Contract termination is a sensitive issue that needs to be handled with care. Be sure to review the information below about different ways contractual agreements can end between property owners and property management companies.
Most property management companies require a contract period that ranges between 1-2 years with very few offering month-to-month options. A contract will be legally binding on its execution (signing date) even if the start date or effective period could begin later. After the initial or primary term is over, the contract may automatically renew itself for another term repeating the process each time the expiration date occurs. It is best to find out how long of a term the auto-renewal will commit you to. If you want to prevent this automatic renewal from taking place, you may have to provide written notice of at least 15-30 days before it renews.
The termination clause is an important component of the contract. It will outline under what circumstances either you or the manager can end the relationship prematurely and what penalties or costs you will incur as a result. Without any potential exit plan, you may be trapped if the relationship does not work out well. Find out how much notice the management company requires before allowing the termination of the contract. 30 days is normal; however, some companies require up to 90. If showing a cause of termination is required, make sure to clarify what sort of cause would need to be shown to terminate the agreement.
Will there be any fees or penalties for terminating the contract early? Not all managers charge a fee and if they do, it’s a flat fee ranging from $300-$500. Conditions can be applied and can range from you having to pay a fee if you cancel during the initial vacancy period or if you cancel after a tenant has been landed. Other contracts are stricter and require future management fees for the life of the contract to be paid upfront as a prerequisite to early termination.
Ideally, you want to structure a contract that allows for termination without cause with 30 days’ notice. This clause provides protection to property owners because it forces property management companies to be accountable for the level of service they provide, so much so, that they are confident you will want to keep working with them. If there are high fees as an effort to retain clients, then this is a bad sign.
There should also be a provision to allow you to exit the contract without penalty if the manager is not able to secure a tenant within an extended period of time (3-4 months). If you do decide to terminate your contract, make sure your written termination date is the exact contract term expiration date to avoid being liable for penalties.
Be sure to pay attention to the circumstances in which the management company cancels the contract, the notice they will give you, and any potential financial implications it could have. Here are some sample clauses to give an idea of circumstances that enable the property management company to terminate the contract:
- “… if the agent in its sole discretion deems the continuation of the agreement subjects itself to liability or is in breach of its duties to the tenants or any other persons.”
- “If Broker determines that Broker cannot continue to effectively provide leasing and management services to Owner for any reason at any time during this agreement…”
- “…should Owner fail to promptly fund repairs required by any city, county, or state law, regulation or ordinance and/or to maintain the condition of the property being rented in a habitable condition as required by either the rental agreement and/or applicable California code sections or appellate decisions, or if the Owner fails to promptly comply with any government-issued Notice of Corrections or court orders.”
- “…Owner has made any misrepresentation of material fact regarding the real property, the tenant, and/or the status of the landlord-tenant relationship, if any, or has been or is not acting in strict conformity with this Express Property Management Agreement and Authorization, or fails in any way to cooperate with the Agent in managing this real property.”
Be sure to understand that some contracts don’t even contain an agent termination clause. However, if they do, they can include a very broad general list of circumstances. Be sure the contract entitles you to provide adequate notice (30 days) in the event that this does not occur. Lastly, find out what the financial ramifications of agent termination will be. An example of a circumstance you may be dealing with is outlined below:
- “In the event that this (name withheld) Agreement and Authorization is terminated for cause as allowed by this section, said termination will not release nor relieve Owner of its responsibilities for payment to Agent of expenses and management fees for the full term of this (name withheld) Agreement.”
Duties Upon Determination
Once either you or the management company has decided to terminate the relationship, there are still important events that need to happen in order to make a legally clean break. Owners need to make a final payment to the management company to settle the account and the contract should ideally cover the tasks below for the management company:
- Providing the owner with a final financial report along with the remaining rents on hand minus the agreed-upon agents’ fees and funds needed to cover all outstanding expenses the manager has incurred as a result of managing the property. There should be a time condition dictating how quickly this should occur after termination. In addition, check if the contract contains a clause giving the manager permission to withhold owner funds, either all or a portion like the reserve, for a certain period of time. 30-60 days is the standard time procedure for this to take place.
- Providing the owner with the necessary records and documents. This includes a list of tenant security deposit obligations, copies of tenants’ leases, and other instruments entered into on behalf of the owner.
- Providing the owner with a record of tenant security deposit obligations.
- Transferring security deposits either to the owner or the owner’s new agent minus the deductions stipulated in the contract.
- Providing tenants written notice of the precise dollar amount of the security deposit and informing them that the owners or owner’s new agent is now responsible for returning their security deposit.
- Giving tenants written a notice that they are no longer managing the property and providing the contact information of the owner’s new agent.
If either party breaches the contract, it needs to be stated how long they have to fix the issue before the other party has the legal right to terminate the contract. This period typically ranges from 0-30 days.
Mediation and Arbitration
The contract should specify the use of a mediator or arbitrator to resolve disputes. It should also be clear who pays for the process and who will preside over the process until there is a resolution.
If legal proceedings should arise, it should be made clear which party will be required to pay for attorney’s fees. Make sure of whether the contract puts a maximum on this amount as well.
Another important issue related to contracts between property owners and property management companies is Indemnification and Boiler Plate terms. To learn more about these legal aspects and how they relate to contracts between property owners and property management companies, continue to the next section of this guide.