The Basics of a Property Management Contract
When you hire a property manager, you need to carefully review their management contract. You need to make sure you understand the responsibilities of the property manager, the responsibilities of the landlord and make sure you are protected if the manager does not fulfill their obligations.
Services and Fees
The first basic part of the management contract you must understand is what services the property manager has agreed to perform and how much they will charge for these services. You need to understand what services are included in the management fee, what services can be performed for an additional fee and what services will not be performed under any circumstances.
The management fee is the most common type of fee that a property manager will charge. Pay close attention to how this fee is broken down.
Do not immediately rule out a property manager because it seems they are charging a higher fee. Property managers who charge a lower initial fee may be charging more for “extra duties” such as filling vacancies, paying bills, maintenance issues, and eviction procedures. You need to read the management agreement very closely to determine what services are actually included in the management fee and what services are considered extra and require additional payment.
For services that are considered extra, the agreement should clearly spell out how you will be charged for these duties. Is it a flat fee, a percentage fee or will the fee be determined on a case by case basis before the service is performed?
Also, be aware of the services the property manager will not perform under any circumstances. This will vary from company to company but common exclusions include refinancing a property or extensive remodeling. Make sure the manager is not excluding anything you consider an absolute necessity, such as finding tenants, collecting rent or handling emergencies.
Responsibilities of the Property Owner
The second part of the contract that you must understand is your responsibilities as the landlord. This section of the contract will define what you are obligated to do by signing the agreement and what you are prevented from doing.
Two examples of obligations of the property owner are:
Set Up and Maintain a Reserve Fund—The landlord is responsible for putting a specific amount of money into a reserve fund that the property manager can use for daily obligations, maintenance issues, and emergencies. You are also responsible for making sure that the fund never falls below a specific amount.
Obtain and Maintain the Proper Insurance—The management agreement should specify the types of insurance and the amount of coverage you must obtain. It should also note if the property management company must be included under your coverage.
Two examples of restrictions on the property owner are:
Finding Tenants—Most agreements will prevent the property owner from placing a tenant in the property themselves. This is meant to protect the property manager from having to manage a tenant that has not been selected according to their guidelines.
Entry—The property owner may not enter the property unless they notify the tenant beforehand or get approval from the property manager.
This is the part of the contract that limits the property manager’s liability. It is known as the hold harmless clause. In general, this clause will protect the property manager, except in cases where they have been negligent.
The property manager is not, however, responsible for the negligence of third parties they hire. For example, a property manager is not responsible if they hire a contractor, and the contractor causes damage to the property.
To protect yourself, you should make sure there is a “reasonable care” clause in the agreement. For example, the manager will not be held liable if “reasonable care” has been taken when hiring a third party—a.k.a they should do their research and not hire a contractor with a history of complaints against them.
You want to try and avoid signing a long agreement until you have proven results from, and confidence in, the management company. Unfortunately, most management companies will not sign a contract for less than a year. In this case, you will want to carefully review the termination clause and make sure you are able to terminate the contract if you are unhappy with the service.
Make sure the management agreement has a clear termination or cancellation clause. It should state why and when the property manager/management company has the right to terminate the contract and when you, the landlord, have the right to terminate the contract.
Notice to Terminate:
You must usually give between 30 and 90 days' notice to terminate the contract. Make sure the agreement also states that the property management company must give you at least 30 days' notice if they decide to terminate the contract.
Fee for Early Termination:
You will often have to pay a fee for terminating the contract early. This fee will vary from a few hundred dollars to having to pay all fees the management company would have accumulated over the remaining length of the contract.
Reason to Terminate:
You will want to look for a contract that does not require cause to terminate the agreement. You will also want a clause that allows you to terminate the contract without penalty if the management company fails to find a tenant within a specified amount of time.
Obligations Upon Termination:
There should also be a list of duties that must take place upon termination and the time window they must be completed within. For example, the property management company must provide the property owner with copies of all tenants' leases within 14 days of contract termination; or that all money owed to either party must be paid within 30 days of contract termination.
If you have any further questions in regards to property management contracts, do not hesitate to contact us for advice.