Apartment Management: The Management Agreement

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When any of the types of manager are employed directly by the owner, the duties and responsibilities are commonly spelled out in a job description. When the manager is an employee of the management company that is acting as the managing agent for the owner, the duties and responsibilities are defined in what is referred to as a management agreement. At its most basic level, this document accomplishes several functions:

• It serves as an employment contract between the owner and the managing agent.

• It establishes an agency relationship, giving the managing agent the right to act in the owner’s behalf and to assume obligations in the name of the owner.

• It spells out the rights, responsibilities, and limitations of the managing agent.

• It stipulates the managing agent’s compensation.

• Finally, it provides for the agreement’s termination.

To undertake the management of real estate without a management agreement is hazardous. The main reason for having an agreement is that it sets out everything in writing, thereby reducing the chance of misunderstandings. The agreement is more for the managing agent’s protection than for the owner’s.

Powers

A managing agent is far more than the owner’s representative. The agent, in effect, acts for the owner and has the same powers as the owner would have.

As the owner’s agent, the manager has the authority to set rents; to execute, extend, and cancel leases; and to make settlements with residents. The authority to collect money and spend it on behalf of the property is also granted. The manager has a fiduciary responsibility to the owner to act honestly and in good faith, which requires a precise accounting of collections and expenditures.

The management agreement also gives the agent the authority to execute contracts for building services, keep the property in good condition, and make repairs. What is spent on maintenance and repairs may be limited by a dollar amount, beyond which the owner’s further approval is needed. The exception would be emergencies when life or property is threatened.

The manager also has the authority to hire, fire, and supervise personnel. Staff employees are generally employees of the property owner, not direct employees of the managing agent. However, even when this is the case, you may be considered an alternate employer because of your authority to hire, fire, and supervise. For instance, you may be held responsible for observing all requirements of the federal and state Wage and Hour Laws. This obligation cannot be avoided, even though the personnel are employees of the owner. Along with the manager’s authority to hire, fire, and supervise there is a corresponding responsibility to see that all employment conditions required by the law are fulfilled. The owner in turn holds the manager responsible for fulfilling all the obligations that are specified in the agreement.

The extent and limitations of the agent’s authority to act on the owner’s behalf should be set forth clearly in the management agreement. This authority is needed for three specific reasons:

1. To establish the manager’s authority to execute a lease. A tenant may challenge your authority to do so. By referring to the management agreement you can support this authority.

2. To meet internal Revenue Service requirements for filing employee tax payments.

3. To distribute net proceeds to the owners. This can be complicated. You must get specific direction from all of the owners for any percentage distribution of net proceeds. It’s not uncommon for a man aging agent to receive a contract from two owners, only to discover later that there are other owners who demand their share of the proceeds. The only protection you have is to identify all of the owners and make sure that they all sign any distribution instructions.

Independent Contractor. When soliciting new management accounts from a lending institution that has a portfolio of foreclosed properties or from a major investment institution that owns apartment properties, you may be asked to sign an agreement that is not the typical form management agreement hut a contract that identities you as an independent con tractor. The reason for this is that these institutions often do not want you to be acting in an agency capacity but rather as a hired vendor. There is a world of difference between the status and liability of an independent contractor and that of an agent. Be sure to carefully review such a document with your attorney to determine whether or not this change in capacity is acceptable to your firm. Many independent contractor contracts are thinly veiled agency agreements that will be interpreted as such by the courts. Be sure to seek a professional legal opinion before proceeding.

Obligations

The manager’s overall obligation is to act in a professional manner with the owner’s interest as the first objective. Most management agreements place obligations on the agent to:

• Ensure that the property achieves maximum occupancy with the most economical outlay of operating expenses.

• Collect rents.

• Pay bills incurred for the property.

• Submit a report to the owner of collections and disbursements.

• Make sure that the necessary property and liability insurance is maintained.

• Pay real estate taxes from building funds.

• File employee payroll tax returns.

• Maintain the property with building funds.

• Notify the owner of the property’s shortcomings and defects as well as citations.

• Maintain records such as leases, tax payments, mortgage payments, original paid invoices, and insurance policies, all of which are the owner’s property. Correspondence files and books of account that the managing agent generates in the course of managing the property remain the property of the agent, not the owner.

Associated Risks

A managing agent is exposed to certain risks. The hold-harmless provisions of the management agreement are designed to minimize these risks by placing many responsibilities on the owner and providing for the payment of legal defense in certain matters, unless the agent has been negligent. These matters generally include:

• Actions stemming from the owner’s refusal to advance needed funds.

• Building code violations.

• Civil rights suits.

• Wage and Hour claims.

• Occupational Safety and Health Act (OSHA) claims.

• Lawsuits in general.

• Harmful or improper acts of employees.

Compensation

The most common method of compensation for property managers is a flat percentage of total collections from a property’s operation (less security deposits). It’s also routine to have an established “floor,” so that the manager has a guaranteed minimum fee. This method is traditional and it gives the managing agent an incentive to collect the maximum rents.

In addition to covering the managing agent’s fee, the agreement should also spell out who pays for on-site administrative help. Usually, this is the responsibility of the owner, not the managing agent.

Finally, the agreement should contain any specifics on commissions for renting apartments and bonuses for renewals.

Termination or Cancellation

The management agreement can be terminated in one of four ways:

• When the term of the agreement expires.

• By notice from either the owner or the managing agent according to contract provisions.

• By mutual agreement. If cancellation is negotiated, one party may ask for payment from the other in return for early termination.

• When the purpose is ended. A common reason for terminating agreements is the sale of the building. Owners retain agents to man- age their property, but if a property is sold, the purpose is gone and the contract normally is ended. The managing agent may seek protection against early termination by having the agreement state that a sale of property does not affect the contract, or if the building is sold, that the agent will receive a specified sum as liquidated damages.

The management agreement is an important document, one that should be kept in a safe place. However, it doesn’t guarantee continuous employment. Only effective performance will do that.

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