Understanding the Management Agreement

The following excerpts are from IREM’s publication, Insider's Tips to Operating a Successful Property Management Company (IREM Copyright, 2007)

The management agreement is the basis for the relationship between the property management firm and the property owner or advisor. The agreement covers fire areas: responsibilities, authority, term, compensation, and exhibits and must be carefully prepared and negotiated. A poorly drafter agreement can result in misunderstandings and eventually a termination of the poorly drafted agreement can result in misunderstandings and eventually a termination of the relationship. The real estate law in many states requires the property management firm to have an executed management agreement to manage a property. Violation of this law can subject the company to disciplinary action and many courts will not review a dispute between the parties if a written agreement is not in effect.

Some management agreements run as long as forty pages and take weeks to negotiate, but they leave no doubts as to what is expected of the managers and owners. during the negotiation of the management agreement, many questions will come up that will lead to helpful discussion and clarification of the positions of the parties.

Most institutional property owners and pension fund advisors require that their property management agreements be used. Because these agreements are usually one-sided, they should be reviewed carefully. Although these clients will not be willing to renegotiate their entire agreements, they will modify certain provisions. The following provisions should be given fees on cobrokered deals, and the party responsible for paying for marketing brochures. The item that is usually non-negotiable is the client's financial reporting requirements. The property manager must carefully analyze the time that will be necessary to prepare these reports and factor this cost into the management fees.

One of the most important and potentially costly issues affecting property management that has developed since the mid-1980s is hazardous waste. A property management firm needs to be protected against another party's illegal use or disposal of hazardous materials.

Equal employment opportunity is not a new issue but one that may need to be emphasized. The agreement should state that the property management firm is an equal opportunity employer and that the property owner and property management firm will not discriminate in leasing space.

Occasionally, a property owner is tempted to hire the property management firm's employees, especially the on-site staff. The property owner may terminate the property management contract and hire the former property management firm's trained employee to manage the property. The sample agreement states that the property owner will not hire the property management firm's employees for two years after the termination of the property management agreement. If the property owner violates this agreement, the property management firm is entitled to a monetary award for damages.

Download General Management Agreement on the Forms and Tools page.