Details of the Management Agreement

The property manager is concerned on a daily basis with a multitude of management details such as rental rates, merchandising space, negotiating leases, adequate insurance coverage and competition from similar buildings. However, ultimately he or she must be concerned with the understanding they have with their property owners.

The management agreement is a written understanding between the property owner and the property management company (referred to as the agent). The agreement details the duties, responsibilities, rights and obligations of each party throughout the existence of the agency relationship.

Managers’ and owners’ obligations are often complex. The written contract spelling out the understanding of the parties avoids any misunderstandings as to rights, obligations and duties. The management agreement or contract is only put into written form after the property manager and the client have met and reviewed in detail their requirements.

If the property is operated by a department of the ownership a formal contract, in the agency sense, may not be necessary. However, there must be the same sort of recitation of rights, duties, obligations and responsibilities as between the management entity and ownership entity.

Terms of the Property Management Contract.
The term of the agreement between the property manager and property owner will vary depending upon many factors. Some of them are: 1) The size of the project and the scope of the property management work; 2) The extent of problems. The property manager must have an agreement with the owner that allows sufficient time to solve the existing problems and be adequately compensated for his services; 3) The owner’s objectives. In many cases there will be considerable work to be done in order to transfer ownership at a fair price to the owner.

If one of the owner’s objectives is to sell the property, then the property manager must insure that the management agreement allows sufficient time to accomplish this goal. Under these circumstances the contract would probably have a cancellation agreement in the event the property is sold.

A primary consideration in determining the term length of the agreement should be the amount of time needed by the property manager to accomplish any agreed-upon goals. The property management company should be provided a fair profit for services rendered during the term of the contract. Bearing this in mind, management contracts are written for varying terms, depending upon specific situations. An initial term normally might be one or two years, with possible negotiated cancellation conditions. Any extensions should probably be on an automatic annual renewal basis unless one of the parties desires to make a change in the terms and conditions.

Contracts which are not backed up by the good faith and cooperation of both parties are often difficult to live with. For this reason there often is a base period established in which to accomplish certain goals (as outlined above) and then a reversion to a month-to-month agreement. In some cases, the property manager may prefer to be released from the contract if he or she has difficulty working with the owner. In the final analysis, the intent of both parties is the most important factor in any contract.

The parties to the agreement.
The owner should be named in the agreement and the agreement should be signed by the owner or his/her authorized agent. It’s a good policy to determine how legal title to the property is held and thus be sure that the contracting parties have the right to contract.

The contract:
• Must be dated and include a commencement date as well as a specific termination date or provision for termination.
• Should provide a description of the property.
• Should provide a clause pertaining to the execution of leases and other documents by the property manager. If the property manager is to execute leases on behalf of the owner, the maximum length of term of those leases, as well as other terms if appropriate, must be stated.
• Must address repairs. The agreement should specify the amount the property manager may spend for any repair without the consent of the owner.
• Should state who will pay for advertising and/or promotional efforts.
• Should state the responsibility for procuring and payment of proper insurance to cover the property. If this becomes the owner’s responsibility, it should be clearly stated in the management agreement.
• Should have a bank account clause. There should be no commingling of funds between the property manager’s business and that of the owner.
• Should be a cancellation or Termination Clause. This is a clause which clearly states under what conditions cancellation of the management agreement can be made.

The last clause of the contract is a clause which states employees on the property are employees of the owner and not of the property manager. While the employees are normally under the direct control and supervision of the property manager, they are paid out of the owner’s funds by the manager.

Worker’s compensation, insurance, social security, etc. are payable whether the employees are those of the property owner or the management firm. A Supreme Court decision stated that only from the standpoint of the Wages & Hour Laws are employees under certain conditions to be considered as those of the manager; regardless of contractual provisions, they are the employees of the property owner. In some cases on-site employees may be employees of the manager. If so, the agreement should so state and should include any pertinent recitations relative to compensation.

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