A Property Management Agreement is an agreement between a property owner and property manager (“Agent”) with specific terms and conditions for the management of rental properties. This agreement provides the agent fees for the leasing, repair, maintenance, and general upkeep of the property.
Why Use a Property Manager?
A property manager takes care of various aspects of managing and renting a property. The owner pays them certain fees such as a percentage of revenue collected on the property (average of 8-12%). While they can take on a variety of tasks, a property manager usually provides at least the following services:
- Advertising leases
- Screening tenant applications
- Entering and managing lease agreements
- Conducting property inspections
- Managing landlord and tenant disputes
- Organizing and managing property repairs and maintenance
- General upkeep (e.g., landscaping, snow removal, etc.)
Why Use a Property Management Agreement?
Handing over an expensive asset is a serious decision. A Property Management Agreement can ease some worries by providing the following benefits:
- Knowledgeable Expertise – A Property Management Agreement provides an owner fservices from someone with expertise in both managing properties and the local market conditions. Their skills will help with both filling vacancies as well as doing so at the greatest rent amount possible.
- Secure Business Relationship – It provides the agent with exclusive rights to manage an owner’s property. For the owner, it provides the same security in having a dedicated property manager focused on the success of their property.
- Mutual Incentives – Most property management agreements pay the Agent a fee that is a percentage of the revenue generated. This type of compensation structure motivates the agent to maximize the income which provides a direct benefit to the owner as well.
- Structure – An agreement provides structure and clarity, to what you hope is a beneficial partnership. This includes a clear fee structure, time frame for termination, and each party’s responsibilities. Having a structured agreement reduces the chance of dispute and provides written documentation in case there is one.
- Liability – An agreement between an owner and an agent can clarify issues and questions about liability. This may include things such as who is responsible if there is a personal injury on the property.
When entering into a Property Management Agreement, there are some important considerations:
- Complexity – This agreement can be complex considering it involves various fees and property management responsibilities. Given some of these complexities, it is important to have an experienced professional assist you in reviewing the agreement.
- Real Estate Licenses – Most states require a property manager to have a real estate license or property manager license to lease and manage a property. Only the following six states do not have this rule: Idaho, Kansas, Maine, Maryland, Massachusetts, and Vermont.
- Termination – Termination may be necessary for several reasons. Your agreement should include all reasons for termination and the type of notice required. Reasons for termination include:
- The property owner decides to sell the property.
- The property owner decides to stop renting the property.
- The property has been vacant for an extended period of time.
- The term has ended and either party decides to end the agreement.
- A breach by either party of the terms and conditions of the agreement.
What to Include in a Property Management Agreement
A Property Management Agreement contains three major sections. Those sections are as follows:
- General Terms – The property(ies) under management, length of the agreement, and compensation are essential elements that are usually addressed at the beginning of the agreement.
- Agent’s Power and Obligations – This section will go into detail on the powers granted by the owner to the agent for property management purposes. It should also highlight the specific obligations of the agent based on the significant authority the owner is delegating to them for the management of their rental property business.
- Owner’s Obligations – This section will include specific obligations the owner has to make, such as providing the agent with the necessary resources to properly execute their job.
Here are the specific items you should include and a brief explanation of their purpose:
- Date – The date the agreement goes into effect and is being signed.
- Parties – This will include the owner and the agent that will be bound by the agreement. This section should also include the address of both parties.
- Agent Appointment – This section provides the general authority being given to the agent along with details about the property the agent will be managing. Provide the full property address(es) and a description.
- Term – Provide the time period the agreement is in effect as well as what will happen when the agreement’s term ends. The average term is 1 year but can vary depending on the situation.
- Termination Rights – The agreement should state if termination of the agreement is allowed and, if so, under what terms.
- Agent’s Compensation – This section provides the standard fees that will be provided to the agent for their services.
- Additional Fees – This section details additional fees for certain specific situations.
- Other Compensation – This section details certain actions that are not part of the agreement and which would require additional compensation if requested by the owner.
- Sale of the Premises – This section will indicate whether or not the agent will have the right to represent the property if the owner decides to put the property up for sale.
- Agency Relationships – This section recognizes that the agent may also be an agent for other property owners, even properties that may compete with the property subject to this agreement.
- Lease Management – Provides the general rights of the agent as it pertains to managing lease agreements with tenants.
- Leasing – This section specifies the types of lease agreements the agent can enter into on the owner’s behalf.
- Security Deposits – The agent’s authority to collect security deposits and which party will be responsible for returning the security deposit to a tenant.
- Lease Amount – This section sets the boundaries for the amount of rent an agent is authorized to charge tenants for lease agreements.
- Owner Distributions – Details how distributions of income are made to the owner.
- Repairs and Maintenance – Provides the agent authority to make repairs and maintenance and provides a dollar threshold on expenses for when an agent needs written approval from the owner. However, there is typically an exception provided for certain emergency situations.
- Evictions – Agent authority to evict tenants and take legal action.
- Trust Funds – Provides the authority and instructions for the agent’s depositing of any funds received.
- Advertising – Provides the agent authority to advertise rental units for lease.
- Hiring Contractors – Provides the agent with the authority to hire contractors for the operation and maintenance of the property.
- Payment of Expenses – Authorizes the agent to use owner funds to pay for expenses for the property.
- Financial Statements to the Owner – This section details the agent’s responsibility for providing the owner with financial statements on the income and expenses of the property.
- Due Diligence – The agent’s agreement to exercise due diligence in performing their duties.
- Federal and State Law – The agent is bound by federal and state law in performing their duties.
- Documentation – This section details the owner’s responsibility to provide the necessary documentation to the agent for them to properly perform their duties.
- Indemnification – The owner agrees that the agent will not be liable for certain actions taken by the owner.
- Habitability – The owner’s obligation to make sure the property is habitable.
- Taxes – With the various financial responsibilities delegated to the agent, this section makes explicit that it is the owner, not the agent, who is responsible for tax payments.
- Financial Obligations – This section specifies certain financial obligations that the owner agrees to be responsible for.
- Lead-Based Paint – The owner is responsible for making sure tenants have the required disclosures regarding lead-based paint if the property was built before January 1, 1978.
- Owner Representations – This section contains important representations from the owner about the status of the property and any adverse events that may affect the property.
- Equal Housing Opportunity – This section states that the property should be leased in compliance with anti-discrimination laws.
- Notices – Specifies how notices should be sent between the parties.
- Arbitration – This section details the party’s agreement to use arbitration to settle any disputes except for certain actions that are explicitly agreed upon and part of the agreement.
- Attorney Fees – Provides for attorney’s fees to the prevailing party in a dispute over compensation.
- Succession – If either party is succeeded by a new party (e.g. the property management company is bought out and has new owners), then this agreement applies to them as well.
- Governing Law – This will provide which state’s laws will govern this agreement and where any disputes will be held.
- Additional Provisions – There may be additional sections you want to include that are specific to your situation. Our template provides a section to insert additional provisions.
- Severability – If any provisions are determined invalid, it does not impact other valid provisions in the agreement.
- Waiver – This section states that just because either party fails to enforce any part of the agreement it does not mean that any part of the agreement was waived.
- Amendments – If there are amendments to this agreement they must be in writing and signed.
- Entire Agreement – The agreement and any attachments are considered the complete agreement. Any prior negotiations or understandings, written or oral, are null and void.
- Acknowledgments – Provides various acknowledgments for both parties.
- Signatures – All parties must sign this agreement. These signatures are what make the agreement binding. A witness should sign and verify that both parties voluntarily entered the agreement.
Both the owner and agent should keep a signed copy of the agreement.
After you have finalized the agreement make sure to notify current tenants that the property is under new management. A great way to do that is to send your tenants a Notice of New Management Letter. This letter will introduce the tenant to the new property management company, provide tenants with their contact information, and reassure them that the terms of their lease have not changed.