The property management agreement is a dated agreement signed by both the manager and the owner (or the owner’s authorized representative) that defines the relationship between the parties, serves as a guide for the operation of the property, and provides a basis for the settlement of any future disputes.
Property management agreements are as varied as the types of real property and the forms of real estate ownership. Specific circumstances aside, most management contracts share the following essential elements:
- Identification of the parties and the property
- Period over which the contract is to run
- Authority and responsibilities of the manager
- Responsibilities of the owner
- Fees and leasing/sales commissions
- Signatures of the parties
Click here to download the property management contract that we use here at Aqua.
This agreement illustrates the kinds of issues that must be resolved before the manager accepts responsibility for the property.
“Successful negotiation is not about getting to ‘yes’; it’s about mastering ‘no’ and understanding what the path to an agreement is.” – Christopher Voss
Identification of The Parties and the Property
The owner’s name ought to appear on the contract exactly as it does on the title or deed to the property.
Required signatures vary depending on the type of ownership. The property must be unmistakably identified.
Parties vary. If the property is owned by a partnership, each partner’s name should be stated in the property management agreement and each should sign the document.
With corporate ownership, the corporate name should appear on the contract, a duly authorized corporate officer should execute the agreement, and, where required,…
…the corporate seal should be affixed to the document.
Identifying the property. Although a full legal description usually is not required, the property must be described so as to leave no doubt concerning its identity, location, and extent.
Exclusions. Exclusions should also be noted. For example, if the owner of an office building that has a restaurant and bar on the first floor wants to deal directly with the restaurateur…
…the property description in the property management agreement should specifically exclude that particular area.
Next, the property management agreement must stipulate a term of service.
There is no single standard term for a management contract. Its length is a function of the size of the property, the responsibilities delegated to the manager, and the future intentions of the owner or owning body.
Terms vary. Long-term contracts are uncommon. Some owners want a provision for cancellation.
Other owners may be thinking of selling their property in the near future and do not want to hinder the sale with a long-term management contract that cannot be cancelled.
On the other hand, the manager who assumes responsibility for a large new property, exerting a considerable initial effort to lease the premises and set up a management system, wants sufficient protection as compensation for his or her extra effort.
…therefore, management agencies usually will seek a minimum one-year contract period.
The amount of additional time requested under the terms of the contract will depend on how much initial effort is needed to take over the management of the premises and obtain a profitable lease-up rate.
Thus, clauses in standard management contracts leave the length of the agreement open so that a mutually satisfactory number of years can be inserted in the appropriate.
Contracts may be for a definite period of time or may also contain a provision for automatic renewal on a yearly basis unless notice of termination is given within the period set forth in the contract.
Termination. Generally, language is included to permit either the owner or the management agent to terminate the property management agreement by giving appropriate notice.
Notice to terminate may be served in person or by registered mail to the address listed on the contract. Mail notices should be sent “Return Receipt Requested.”
Cancellation is considered to be effective when the notice is deposited in the mail.
Termination by agent due to an owner’s illegal acts does not release the owner from his or her obligations under the contract terms.
The longer the agreement, the more likely things will change. Procedures for future amendments should be built into the property management agreement to adapt the agreement to changed circumstances.
The manager is responsible for conveying to the owner information regarding the property. The following reports offer an idea of the status of the property and insight into the effectiveness of the owner.
Monthly reports and disbursements. The owner depends on the agent to prepare a monthly earnings statement itemizing income and expense for the owner’s property.
Surety bonds. As a rule, the property manager’s employees who handle funds have to be covered by a surety bond, obtained at the manager’s expense.
Handling funds. Most contracts (and most state laws) require the manager to maintain a separate bank account for the owner’s funds…
…that is, the owner’s funds should never be commingled with the agent’s personal or business funds.
Traditionally, if the manager worked for more than one owner, the manager should set up an individual account for each client.
However, with today’s software programs, the manager can easily track deposits and expenditures in one bank account without the necessity of multiple accounts, and deposit slips.
Authority to rent, operate, and manage premises. The terms of the contract should list the agent’s authority to lease, collect rents, terminate tenancies, return security deposits, evict tenants, and bring legal action for recovery of lost rents.
The most important is the agent’s authority to sign leases, for the statutes of fraud in most states do not consider an oral lease agreement of more than a certain duration (usually one year) to be enforceable.
Expenditures. Expenditures for maintenance, personnel, and services are an inherent feature of property management, but the amount the agent may incur without consulting the owner must be stated in the property management agreement.
Marketing costs. Advertising is considered part of the normal operating expense for many properties and, as such, is usually charged to the building and absorbed by the owner. The amount of the advertising budget is typically recommended by the management company and approved by the owner.
Agent’s control over personnel. The property management agreement should also specify the agent’s powers to hire and fire maintenance personnel for the premises.
These powers will vary from contract to contract; as a general rule, though, the manager who is going to be responsible for the work done by building employees should also have the power to hire and supervise them.
The property management agreement should spell out the owner’s responsibility for miscellaneous management expenses.
It should contain a clear statement designating the person responsible for each item of management and maintenance expenses, including the following:
- Payroll—maintenance, security, and supervision
- Insurance—employee and fidelity premiums
- Payments on owner’s behalf
- Bookkeeping and auditing
- Building expenses and repairs
- Advertising for tenants
- Management Fees
Payroll. Unless previously agreed upon, the property management agreement should also clarify whether the manager or the owner is the employer of the maintenance employees….
…the employer may not actually be the same person who is responsible for hiring and supervising the employee.
Some management companies engage a third party to process all paperwork necessary to meet all statutory requirements governing the employer-employee relations, including payroll…
…the employees work for the employer; the third party simply exercises all human resource responsibilities.
Insurance. The property management agreement should also specify that the owner will carry, at his or her own expense, sufficient liability and workers’ compensation insurance.
The owner and the manager should be named as co-insureds on these policies, and the owner should provide the manager with certificates of evidence for such coverage.
For the manager’s protection, a stipulation should be included that the manager may purchase such insurance at the owner’s expense if certificates of coverage are not produced within a reasonable period.
It is in the manager’s best interests to review the terms of these policies, for the owner usually looks to the manager to work closely with the insurance agency to settle any claims that might arise.
Purchasing. The owner should agree in the contract to give the agent a schedule of payments that must be made for debt service, taxes, special assessments, or insurance premiums. The manager can then budget or establish reserves for these items.
Building repairs. It is important for the property management agreement to contain a clause that requires the owner to make any repairs and replacements necessary to keep the premises in their current condition and operating efficiently.
Thus, the owner will be responsible for complying with the terms of the lease agreements, minimum housing codes, and any other applicable laws.
Advertising. The property management agreement should clarify advertising responsibility. Generally, it is the owner’s responsibility with smaller, scattered site housing.
As previously noted, advertising may be a management cost in very large apartment buildings and commercial properties. If it is an owner cost, limits should be set.
Management fees differ. Apartment buildings do not pose the same management problems as office buildings, and inner-city property has management needs that are different from those of suburban properties.
Nonetheless, all contracts should specify the amount of the fee to be paid, when it is to be paid, and the manner of payment. Although no universal rule exists for establishing fees, you can click here to read on two basic formulas that can be used to calculate fees.
Flat or fixed fee versus percentage fee versus other fees. The type of property will determine the appropriate fee.
A flat fee per unit may be most appropriate when managing a condominium or cooperative complex inasmuch as the owners want management to contain expenses, not increase them.
The percentage fee is a wonderful incentive, on the other hand, for the manager to seek to improve the income of the building, although a minimum fee may be established to protect management fees if the building revenue drops.
Some owners are willing to pay a lump-sum fee or bonus when a new lease is executed or if the agent reaches certain lease-up goals.
Commissions to outside leasing agents. The management agent often is not the sole leasing agent for the property, especially for commercial property.
Sometimes, the leasing fee is either split between the property manager and the leasing broker or wholly retained by the leasing broker.
In other cases, the owner may agree to pay an additional amount when an outside broker or agent is involved. All possibilities should be discussed and agreed upon in the original property management agreement.
Early termination. In all circumstances, the manager should see that the contract contains a clause that provides adequate compensation for the leases that the manager has already negotiated, should the owner wish to terminate the contract prior to its scheduled cancellation date.
The owner should be able to terminate the property management agreement upon service of proper notice as agreed to in the management contract, and the agent should receive payment for negotiating leases on behalf of the owner up to the date of termination.
The contract should also contain a provision regarding current prospects with whom the management company is or has been in negotiation with and how the management company is to be compensated if those prospects become tenants.
Antitrust issues. All fee structures must be negotiated between the owner and the manager, and terms should be kept between the two negotiating parties. Fees must not be discussed with other competing property management firms.
If members of the property management profession try to impose uniform rates (or even appear as if they are trying to establish uniform rates), they will violate state and federal antitrust laws.
Property managers must always be able to represent that the fees set by their firms have been established independently and must avoid any discussions with competing firms that may even hint at collusion. Penalties for antitrust violations include fines, imprisonment, or both.
Make sure to read all the statements of the property management agreement to be sure of things you are saying “yes” to.