Essential Parts of a Property Management Agreement

The Sections Every Landlord Should Pay Close Attention To

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Essential Parts of Property Management Agreement. PhotoAlto-Eric Audras/PhotoAlto Agency RF Collections/Getty Images

When you hire a property manager, it is important that you look over their management agreement very carefully so that you understand exactly what you are agreeing to. Verbal agreements mean nothing if they are not actually part of the contract you are signing. Here are six essential parts of the contract that you should examine carefully.

  1. Services and Fees
  2. Responsibilities of the Property Owner
  3. Equal Opportunity Housing
  1. Liability
  2. Contract Duration
  3. Termination Clause

1. Services and Fees

The first essential part of the property management contract that you must understand are the services the manager will perform and the fees charged for these services. You need to understand what services are included in the management fee, what services can be performed for an additional fee and what services will not be performed under any circumstances.

Included Services:

The management fee is the most common type of fee that a property manager will charge. Pay close attention to how this fee is broken down. If, out of three property managers, one charges a management fee of 4%, while the other two charge a fee of 6%, don’t write the 6% managers off so quickly. 

The manager with the 4% fee may not be telling you they will charge additional fees for what they consider to be “extra management duties” such as filling vacancies, paying bills, maintenance issues, and eviction procedures.

You need to read the management agreement very closely to determine what services are actually included in the management fee and what services are considered extra and require additional payment.

Extra Services:

For services that are considered extra, the agreement should clearly spell out how you will be charged for these duties, whether there is a flat fee, a percentage fee or if the fee will be determined on a case by case basis before the service is performed.

Excluded Services:

Also, be aware of the services the property manager will not perform under any circumstances. This will vary from company to company but common exclusions include refinancing a property or extensive remodeling. Make sure they are not excluding anything you consider absolute necessities for hiring a property manager such as finding tenants, collecting rent or handling emergencies.

2. Responsibilities of the Property Owner

The second part of the agreement that you must understand are your responsibilities as the landlord. This section of the contract will define what you are obligated to do by signing the agreement and what you are prevented from doing.

Two examples of obligations of the property owner are:

  1. To Set Up and Maintain a Reserve Fund – You will be expected to put a specific amount of money into a reserve fund that the property manager can access to deal with daily obligations, maintenance issues, and emergencies. You are also responsible for making sure that the fund never falls below a specific amount.
  2. To Obtain and Maintain the Proper Insurance- The management agreement should specify the types of insurance and the amount of coverage they require you to obtain. It should also note if the property management company must be included under your coverage.

    Two examples of restrictions on the property owner are:

    1. Most agreements will prevent the property owner from placing a tenant in the property themselves. This is meant to protect the property manager from having to manage a tenant that has not been selected according to their guidelines.
    2. The property owner may not enter the property unless they notify the tenant beforehand or get approval from the property manager.

    3. Equal Opportunity Housing

    You want to make sure the management agreement has a section that says they support Equal Opportunity Housing. It should say they abide by both the state and federal fair housing laws.

    4. Liability

    This is the essential part of the agreement that limits the property manager’s liability. It is known as the hold harmless clause. In general, this clause will protect the property manager, except in cases where they have been negligent.

    The property manager is not, however, responsible for negligence of third parties they hire. For example, a property manager is not responsible if they hire a contractor, and the contractor causes damage to the property.

    To protect yourself, you should make sure there is a “reasonable care” clause in the agreement. For example, the manager will not be held liable if “reasonable care” has been taken when hiring a third party- a.k.a they should do their research and not hire a contractor with a history of complaints against them.

    5. Contract Duration

    You want to try and avoid signing a long agreement until you have proven results from, and confidence in, the management company. Unfortunately, most management companies will not sign a contract for less than a year. In this case, you will want to carefully review the termination clause and make sure you are able to terminate the contract if you are unhappy with the service.

    6. Termination Clause

    Make sure the management agreement has a clear termination or cancellation clause. It should state why and when the property manager/management company has the right to terminate the contract and when you, the owner, have the right to terminate the contract.

    Notice to Terminate:

    You will usually be allowed to terminate the contract by giving between 30 and 90 days notice. Make sure the agreement states the property management company is required to give you at least 30 days notice if they decide to terminate the contract on their end.

    Fee for Early Termination:

    You will often have to pay a fee for terminating the contract early. This fee will vary from a few hundred dollars to having to pay all fees the management company would have accumulated over the length of the contract. 

    Reason to Terminate:

    You will want to look for a contract that does not require cause to terminate the agreement. You will also want a provision included that allows you to terminate the contract without penalty if the management company fails to find a tenant within a specified amount of time.

    Obligations Upon Termination:

    There should also be a list of duties that must take place upon termination and the time window they must be completed within. For example, the property management company must provide the property owner with copies of all tenants' leases within 14 days of contract termination; or that all money owed to either party must be paid within 30 days of contract termination.

    Next: How to Terminate a Property Management Contract

    Back to: The Complete Guide to Property Managers