PART 2

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By Nate Bernstein, Managing Attorney of LA Real Estate Law Group.

Read Part 1 Here

#8. Avoid Sweeping Limitation of Liability Clauses

Property managers will often try to limit liability and types of damages caused by their errors and omissions.  Do not agree to sweeping limitation of liability clauses.  The property manager needs to be accountable for losses, special damages, and consequential damages that he or she causes.

Owners should carefully review the language of any provision that limits the property manager’s liability.  Watch out for provisions that place a dollar cap on the manager’s liability, broadly release the manager from liability, exclude particular types of damages, or excuse the manager from responsibility for specific mistakes or failures.

These provisions can substantially affect the owner’s ability to recover losses caused by the property manager.  The owner should understand exactly what liability is being limited before agreeing to the provision.

A limitation of liability provision should not be treated as “routine boilerplate.”  It can materially affect the owner’s rights if the management company makes a mistake that causes a loss.

#9. Strive for Cost Benchmarks for Hiring Legal Counsel

The method and cost for hiring legal counsel is an important factor in the management relationship.  Some property managers hire in-house counsel to save money.  For many legal matters, it is better to have outside counsel.       

You should have cost benchmarks for legal services such as non-jury eviction trials.  The property management company should obtain estimates for pretrial and trial services for evictions.

The management agreement should also address the property manager’s authority to retain legal counsel and whether owner approval is required before legal services are incurred.  Establishing cost benchmarks in advance can give the owner greater control over legal expenses associated with managing the property.

The owner should understand not only that the property manager can obtain legal services when necessary, but also how those services will be approved and what costs the owner should expect.

#10. Achieve Cost Saving Benchmarks and Address Conflicts of Interest for Third-Party Contractors

Property managers tend to get “very cozy” with certain third-party contractors.  For projects above a certain cost level, you can require that there be multiple bids for the project, disclosure of prior contracts, and disclosure of past problems and conflicts with that contractor.  This encourages competition and price efficiency and can reduce the risk of collusion, conflicts of interest, or other improper conduct arising from the property manager’s repeated use of the same contractor.

The management agreement should also address potential conflicts of interest involving third-party contractors.  The owner should consider whether the management company can use an affiliated contractor, receive a referral fee or other compensation from a contractor, or mark up a contractor’s invoice.

The agreement should require disclosure and transparency of the details of any relationship between the management company and a contractor. It can also require multiple bids above a specified amount.  These provisions give the owner greater visibility into how contractors are selected and whether the manager has a prior financial relationship with a contractor being hired to perform work at the property.

Require that a list of all third-party contractors, handymen, and repair staff be provided to the owners for review.

The goal is not necessarily to prevent the management company from using contractors with whom it has an established relationship.  Rather, the owner should understand those relationships and have a process in place for evaluating significant expenditures and potential conflicts of interest, past problems with contractors, and the potential for corruption.

#11. Establish Rent Collection and Delinquency Procedures

Rent collection is a fundamental part of managing an income producing property, and the management agreement should establish how delinquent rent will be handled.

The contract should establish when rent is considered delinquent, what the manager must do when the rent is not paid, when notices are sent, when the owner is notified, and how payments are handled.  The property manager should be aware of rent delinquency thresholds in the local jurisdiction that are mandated prior to starting an eviction for non-payment of rent.   

The agreement should also make clear the property manager’s authority and responsibilities when rent is not collected.  The owner should know what steps the manager is expected to take and when the owner will be notified about a delinquent account.

Establishing these procedures in advance helps ensure that the owner and manager have the same expectations regarding rent collection and delinquency.

#12. Define Leasing and Tenant Selection Authority

The management agreement should establish who sets the rental rates, who approves applicants, what screening process is used, who negotiates lease terms, whether the manager may offer concessions, and whether the owner must approve leases above or below specified parameters.  Require the property managers to perform employment and credit score background checks.      

The central issue is how much discretion the property manager has when putting tenants into the owner’s property.  The owner should understand which leasing decisions the manager can make independently, and which decisions require owner approval.

The agreement should therefore define the manager’s authority over rental rates, applicant approval, tenant qualification and background screening, lease terms, and concessions.  The more discretion the manager has, the more important it is that the limits of that discretion are clearly understood by both parties.

#13. Preserve the Owner’s Property Access and Inspection Rights

An owner may not want to handle every day-to-day management issue, but the owner should not lose access or visibility into the owner’s own investment.  The management agreement should address the owner’s ability to inspect the property even though the manager is handling its day-to-day operation.

The parties should establish reasonable procedures for owner inspections and access.  The owner should be able to remain informed about the condition and operation of the property without having to take over routine management responsibilities.

The management relationship should provide the property manager with the authority necessary to perform the job while preserving the owner’s ability to monitor the investment.

#14. Delineate Clear Termination and Transition Procedures

Termination of the relationship should be addressed before the management agreement is signed.  You should have the right to terminate the relationship within 2 weeks of written notice.  The right of the owners and investors to terminate the property management company should be designated as “at will” and should not require any “just cause,” factor, or reason.  

The agreement should also establish what happens when the relationship ends.  Upon termination, the principals are entitled to all computer files, written records, and an accounting of all activity.

The transition provisions should specify when records must be delivered and how the transfer will be handled.  This should include electronic files, keys, access codes, tenant records, utility system information, government registration, and other property or information necessary to continue management of the property.

The agreement should make the transition process clear so that termination of the management relationship does not leave the owner without the records, information, access, or other materials necessary to continue operating the property.

Concluding Thoughts

As an owner or investor, you have important rights when it comes to negotiating a property management agreement.  You should develop a simple checklist of all issues you are concerned about.  The terms and conditions of the written agreement are negotiable, and you should come into the negotiation in a position of strength with an open mind.  

Setting up a well-drafted agreement with the property management company of your choosing is good asset protection planning to protect your valuable asset and your own interests as an investor.  You should show the agreement to your legal counsel, and have counsel critically evaluate the terms and conditions of the agreement. Then you can negotiate the best deal. 

Author Bio

Nate Bernstein, Esq., is the Managing Counsel of LA Real Estate Law Group and a member of the State Bar of California.  His practice concentrates in the areas of complex real estate title litigation, commercial litigation, landlord-tenant law, employment law, and bankruptcy matters.  Attorney Bernstein served as in-house corporate litigation counsel at Fidelity National Title Insurance Company and represented the company’s subsidiaries and insured institutional lenders.  He is a 32-year veteran Los Angeles real estate and business attorney and trial lawyer.  Mr. Bernstein also has expertise in bankruptcy law, the federal bankruptcy court system, creditor’s rights and out-of-court workout solutions.  He serves as an expert witness on complex real estate, title, joint venture, and other business issues.

Mr. Bernstein is a frequent speaker at apartment owners’ association seminars and has been a featured speaker with the California Associations of Realtors, Apartment Owners Association, AAGLA, AAOA, the Collateral Lenders Association, and the Beverly Hills Bar Association.  He created www.laquiettitleattorney.com, a leading educational resource on quiet title real estate litigation. LA Real Estate Law Group handles litigation in Los Angeles, Ventura County, Orange County, Inland Empire, and San Diego.  For more information or to schedule a professional consultation, please contact the office at (818) 383-5759, or email [email protected].