There are several other components to legal contracts that need to be understood. Even though only certain aspects are relevant to property management agreements between property owners and property management companies, it is important to have a basic understanding of them to avoid costly misunderstandings in the future. If you fail to understand these issues, it is always wise to have an attorney look over your particular agreement to make valuable recommendations.
Liability and Indemnification
All contracts will have a section that addresses what the management company can and cannot be liable for. The objective behind this is to set limits and eliminate misunderstandings in the long-term. It will be better if your contract is broader and more comprehensive in terms of what the property management company requires the property owner to indemnify them from.
What Does Indemnification Means?
Indemnify means to compensate for a loss or damage or to provide security for financial reimbursement to an individual in case of any particular loss incurred by the person. Indemnification is essential in contracts because it is one of the fundamental legal theories that protect the parties. A comprehensive example of an indemnification clause is outlined below. Please note, that it is not wise to apply this direct text to your particular agreement. It is meant to serve as an example of what types of elements need to be included in an indemnification clause.
“Liability and Indemnification:
1. The broker is not responsible or liable in any manner for personal injury to any person or for loss or damage to any person’s real or personal property resulting from any act or omission not caused by Broker’s negligence, including but not limited to injuries or damages caused by:
- Other brokers, their associates, inspectors, appraisers, and contractors who are authorized to access the property;
- Acts of third parties (for example, vandalism, theft, or other criminal acts);
- Freezing or leaking water pipes;
- A dangerous condition or environmental condition on the property; or
- The property’s non-compliance with any law or ordinance.
2. The broker is not responsible or liable in any manner for:
- Any late fees or other charges Owner incurs to any creditor caused by late or insufficient payments by any tenant in the Property; or
- Damages to Owner caused by a tenant’s breach of the lease.
3. Owner agrees to protect, defend, indemnify, and hold Broker harmless from any damage, costs, attorney’s fees, and expenses that:
- Are caused by Owner, negligently or otherwise;
- Arise from Owners failure to disclose any material or relevant information about the Property;
- Are caused by the Owner giving incorrect information to any person; or
- Are related to the management of the property and are not caused by Broker, negligently or otherwise.
4. Owner is responsible and liable for all contracts and obligations related to the Property (for example, maintenance, service, repair and utility agreements) entered into before or during this Agreement by Owner or by Broker under Broker’s authority under this agreement. The owner agrees to hold Broker harmless from all claims related to any such contracts.”
Even though the contract typically holds the property management company liable for its acts of negligence, they are not liable for the negligence acts of those whom they hire to work on their behalf. While it would be unreasonable to expect them to be responsible for all the actions of the third parties they hire, they need to at least be responsible if they hire someone with a history of bad work and should have performed more due diligence to disqualify the unqualified candidate. To protect the property owner, a clause can be added requiring “reasonable care” such as:
- “Agent may perform any of its duties through Owner’s or Agent’s attorneys, Agents, or employees and shall not be responsible for their acts, defaults or negligence if reasonable care has been exercised in their appointment and retention.”
Boiler Plate Legalese
The following are common clauses that are found at the end of many contracts. Be sure you understand exactly what they mean because they can be referenced later in the event of a dispute.
An Entire Agreement provision establishes that regardless of what you talked about with the management company beforehand, this contract is the final version of the agreement and supersedes all prior written and oral proposals. A simple way to remember this is that the contract is confined to the four corners of the document.
Modification needs to be clearly defined at the beginning. There should be a clause stating that the contract cannot be modified unless a written agreement is provided by both parties.
Assignments are a grey area that many individuals do not understand. Find out if the company has the power to transfer the contract to another company without your permission. It is always best to make sure your approval is a prerequisite before the management company can transfer your contract to another firm. If you do not want to include assignments, then be sure to have this drafted into your contractual agreement.
It is imperative to specify particular dates and times. It is also wise to write the date in both letters and numbers to avoid any misunderstandings in the future. Many jurisdictions have a statute of limitations, which defines how long an individual has to bring a court case. Make sure to have clear dates on your contracts to protect you from unnecessary lawsuits. You also need to have clauses about timing in terms of the scope of your property management agreement. An excellent example of timing used in a contract relevant to property management agreements is:
- “The property management company must provide the property owner with at least 30 days’ notice if they would like to terminate this Contractual Agreement…”
Governing Law; Venue
This clause determines which states’ laws will govern the interpretation of the contract and may also specify the country in which all disputes should be handled. Specifying the country and state is important since the laws vary depending on where the case is heard.
Severability is important to understand. At times, a certain clause of a contract can be invalid, but the rest of the contract can remain intact. Severability enables a clause or certain clauses of a contract to remain valid and enforceable even if a specific clause is determined to be unenforceable. This helps to promote efficiency in avoiding canceling entire contracts if only one clause needs to be canceled.
Having up-to-date contractual knowledge is important when dealing with agreements between property management companies and property owners. To learn more about valuable contractual agreement information about property management agreements, continue to the next section of this guide related to What to Look for in a Property Management Contract.