It is crucial that landlords carefully review their property management contracts before signing them. In doing so, they can make sure they are not agreeing to unreasonable terms or hidden costs.
Understanding the Parts of a Property Management Contract
For a lot of property management companies, the contract simply represents another deal. It contains standard information that they would normally include in all of their agreements. But, for landlords, the property management contract is far more important. The contract outlines all of the details of the agreement between the two parties, including what the company is expected to do for the landlord.
It is important that all landlords understand what their property management contracts are saying. Apart from the basics, there are also clauses that may or may not hurt the landlord in the long run.
Here are the parts of a standard property management contract and what they mean.
1. Scope of Work
A property management agreement must detail, in clear terms, the scope of work. This should dictate what the property management company is specifically responsible for. The scope of work should, at the very least, include the following:
- Services the property management company must provide each month
- Details of the screening process, including how the company approves tenants (if the scope of work includes tenant screening)
- Responsibility to collect rent as well as overdue rent
- Maintenance and repair responsibilities
- How maintenance and repairs will receive approval and funding
- Reports the company must send to the property owner as well as how often they must be sent
Obviously, the more responsibilities a property management company has, the higher the fees. The opposite is also true. The scope of work will generally define how much a property owner needs to pay.
2. Owner Responsibilities
Even though property owners outsource most of their duties to a management company, there are still some responsibilities left for them to fulfill. The contract will also typically state what these responsibilities are.
A common obligation of the property owner is to create and maintain a reserve fund. Owners must deposit a certain amount of money into a separate bank account, which the property management company will use to fund maintenance and repairs. The reserve fund can also normally be used for emergencies.
Another common obligation of the property owner is to buy and maintain proper insurance. Owners should not expect the company to do this for them. It is generally the owner’s responsibility to pay for insurance, though owners can receive guidance from their company. The contract will detail the types of insurance required as well as the amount of coverage necessary.
Apart from what the owner must do, the contract may also cover what the owner is prohibited from doing. Common examples include finding tenants (if the company is responsible for tenant placement) and entering the property without notifying the property manager and tenant.
3. Fee Structure
Property management contracts are never complete without describing the fee structure. The contract should detail the different property management fees the owner must pay. This includes the monthly management fee as well as any other fees the company charges on the side. The agreement must also include cost estimates for man-hours, benefits, and the like.
Monthly management fees typically come in one of two forms. The first is fixed-rate or flat fee property management. This is when the company charges the owner a flat rate every month. The rate will usually depend on the size and type of the property as well as the nature of services provided.
The second is fees collected as a percentage of rent. This is when the company collects a percentage of the monthly rent as their management fee. The percentage can vary from one company to another, though the general range is between 8% and 12%. Landlords should make sure that the percentage is based on rent collected instead of rent due. Otherwise, they will be paying the company a fee even when they fail to collect any rent from the tenant.
4. Duration, Renewal, and Termination
The terms of a property management contract should indicate the duration of the agreement. It should have a beginning and an end date. There must also be renewal provisions, which should tell the owner how they can renew the contract if they want to.
Keep in mind that some contracts do contain an auto-renewal clause. This means that the agreement will automatically renew for another set number of years if the property owner does not cancel the contract within the required time period.
Speaking of cancellations, the contract must also indicate how each party can terminate the contract. This includes any terminations made early (i.e. before the contract expiry). Termination clauses should include the following:
- Notice to Terminate. How much notice must each party provide the other before terminating the contract? Typically, this plays between 30 and 90 days.
- Reason to Terminate. Owners should make sure to enter a contract that does not require them to provide a cause to terminate the contract early.
- Early Termination Fee. Generally, a company will charge the owner a fee if the latter opts to end the contract before its expiry. This fee can vary from one company to another. Some companies charge a fixed termination fee. Meanwhile, others will charge the owner the total cost of the monthly management fee for the remaining months in the contract.
- Obligations After Termination. The contract should outline the list of obligations the property management company must perform and how long they have to complete each obligation upon contract termination. This includes turning over all related bank accounts to the owner and sending the owner the original copies of all tenants’ leases.
5. 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. Typically, a contract will be broader and more comprehensive in terms of what the property management company requires the property owner to indemnify them from.
What Does Indemnification Mean?
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 a property management contract indemnification clause is outlined below. Please note that it is not wise to apply this direct text to your particular agreement. It only serves as an example of what types of elements appear in an indemnification clause.
Example of 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.”
Reasonable Care Clause
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, it is a good idea to add a clause 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.”
Property Management Contract Boilerplate Items
The following are common clauses owners will find at the end of many contracts. Owners should understand what these clauses mean so that they can reference them later in the event of a dispute.
1. Entire Agreement
An Entire Agreement provision establishes that, regardless of what the owner 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.
The contract should clearly define how modifications work at the very start of the agreement. The modification clause will typically state that neither party can alter the contract unless both provide a written agreement amending it.
Assignments are a grey area that many individuals do not understand. This is when a company reserves the power to transfer the contract to another company without the owner’s permission. It is always best to make sure the owner has a say before the company transfers the contract to another firm. Owners may also negotiate to remove assignments from the 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. The following serves as an example:
- “The property management company must provide the property owner with at least 30 days’ notice if they would like to terminate this Contractual Agreement…”
5. 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.
Knowledge of the parts and functions of a property management contract is critical to every rental property owner. Familiarity with the contract not only gives them the ability to negotiate better but can also protect their interests.
Many owners find it hard to manage their rental property alone. Find the best property management company today with the help of Rental Choice’s online directory.
- What To Look For In A Property Management Agreement? How To Terminate It?
- What Are The Legal Liabilities Of Property Managers
- Broker, Owner, And Landlord Responsibilities