to me after the original property owner passed away and informed me that their children were shocked to find what a bad deal they had made with the management company. Many people think that ‘trustee’ means ‘an honest broker.’
Fortunately, changing the terms of a property management agreement does not require the parties to totally renegotiate the entire agreement each time. Legislative activity, marketplace changes, litigation, and management practices can often be addressed by making targeted changes to specific provisions of a property management agreement. Importantly, property owners should understand and know about the issues before they take effect.