What Is A Property Management Contract?
A property management contract is a legal agreement between a real estate owner and an estate agent through which the real estate owner hires the estate agent to manage, control, operate, rent, lease and maintain a rental property on his behalf.
The contract designates the manager as a service provider and gives him the task of superintending over the owner’s rental property.
Nature of relationship
The relationship between a manager and the owner is an agency relationship. The owner is the principal while the manager is the agent. It means that the manager owes the owner legal and fiduciary duties.
A manager as the agent of the owner is subject to the control by the owner. He is not an independent agent like agents who simply just search for tenants and receive a onetime commission from the tenant or the landlord.
The manager once appointed becomes a defacto landlord. He or she though representing the landlord can also be referred to as the landlord.
The tenancy law defines a landlord as the owner of the property or anyone acting as his agent.
The property manager can also institute or defend a court action against the tenants in the name of the landlord with respect to the managed property.
Essential ingredients of a property management contract
By entering into a property management agreement, both parties are exchanging a promise for a promise.
The manager is promising that he will superintend over the property, while the owner is promising that he would compensate the manager for his services.
Although a property management contract can be created orally, it is, however, better to have it in writing.
The Parties
The parties in a property management agreement are the owner and the manager.
The owner can either be an individual, group or corporate owner of a piece of real estate, a beneficial owner or his representative.
The property manager is usually a sole proprietor, partnership or company licensed to practice the business of estate agency within the state or country where the property is located.
The Property
The property to be managed must be adequately described in the contract. It is possible that there may be more than one property involved. If that is the case, all the properties must be listed and described in the agreement.
A real estate property to be managed can either be a bare land or a developed property.
It can also belong to any of the asset types such as residential, commercial, industrial or mixed-use property.
The description of the property must include the address, the type of property and what the property is to be used for.
A property management contract is usually but not always for rental properties.
Mode of Operation
The contract must include also the modus operandi of both parties. Since the contract designates the manager as the owner’s agent, then the contract must specifically state the duties of the manager with respect to the property.
Some of the duties of the manager would include:
- Duty to advertise and search for tenants
- Duty to communicate with tenants
- Duty to ensure that tenants observe the rules of proper care of premises.
- Duty to carry out periodic inspection of the premises
- Duty to demand and collect rent on behalf of the owner
- Duty to institute or defend court actions on behalf of the owner
- Duty to effect repairs on the premises
- Duty to engage third party service providers on behalf of the owner
These are just some of the duties the manager owes the owner.
Other duties are implied by law some of which are fiduciary duties. Fiduciary duties connote that the manager owes the owner duty to act in the owner’s best interest.
The manager also owes the owner the duty to properly manage the funds he receives from the tenant. He is not to make a secret profit at the expense of his principal.
The law of property management requires the manager to operate a separate bank account for the purpose of receiving and managing clients’ funds.
This would ensure that the manager would not co-mingle his funds with his client’s funds.
Consideration
A property management agreement should also include a consideration clause which stipulates the pecuniary benefit that would accrue to the property manager.
Contingency Fee
In most cases, compensation is percentage-based.
Hence, the owner compensates the manager for his efforts by asking him to deduct a percentage from each rent he collects.
The rate could be between five to fifteen per cent. What this means is that the manager gets paid each time a tenant pays his rent. If the manager receives the rent on the owner’s behalf, he is expected to deduct his commission from the rent and remit the balance to the owner.
Retainer Fee
An owner can also compensate the property manager by paying him a fixed fee which does not constitute a percentage of the rent. A fixed fee is a retainer type of payment which when paid covers a specific length of time.
For instance, an owner can pay a bulk sum to the manager to cover for the period of one year. A retainer fee can either be paid in advance or in separate instalments.
Property Maintenance And Repairs
One of the duties of the manager is to watch over the property and ensure that it is kept in good condition. This requires periodic maintenance and repairs of damages occasioned on the property.
Generally, the tenants take care of the internal repairs and minor wears and tears of the property, while the landlord is to repair the external and structural features.
The owner may also be forced to make some repairs when a tenant moves out in order to make the property attractive to prospective tenants.
A property management agreement should contain the mode of repairs, how the repairs are to be made and where the costs of repairs are to be drawn from.
In some cases, the owner authorises the manager to deduct a further five per cent from the rents collected and apply it to the repairs of the premises. This money must also be kept in a clients’ bank account and should not be co-mingled with the manager’s personal funds.
Reports and Notices
Every manager must give periodic reports to the owner either in writing or through verbal updates. The report ought to be in writing and accompanied by other forms of communication.
The report is of two folds. The first is the tenant and property updates and the other is the financial report.
Every property contract should mention the reports, how and when it should be given.
Also, the contract should contain a clause for notices. The notices include letters, reports, notifications and information that are peculiar to the property management.
The question to be answered is, what makes a notice valid? Should it be a letter sent by post, or a phone conversation or an email etc?
Dispute Resolution Clause
The dispute resolution clause defines the mode of dispute resolution between the manager and the owner. Mostly an arbitration clause might be included specifically to forestall the parties from adopting litigation in the event of a dispute.
Termination Clause
The termination clause specifies the procedure by which both parties can bring the relationship to an end if they ever or whenever they want to. The termination clause usually stipulates the party who intends to terminate to notify the other party of his intention to terminate the contract.
Take-Aways
- A property manager is an estate agent who superintends over a rental property on behalf of an owner.
- The property manager is subject to the control of the principal and cannot act outside the scope of his authority.
