The contract that you decide to sign with a property management company should not be something that you sign without reading carefully. You need to understand every word within the contract to be sure it is the right agreement for your property. A contract that is signed between you and a property management company clearly defines the terms related to the services you will or will not receive and what potential costs you will incur. The contract will also determine what legal rights you have surrounding the contractual relationship.
It is a common misconception that by interviewing a prospective property management company that it is sufficient to not read the contractual agreement carefully. Both steps are crucial in determining whether the right property manager has been selected and the right contractual agreement has been signed between the parties. The contract is designed to eliminate confusion and create a clear mutual understanding of how the contractual relationship will operate in all foreseeable circumstances where a dispute could arise.
Don’t let positive impressions about the company’s professionalism and ethics make you less attentive when trying to understand the terms of the contract. Any company that tries to get you to sign without understanding the agreement is trying to trap you into an undesirable agreement.
Even though the “fine print” may seem cumbersome to read through, it is valuable to do so. If you fail to read through the “fine print,” it is possible that you will have fundamental misunderstandings about the property management services that are included, associated property management fees, how tenants are treated, and what you must do and/or owe in the event that you want to end the contractual relationship. Ask questions about anything that you do not understanding. Do not wait until the last minute to ask for the contract. Get a copy of contracts from each company that you are interviewing to compare them. This way, you can negotiate terms with the company you end up selecting if you want to integrate terms that you were comfortable with from another company’s contract.
Do I Need a Lawyer?
This answer depends on you. However, if you have invested a substantial amount of capital in a rental property and are looking to be financially successful in your endeavor, you need to set yourself up for success. If you did not go to law school, that is a non-issue; however, if you do not have a basic understanding of contracts, you are going to need to consult with a lawyer. Some real estate lawyers also have contacts in the property management sector that could be additional companies for you to explore. Make sure to have a lawyer look over any contract that you are unsure about. Lawyers can serve as a resource to recommend options and can save you a great deal of capital from avoiding mistakes by having a clear understanding of contractual agreements.
A Three-Part Guide to Breaking Down Management Contracts
It is important to remember that there are many different kinds of contracts. Some contracts are complex, some are not. Also, some contracts have certain requirements to be tailored to specific industries. In essence, there are three primary parts to contracts between property owners and property management companies. Bear in mind that each section is dense and that there are many components included in those sections to protect both property owners, tenants, and the management companies. Review the sections to learn more about what to look for regarding a contractual agreement between a property owner and a property management company:
Responsibilities and representations are a fundamental part of the contractual agreement. They need to clarify what each party needs to do to successfully perform on the contract.
Broker responsibilities are essential. The clause needs to cover what the broker needs to do and what aspect of their services are included in their fee. The kind of fee they are charging needs to be clarified along with what happens to the fee in the event of vacancies or early termination.
Extra duties are nice to offer property owners; however, they need to be mentioned in the contract accompanied by an exact price that the property owner will be required to pay on top of the existing property management fee agreement.
Clauses regarding legal compliance with local, state, and national law should be mentioned in the contract to protect both parties.
Advances are something that needs to be included. It should be mentioned whether the company is willing to front expenses and if so, what period the property owner has to reimburse them.
Owners Representation and Responsibilities/Duties
There should be a clause indicating the owner’s legal right to sign an agreement for their property with a property management company. This clause can also mention certain tasks that the owner must complete.
Insurance is wise when dealing with tenants. A clause about how insurance will be paid for should be mentioned as well.
Contract termination protocols must be written clearly and followed precisely.
The term of the contract must be identified clearly. It must also be made clear if the contract is automatically renewed to avoid confusion.
Owner termination needs to be defined and what fees are charged when an owner terminates a contract early.
If an agent terminates the contract early, then there has to be a clause defining what will happen next.
Duties Upon Termination
Duties upon termination should be clear and have a defined timeline. This will help speed up the transition and help the property owner to be eligible to keep their existing tenants or find new ones.
To protect the company, it has to be defined what happens if the property owner defaults on taxes, the mortgage, HOA fees, etc.
Mediation and Arbitration
To resolve future potential disputes, the contract should have a procedure in place if the two parties cannot come to a solution. Mediation and Arbitration protocols should be put in place.
If the conflict continues to escalate, the contract should have a clear clause about which party will be responsible for paying the other’s attorney’s fees.
Indemnification and Boiler Plate Terms are standard items that need to be at the end of the contract to provide clarity on what function the contract can possess.
Liability and Indemnification
Liability and Indemnification clauses define what things the property management company can and cannot be liable for. Also, they define what kind of compensation can occur if the property management company or property owner is liable.
Boiler Plate Legalese
Boiler Plate Legalese is a common cause found at the end of contracts. Normally, attorneys will pick and choose which ones are the most relevant to the contractual agreement they are writing.
An Entire Agreement clause protects the contract as only the text on the contractual document itself. It does not include prior conversations.
Modification is something that usually has to be requested in writing. There should be a clause in the contract about Modification.
Assignments occur when a company would assign the contract to another company. Be careful with assignments. Ideally, you will want to not include these as an option in property management contracts.
Timing should be mentioned in every clause where there is a doubt. The duration of the agreement, timing to complete certain tasks, etc. must be documented in clauses of the contract.
Governing law is wise, particularly for property owners located outside the state where their property is located. This will make it easier to go to court if it is required in the long-term.
Severability is important if one part of the contract is no longer valid and the parties want to keep the rest of the contractual agreement in place. Contracts should have a Severability clause defining what occurs if a clause has to be removed from the contractual agreement.
Are you looking to understand more about the property management market and how legal contracts are applicable between property management companies and property owners? If so, we highly recommend using Rental Choice to help you with your upcoming search and our guide to assist you with walking through each step of finding the right property manager for your property. If you want to discuss our services, email us at email@example.com or contact us online.