Understanding Property Management Contracts
If you don’t get it right from the start, property management contracts can end up being one giant headache later down the line. Any property owner who rents out their property will tell you that it can all be plain sailing until things start taking a turn for the worst.
The idea of hiring a commercial property manager is to take all of the groundwork away from the owner and make their life as easy as possible. There is a lot of legwork that must be done when it comes to renting out commercial properties and the more of these that can be offloaded in the property management contracts, the better.
In this article, we will look over the key aspects of property management contracts and some of the key areas of interest for both parties. A management contract’s definition is to precisely detail the responsibilities, fees, limitations, and liabilities of the manager in a wide variety of situations, however, more often than not there are still some gray areas.
With that being said, let’s jump into the specifics.
Outline The Scope of Work
What are the manager’s responsibilities? This needs to be highlighted very clearly in the contract, so much so that there is no room for ambiguity. Here is a list of some of the key responsibilities that are found in most management contracts definition:
- Advertising the property for rent
- Engaging with potential renters/buyers
- Screening potential buyers effectively
- Entering into rental agreements with the renters
- Maintenance and repair of the property
- Hiring personnel
- Handling legal proceedings
Labor Estimates and Fee Structure
It’s important to clearly identify the fees that the property manager will be able to charge during the term of the arrangement. As with any service that we purchase, we must know how much money it will cost us and what service we are getting for that price. This should be very clearly stipulated within the contract.
It’s essential that both parties recognize what services are covered under the management fee and what isn’t. The services that are not covered will typically require an additional fee from the property owner. In fact, there will be situations where the service will not be covered at all, and these scenarios must be covered by the property owner.
In the instance that the property manager must do extra work on the property, then there should be a set way to determine labor estimates for this work.
There will inevitably be expenses that the property manager will incur as a result of the responsibility, such as advertising, maintenance, and potentially legal fees. The manager should provide an invoice for this, and the owner will be liable to reimburse these costs.
Contract Amendments, Duration and Cancellation Procedures
If possible, it is always better for the property owner to refrain from entering into a long term agreement before seeing proven results from the property manager in question. It can be time-consuming and costly to make amendments to the contract once it is in place, so opt for a short term solution before committing to anything of a longer-term.
Typically, most management firms will not be open to signing a contract that is shorter than 12 months. If this is the case, then you must carefully consider the termination clauses to prevent any nasty surprises further down the road.
Make sure you are aware of the fee for early termination, the notice period that must be given, and whether or not there needs to be just cause for the termination.
NOTE: Be sure to stipulate what the property management’s obligations are upon termination. This should be things like handing over documents and the settling of accounts in a timely manner.
Generally speaking, each contract should have in it an indemnity clause that will indemnify the property management for any damages that are beyond their control.
This is an added layer of security for the property management company and means that the property owner must take control under very specific situations, such as; natural disasters, severe defects in the property, and any damage or extra work that is taken on by the property owner themselves.