All happy landlord/property manager relationships are alike. All unhappy landlord/property manager relationships are unhappy in their own way.
Yes, I’m stealing the intro from Leo Tolstoy’s great novel Anna Karenina, but it’s true: If every business relationship went perfectly, no one would need to pull out a contract. Money would be paid on time, and all expected services would be delivered as expected. Everyone would be happy. In the real world, people are imperfect and forgetful. Honest people make mistakes, and average people look for ways to “shave the edge.”
We need contracts because people are imperfect, and because disputes inevitably arise even under the best of situations. A good contract doesn’t just list services, goods and fees. A good contract also anticipates the many things that can go wrong, and spells out what happens in these situations.
That’s a valuable safety valve.
The rule of law takes over to settle disputes, and ensures a fair and just process, though sometimes an imperfect one. At a minimum, however, any property management engagement contract should address the following elements.
Let’s begin with the obvious. The property management contract should spell out deliverables. That is, it defines who does what for whom and when.
This section spells out the manager’s responsibilities to the landlord, of course. But it also spells out the owner’s responsibilities to the landlord.
At a minimum, it should define the following:
- Basic services the management company must perform every month
- Tenant screening criteria
- Who screens tenants and how they are approved
- Rent collection responsibilities
- Responsibilities for repairs and how they are approved
- How the landlord will fund repairs
- Cash reserves the landlord will provide up front
- Responsibility for landscaping, gardening, pool maintenance and other ancillary activities and how they are funded
- Reports due to the landlord
- Services that the property manager can perform on request, for an additional fee, but which are not part of the basic monthly package of services.
2. Fee structure
The contract should address both routine fees and charges that occur every month, as well as startup and close-out costs. There are also expenses that come up from time to time in any property management engagement and your contract should address these, as well:
Monthly fee. Is it a flat rate? A percentage of rent collected? Or a percentage of rent due? There is a big difference between all these arrangements: If the contract calls for the landlord to pay the property manager a percentage of rent due, as opposed to rent collected, the management firm is entitled to their fee even if they do nothing to collect from a slow-paying tenant, and even if they fail to get a property rented! It’s still workable, but if you’re paying a percentage of rent due, rather than collected, your monthly fee should be that much lower to compensate you for the risk of non-collection or vacancy.
I much prefer contracts that pay on the basis of rent collected, because that method aligns the interests of the landlord and the management firm. They are on the same side in any problem with a tenant, and both have a powerful incentive to keep a property rented.
Other elements of fee structure to address include:
- Who keeps application fees?
- Who keeps security deposits?
- Who keeps late fees?
- What routine repair and maintenance services are included in the monthly or annual retainer vs. the responsibility of the landlord?
- Who pays bad check fees?
- Who collects bad check penalties from the tenant?
Generally, a property management contract will specify that the property owner must “hold harmless” the property manager for any liability that arises as a result of the reasonable, competent and diligent exercise of its responsibilities within the scope of the property management engagement. The usual exceptions are:
- Gross negligence on behalf of the property manager, its staff or its agents.
- Acts (or omissions) that are not within the scope of the contract. If a management firm starts to wander “off the reservation” in managing the property and the tenants, it could expose itself to liability. Otherwise, the assumption is that liability is the responsibility of the landlord, since the property management company was selected by the landlord and is acting as the landlord’s agent.
As a landlord, it’s your responsibility to keep adequate homeowners coverage and liability umbrella coverage in place to cover yourself against claims made by tenants and others, both against you and against the property management firm. But property management firms should maintain errors and omissions insurance and liability insurance of their own, as well. This protects both the tenant and the landlord, as well as the management firm itself.
4. Cancellation Procedures
Generally there’s a beginning and an end date, as well as renewal procedures specified in the contract.
The contract should also specify how either party may end the contract – generally by providing a certain number of days notice to the other party, and by accounting for deposits, reserves, or other money the management firm may be holding on behalf of the owner.
Look for a contract that provides enough time for the landlord to provide a replacement, and to provide for an orderly unwinding of operations on the part of the management firm.
What state laws govern the contract? This could be vitally important, for example, with out-of-state landlords.
6. Legal Compliance
Landlords should demand that their property managers comport themselves in accordance with applicable laws. It’s therefore a good idea to include a clause that all parties will carry out their duties in accordance with these major federal laws:
- Fair Housing Act
- Americans with Disabilities Act
- Soldiers and Sailors Civil Protection Act, the
- Fair Credit Reporting and Collections Act
You should also consider including other relevant federal and state laws and any local ordinances governing housing discrimination, codes and zoning.
Naturally, the property owner has a right to expect the same of the landlord – and has tremendous self-interest in doing so.
Case law has established that despite the hold harmless clause mentioned above, landlords and property management firms share liability in the case of violations of housing discrimination laws.
7. Amendments and Change Orders
What happens if it’s necessary to change the terms, services, fees and conditions in the contract, midstream? A good contract allows for flexibility for two parties acting in good faith to make arrangements to ensure that the engagement is mutually beneficial and long-lasting. You don’t want one party to be eager to end the contract at the first legal opportunity. Strive to craft a win-win agreement that is sustainable for both parties.
8. Points of Contact
Who, specifically, is the contract manager at the property management firm? Who is authorized to make decisions within the scope of the agreement in a non-emergency situation? Controlling who is making decisions or acting on them is a big part of avoiding miscues.
9. Pictures or Diagrams
Include these as necessary to clarify language in the contract.
If the property has furniture, tools or appliances, the property management firm should account for them. Include these as an annex to the contract. These items should be in place or serviceable whenever a tenant leaves, or the property management firm should collect enough from the security deposit to replace them or forward the amount collected to the owner.
Place a dollar value on these items. The management firm should sign for them, and in turn have any tenants sign for them when they move in.
11. Arbitration procedures
Some contracts call for mandatory arbitration of disputes. This could limit both party’s right to sue, but could save a lot on court costs. Your contract should specify any mandatory arbitration and/or mediation. State laws vary.
Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.