The Basics of a Property Management Agreement
Property Management Agreements are common in New York, as most commercial property owners employ the services of a managing agent. A Property Management Agreement is a legally binding document between the landlord and their property manager. The agreement sets forth duties and responsibilities of the parties, including but not limited to: overseeing day to day operations; collecting rents; leasing of space; staff hiring and oversight; bookkeeping; maintenance problems; preparing annual budgets; and, compliance with rules and regulations, as well as municipal laws, ordinances, and regulations. Sometimes a Property Management Agreement will designate a number of other contract documents that will become part of the agreement. The owner is sometimes called the principal while the management company is sometimes deemed the agent .
A Property Management Agreement must be in writing and signed by the parties, and signed by the property owner if there is a co-owner or partners in the business. Property Management Agreements contain certain standard terms, and also may have many provisions that are unique to the specific property or the relationship between the parties. For example, the Agreement could include a provision whereby the owner agrees to pay the management fees from rentals collected or the management company could require an additional fee for leasing new tenants, as well as a percentage of the gross rental income. Since the nature of the parties’ relationship is so crucial to the management function, this Contract is a critically important document that can have a significant impact on the future success of the property.
Essential Components in New York Property Management Agreements
The specifics of the agreement can vary significantly. Regardless, Section 9-103 of New York’s Real Property Actions and Proceedings Law carefully lays out the typical components that should be included in a property management agreement for real estate. Section 9-103 states:
"§ 9-103. Contracts between owner and manager
The contract between the owner of the property and the manager shall be done in writing, signed by all parties or their duly authorized representatives, and shall contain an accurate description of the property and a statement of the authority, obligations and liabilities of each party. The contract shall include comparable charges for comparable services offered by independent contractors as provided by law.
In addition, a property management agreement for a single-family residential or tenant unoccupied residential unit shall include:
(a) the amount of commission or other payments, how often such payments will be made and when due, and any other fees to be charged or reimbursed by the owner;
(b) a provision that provides that if the agreement is terminated by the owner before the expiration of its term, the manager has a duty to mitigate damages by re-letting the apartment within the shortest time that may be reasonably expected under the circumstances, and if the actual term of the agreement, or the renewal thereof, is less than one year, the owner shall have no liability whatsoever for any commission or other payment to the manager beyond the term of the agreement, or renewal thereof; and
(c) a provision that gives the owner the right to terminate the agreement for a material violation of its terms upon seven days prior notice to the manager of such violation. In the event of a temporary suspension of services under the regulations of the local department of health or other competent governmental authority, such termination shall be effective immediately; where the cause of such temporary suspension of services is remediable, the owner shall have the right to require the manager to remedy the cause, with the right to terminate after seven days notice if the manager fails to do so.
As of the effective date of this section, a contract for manager or managing agent of property containing rental units shall not include a provision requiring the unit to be vacant when presented to the prospective renter or customer; barring occupancy by the renter or customer during specific dates or during certain hours on specifically designated days for house-cleaning or other similar purposes; obstructing access to the apartment by the renter or customer; and barring occupancy for the purpose of showing the apartment."
Paragraphs (b) and (c) are new additions to the laws governing contracts between owners and managers, which became effective on June 15, 2010.
The Legal Requirements in New York
In New York, property manager agreements are subject to specific legal requirements. According to New York Real Property Law Article 7-A, property manager agreements must be executed in writing for a term of no greater than one year and not automatically renewable by their terms; include a notice to the owner of the real property that all contractual obligations cease upon the expiration of the agreement (except for the payment of fees); and be signed by the owner. While this law primarily applies to the management of residential property, the New York State Association of Realtors specifically advises its members not to utilize the form contract for the management of nonresidential property, particularly because the written agreement must contain a notice to the owner of the owned real property that all contractual obligations cease upon expiration of agreement (except for the payment of fees). Moreover, the time period of one year is longer than is typically found in nonresidential property management agreements throughout the country. New York lawyers have further written that "specific New York statutes govern the management of real property generally, including residential rental property."
Another provision of Article 7-A requires that an authorized real estate broker handle the business affairs for the owner of the property. The statute exempts from this requirement a property that does not qualify as "commercial property" or a property managed for a "single family residence." A "single family residence" is defined in RPL § 440-C(1) as a residence for a single person or for a single family. The statute does not contain any further definition, such as measures of the square footage or the number of rooms within the unit, or any special licensing requirements or certifications. Other rules and regulations may apply to condominium associations and cooperatives. New York City, for example, prohibits management companies from collecting payments from tenants on behalf of cooperative apartments unless they are registered with the New York State Attorney General.
In New York, property managers require a real estate broker license if the manager will represent the landlord, individually, in property occupation issues. It is important to keep in mind that broker-dealer contracts with non-residential landlords or brokers may be drawn up by non-attorneys, since the licensure requirements do not apply to owner-developers (of a property) or to agents of an owner-developer.
Residential vs. Commercial: The Differences in Agreements
In New York State, property management companies or managers may be used to manage both residential and commercial real estate properties. Although residential and commercial property management agreements may include some similar provisions, there are significant differences in the agreements depending on the nature of the property managed.
The primary consideration is whether a property is residential or commercial. A residential property management agreement regulates units that are leased for human habitation. These properties include houses, apartments, mobile homes, townhouses, condominiums and cooperative apartments. A residential lease is meant to protect the health and safety of the tenant and ensure the residential property with its amenities, such as water and power, is habitable.
A commercial real estate property management agreement has a number of property management functions that may be required but are not typically found in agreements regarding residential properties. For example, many commercial properties are leased for business purposes, even in multi-unit situations such as with apartment buildings, where the units may be leased for families to live in or for owners to occupy. When a commercial lease takes effect, the business that leases it will conduct an inspection of the space before finalizing the lease to ensure no repairs are needed and that the premises comply with local health and safety codes.
In addition, commercial property managers may be responsible for ensuring that the proper certificates of occupancy, use or existing premises are obtained from the appropriate agencies. Many commercial property management agreements also require the maintenance and supervision of elevators, freight storage areas and customer areas.
Common Issues and How to Resolve Them
Property management agreements in New York are intended to define the scope of the relationship between the property owner and manager. A successful agreement will also provide clear mechanisms for resolving any disputes that arise during its term. While it is always expected that common ground can be reached through a cooperative approach to negotiations, experience shows that the issues in these disputes often fall into a few broad categories:
Contractual Issues Disputes based upon the terms of the agreement are typically resolved by reference to the language of the agreement itself. New York courts will typically honor the clear language contained in the agreement – regardless of whether one side later disagrees with how it was later applied to a particular situation. This can become complicated, however, if a disagreement arises with respect to the provisions in the contract to which the dispute relates. These disagreements can sometimes be resolved through discovery and motion practice before a judge. If they cannot be resolved in that way, then a trial will be necessary. The good news is this is an area where the court is empowered to appoint a referee to act as a means of resolving the contract disputes on behalf of the court.
Specific Performance Property management agreements often envision with great detail the specifics of the duties and obligations of the property manager, and the benefits to be derived by the property owner as a result . If the property manager fails in some way to live up to those obligations the owner may pursue a claim for specific performance under contract theory. New York law is clear that an action for specific performance is appropriate in any case involving a confidential or fiduciary relationship where the court is able to supervise compliance by the party who has failed to live up to all of those obligations.
Trespass and Breach of Fiduciary Duty A property owner may also be able to pursue claims of trespass or breach of fiduciary duty against a property manager in appropriate circumstances. Trespass can arise where for example, the property manager enters the real property owned by its client without express permission. A fiduciary duty is a duty that one party owes to another by virtue of that relationship (for example, a relationship of trust and confidence). Fiduciary duties can arise in the context of an attorney-client relationship, doctor-patient relationship, and others. When a property manager is hired to manage real estate for the owner, a fiduciary relationship may arise between the two parties depending on the facts. If a property manager violates the fiduciary duty that he or she owes to the real estate owner, in the course of managing the property, the owner may bring suit against the manager for damages.
Fraud Under certain circumstances, property management agreements can be viewed as having been entered into in furtherance of a fraudulent scheme. When this happens, one party to the contract may be able to make a claim for damages against the other.
Negotiating a Reasonable Property Management Agreement
Strategies for Negotiating a Fair Agreement
A few critical factors can help a landlord negotiate a fair agreement and develop a successful relationship with the property manager (the latter is considered later in this entry).
The first element involves obtaining multiple bids from several reputable property management firms. The reason is that an owner who simply asks one company to propose terms and then chooses to accept those terms because it is too weary of the process will almost certainly have regrets at a future date. A property owner without understanding of the property management business (or any business or profession for that matter) should not expect a potentially multi-year relationship to be negotiated properly without doing appropriate due diligence.
Expect a competent management firm to ask questions during the bidding process. A truthful, thoughtful response likely will indicate a willingness of the prospective manager to dive into the issues. Make sure to take the applicant seriously, but please question anything that does not pass the sniff test. For example, everyone is going to tout their integrity, but consider whether the person with whom you are dealing really seems to exhibit such traits. For example, do they seem to bend the truth a bit too much? Do their promises hold up to an important test described shortly below?
The final element involves a check on your gut. After conducting appropriate due diligence and asking probing questions, your gut instinct about whether to proceed with the relationship is probably right. One test to apply is whether the prospective management firm is patched together or someone seems to have carved out a job simply as a piece of the marketing function. Well-run companies will typically be managed by someone with background and experience in the industry. Such a company should offer an appropriate level of service.
In sum, take time before entering into the relationship with a property management firm. Finding a match for your property at a cost that allows you to sleep well at night is central to a good real estate investment.
How to Select the Right Property Management Company
Choosing the right property management company is crucial for a successful rental property. For many owners and investors, a 3rd party management firm becomes the face of the business – one that handles the every day responsibilities of being a landlord. So how do you choose the right one for your investment? First, make sure that you evaluate management firms the right way, so you can feel confident that your decision is informed by what each firm can bring to the table. We believe that there are 5 questions that every property owner should ask themselves when evaluating a property management firm .
- Does the firm have experience with your property type and style?
- What are the fees and how are the fees adjusted if the firm is not performing?
- Does the firm comply with all federal, state and local laws and codes?
- What is the firm’s strategy for tenant placement?
- How does the firm handle conflicts with tenants, vendors and other 3rd parties? Unfortunately, many residential management firms do not have robust training systems to ensure that all employees are up to speed on compliance issues. Ask any property manager for copies of their recent policy and procedure manuals and other documents showing how training takes place.