Introduction About the Property Management Agreement
Property management refers to the management of the affairs of a property. It includes, but is not limited to renting out the premises, maintenance and housekeeping activities, managing utility payments, and maintaining the accounts. As a property manager, he is required to look after the needs of the tenants and act as a SPOC between the tenants and the owner. He is also in charge of collecting dues and rents along with meeting the requests of the tenants.
Apart from that, he’s also responsible for ensuring there is reasonable occupancy in the property. This means that he is required to advertise the property suitably and ensure all the legal requirements are taken care of with respect to maintenance or paying taxes. He also acts as a liaison for any lawsuits brought by the tenants. An agreement entered into between the owner of a property and a company or an individual being hired to manage the property is a property management agreement.
It is a standard requirement for the transaction, and primarily outlines the roles and responsibilities of each party towards the property and each other. It also allows both parties to define the terms of the arrangement clearly and helps in avoiding any future disputes. Further, for any legal purposes, the agreement holds as a binding document and provides proof of the arrangements between the parties.
Who Takes the Property Management Agreement?
The agreement is between the owner of a property who wants to make use of property management services, and a company or individual having a license to provide the service. These are available for both commercial and residential properties. The terms are subjective and depend on the needs of the property owner and the conditions of the manager.
Purpose of the Property Management Contract
The primary purpose of the contract is to appoint a manager for the property, and to highlight the roles and responsibilities of the parties involved. Property management services are very subjective and largely depend on the parties. As such, it is essential to lay out all the terms and conditions beforehand. It enables the concerned parties to set their expectations and limitations and reach a mutual agreement. The agreement also makes it easier to hold the concerned party accountable and provides proof in the event of any disputes.
Property management agreement docs are essential tools that owners and managers use to manage the property. It outlines the scope of work, terms of engagement, and working relationship between the parties. It also sets a standard of performance for the building during the term of the agreement.
The owner may protect his interests by setting restrictions on the use of the property and from a conflict of interest of the manager. On the other hand, the manager or management company can protect themselves in the event where the owner does not comply with his responsibilities regarding access, power of attorney for the functions and the payments. Overall it enables a smooth flow of operations and helps minimize conflicts. It provides clarity of the terms of the arrangement and ensures that the parties are on the same page.
Types of Property Management Agreements
The types of property management agreements depend on the type of property being managed. They are classified as the following:
- Commercial Property Management Agreement – These agreements are for commercial properties. These include industries, offices, restaurants, malls, etc.
- Residential Property Management Agreement – There agreements are for residential properties. They include individual houses and apartments.
- Real Estate Property Management Agreement – These agreements are for the real estate, i.e. the land and the property attached with it.
Although the general structure of all these types of agreements would remain the same, certain clauses are altered to the specifics of the property.
Contents of the Property Management Agreement
Property management agreement must be comprehensive, yet transparent. It can’t leave room for ambiguous terms that can lead to misunderstandings. A standard property management agreement template contains
- Acceptance of appointment by the manager – There is no requirement for a separate acceptance letter. The agreement can serve as a detailed document for both purposes.
- A detailed listing of the duties and responsibilities of the manager – These should include a thorough list of tasks that the manager is expected to perform and how he must go about it.
These can include the following:
- Advertisement of the property to look for tenants, show the property to prospective renters and to review their applications.
- Terms of renting the property to tenants and the conditions of security deposits, rent receipts, termination and eviction of the tenant.
- Carrying out of the maintenance activities for the upkeep of the property.
- Hiring of a team to conduct the contracted services.
The obligations of the owner of the property – These must include the provisions for items necessary for the manager to carry out his activities. These can include the following:
- Maintenance of property ownership, insurance and other mandatory documents.
- Maintenance of funds to make payments to the manager for the performance of his duties and any out of pockets expenses incurred.
- Provision of any critical information regarding the property to the manager.
- Provision of any assistance or further documentation that the manager may need to perform his duties.
- Details of the fees and other payments to the manager – This should include a breakdown of the payments to be made to the manager for his services. It may be presented as a schedule of the payments, including the amounts and payment due dates. Further, the method of computation of the fees may also be highlighted. The payment can be made as a fixed fee, as a percentage of the income earned from the property or as a combination of both.
- Reimbursements to be made to the manager – These include the repayment to the manager or management company for any expenses they incur for the property on behalf of the owner.
- Conditions of use of the property – These may include any restrictions that the owner may want to apply. He may restrict the manager from entry to the property without prior intimation or from making use of the property for his personal agendas.
Lastly, the agreement must also contain the general contractual clauses which include:
- The names, registered addresses, and other details of the parties.
- The term or the duration of the agreement.
- The details of causes that may lead to a violation of the agreement.
- Circumstances wherein the agreement may be terminated and the procedure to be followed for the same.
- The governing laws of the agreement and its jurisdiction.
- The legal standing of the agreement in the event of any modifications in the governing laws.
How to Draft the Agreement?
When drafting the contract, the main concern is to eliminate any uncertainty and have a mutual understanding between the parties. It is important to keep the following concerns in mind:
- Service Fee: How will a manager be paid for his services, and what is the scope of his services
- Owner Responsibilities: The owner is responsible for timely payments. In case an owner sells the property, the agent shall have exclusive right of representation. He shall also indemnify the agent for any loss or damage caused because of the owner
- Liability: The division of liability between the owner and the agent should be spelled out clearly. In case of any misrepresentation by the owner, the agent shall not be responsible. All legal fees have to be paid by the agent. The liability of the owner extends to providing insurance for the property
- Contract Validity and Termination: The period of representation of services and the agency relationship continuance should be mentioned. Along with this, the grounds for termination, and the completion of the contract date should be discussed. Also should be included information about any possibility of extension of contracts. The notice period that should be given before termination should also be mentioned
- Compensation: The compensation that the agent should receive for any misrepresentation, omission, failure of performance or any other acts for which the agent becomes liable should also be mentioned
- Modification: The agreement should contain information about any modifications that would be allowed as part of the contract. It should also mention whether these modification would be in respect of the scope of services or the relationship between the parties
- Assignment: The contract should mention who the rights and responsibilities can be assigned to and how the assignment process should take place.
- Miscellaneous Clauses: Any information about the notices that are required to be furnished by the owner or represented by the agent should be mentioned. In addition to this, the location and description of the point of service provider should be included.
At the time of negotiations of a property management agreement, it is imperative that the parties agree upon the terms mutually. Both parties must ensure that they have procured the necessary licenses and documents. They must keep in mind that the services are collaborative, and they require the assistance of the other party to have a smooth-running system in place. As such, the concerns of both parties must be addressed in the clauses laid out.
Lastly, the clauses on dispute resolutions form an important part. The best practice would be to anticipate the common defaults that may arise and negotiate on the strategies to solve the same. Some leeway may be given for certain types of defaults while other defaults may lead to the termination of the agreement and legal proceedings.
Benefits & Drawbacks of a Property Management Agreement
The advantages and disadvantages of property management agreements are similar to that of hiring any third-party manager to oversee aspects of any business. With that said, the benefits of the arrangement are seen in the following:
- The arrangement provides for the hire of experienced professionals who have expertise in the field and can conduct the work efficiently.
- It saves the time and resources of the owner of the property and frees him up to focus on his priorities.
- It saves the owner money he would otherwise lose on negotiations with other parties.
- The hire of a management company also assures business continuity as all their employees would provide the same standard of service and help in not upsetting any of the business activities.
The arrangement also comes with some inherent drawbacks. These are seen in the following:
- There is a loss of control in the affairs of the property from the point of view of the owner. The management company takes the transactions forward, and it may not be in the exact manner as the owner expects.
- Despite outsourcing the tasks, the owner may still have to be involved in supervising the same. In the event of any defaults or misconduct from the manager, the reputation of the owner is damaged.
- The management company is subject to a conflict of interest and may act in a manner more beneficial to him rather than the owner.
While the drawbacks may be addressed to a certain extent by including clauses to protect the parties, it makes the agreement less flexible and may hamper the day-to-day operations.
What Happens in Case of Violation?
The agreement is considered to be violated(1) if either party fails to comply with the clauses(1). There are various degrees of violations, and the proceedings are decided based on the same.
In case of minor defaults, the parties generally agree to extend the timeline of the activity so that the task may be performed. This may be done by modifying the agreement or agreeing otherwise. In the case of repeated issues or larger problems, the parties may want to terminate the agreement. The contract usually provides the measures to be undertaken in case of any conflicts or when either party wants to terminate the agreement. Lastly, the agreement holds as a legally binding document and may be used in the court of law as proof in the case of litigations.
In conclusion, a property management contract provides the parties with a comprehensive document wherein all the terms, conditions and expectations are laid out. It allows a common understanding and sets up the system for both parties to benefit from. It also provides any concerned party with the information they may need about the arrangement, and it protects the parties from any disputes that may arise.