Property management agreement: How-to guide

Understanding the essentials of property management services

You’ve found the building. You’ve made your investment. Now it’s time to put your asset to work. If you don’t have the time or experience to manage your own rental property, hiring a property manager to perform these tasks can be a smart and profitable idea.

A property manager (sometimes called a real estate manager) is a person or company that oversees the performance of your income-producing property, ensuring that your investment provides you with maximum revenue and minimum headache.

A property manager can take on many responsibilities, including marketing open units, leasing apartments, maintaining and improving the property, collecting rent, negotiating agreements, addressing tenant problems, and much more.

Instructions for a property manager and property owner

License requirement for property managers

Most states require that property managers have either a property management license or a real estate license. These rules vary based on the state and the management type (e.g., property vs. association).

Unfortunately, there is no national clearinghouse for confirming these registrations and no single way to check across the country. Search on the internet for the term “real estate commission” and the name of your state. The links that come up should allow you to confirm that the company or individual you’re considering is licensed. For example, type “real estate commission” and “Arizona”, and you will find the site of the Arizona Department of Real Estate.

Property manager’s obligations

The property manager is an agent of the property owner and is, therefore, subject to all of the legal obligations generally imposed on agents (in addition to those specifically included in the contract). These include good faith and loyalty to the owner, performance of all duties with skill, care, and due diligence, full disclosure of all important details, avoidance of commingling of funds, and refraining from personal profits without the owner’s full knowledge and consent.

Awareness about real estate and governing law 

The manager must also be familiar with laws concerning real estate licensing, contracts, agency, fair housing, employment, property protection, and tenant/landlord relationships.

Appointing property manager as power of attorney

It’s a good idea for the property owners to execute a special power of attorney in favor of the property managers. This may be required if the manager will be signing leases or other contracts on the owner’s behalf.

Real estate obligations for commercial and residential properties  

Commercial properties will have different considerations than residential ones. Residential tenants have many more rights and fewer obligations than commercial tenants, which will determine how your property can be run.

Speak to a tax expert to manage rental income 

Talk to your tax professional about deducting the cost of property management from the income you’re earning on the property.

Allow involved parties enough time to review the property management contract 

Allow each party to spend time reviewing the agreement. This will reduce the likelihood, or at least the efficacy, of a claim that a party did not understand any terms or how those might affect the agreement as a whole.

Both parties should review the completed agreement carefully to ensure that all relevant deal points have been included. It is better to be over-inclusive than under-inclusive. Do not assume that certain expectations or terms are agreed to if they are not stated expressly in the document.

Keep copies of the signed document

Sign two copies of the property management agreement, one for you and one for the property manager. Keep a copy of the signed agreement for your records. At the end of its term, you and the other party can revisit its provisions and consider whether to renew.

Need for a notary

Depending on the nature of its terms, you may decide to have your agreement witnessed or notarized. This will limit later challenges to the validity of a party’s signature.

Seeking attorney help

If your agreement is complicated, contacting an attorney to help you draft a document that will meet your specific needs is better.

Essential clauses of a property management agreement

The following instructions will help you understand the terms of your property management agreement.

Introduction

The intro part identifies the document as a property management agreement. You need to provide the effective date on which the agreement will become valid (the effective date is the date on which the agreement is signed).

Identify the parties and, if applicable, what type of organization they are. Whether the rental property is commercial or residential, the agent is a property management company or individual property manager. In the agreement, the property owner is called the “owner,” and the property manager is called the “manager.”

If the property is owned by a partnership, each partner’s name should be stated in the agreement, and each should sign the document. If the property is owned by a corporation, the corporate name should appear on the agreement, and (where required) the corporate seal should be on the document as well.

Recitals

The “whereas” clauses, referred to as recitals, define the world of the agreement and offer key background information about the parties. In this agreement, the recitals include a simple statement of your intent to enter into a property management arrangement.

Description of rental property 

Describe the property that is being managed. You don’t need to include a full legal description, but provide enough information so it can be clearly identified. For individual houses, the address will usually be sufficient. If the property has a specific name (e.g., “Lincoln Towers”), include that as well.

Property manager’s duties; obligations

This section lists the manager’s rights and responsibilities under the agreement. A list of tasks that the manager is specifically permitted by the owner to do. The following provides a broad range of ideas, some of which may not be relevant to your arrangement or local rules.

• Collect rent and forward it to creditors or the owner.
• Deposit money. Note that some states require the manager to maintain at least one trust account to deposit money collected from various sources.
• Give back security deposits at the end of a tenancy.
• Give notice to (and demand payment from) tenants who are late in their rent and are violating their lease agreement.
• Start legal proceedings against a tenant or his property to collect unpaid rent. Note that the owner must be notified of the manager’s intent to do this.
• Buy all necessary materials to operate the property.
• Repair or maintain the property. Generally, the manager is given leeway in this regard, but if the repair will cost more than a certain amount, the owner has the right to be informed. Enter the amount over which the owner must be notified of the spending.
• Hire employees.
• Advertise the property and any vacant apartments. This section also allows the owner to put a cap on the amount the manager can spend without prior approval.
• Review prospective tenants.
• Sign leases on the owner’s behalf. If there are specific types of leases that the manager may not enter into (e.g., more than 4 years, less than one week), enter those details as well.
• End leases and give tenants notice of that termination.
• Put a box for rent payments on the property.
• Make copies of keys to make it easier to show the property to prospective tenants.
• Provide information about lead paint and other hazards. This is an optional provision required in some states.
• Raise or lower the rent to persuade someone to rent a unit.
• Obligations. This is the other side of the managerial coin. In addition to the things the manager can do, there are also things they must do.
• Try to rent out the property.
• Maintain and manage the property.
• Keep good records.
• Provide itemized statements of the property to the owner, including amounts earned and money spent. Write in how often you want these reports to be made.
• Pay any money that’s not deposited to the owner.
• Maintain whatever license (property management, general real estate, etc.) is required by state law.

Owner’s obligations 

This segment covers the duties the owner agrees to fulfill. Some of them are:

• The property owner should give all relevant information regarding the property. The owner shall also provide document copies to the property manager.
• The property owner needs to provide document copies only if the manager will be making payments for loan, tax, and insurance coverage on behalf of the owner. If this doesn’t describe your arrangement, the manager will not need copies of the documents needed to pay these bills.
• If the property manager doesn’t pay the taxes, then as the property owner, you must pay all the taxes and other additional payments on the property.
• The property owner should help the manager in any way possible to fulfill their obligations.
• Provide any further documents that may be needed to the manager.
• Tell the manager if he is going to sell the property.
• Determine what kind of insurance coverage is necessary for the property, and get and pay for that insurance.
• Reimburse the property manager for any out-of-pocket payments they make for advertising or other managerial tasks.
• Pay for the expenses incurred by the manager because the owner didn’t provide the manager with sufficient funds to pay for property-related bills.

Reimbursement of expenses

Allows the parties to specify which expenses the manager will be reimbursed for. If there are additional items the owner will pay for, enter the details as well.

Term

Allows you to specify how long you want the first term of the agreement to last. By calling it the “initial term,” you are not obligating yourself to any additional terms – it may be the only one. Enter the number of years you want the initial term to last.

Some property management agreements will renew automatically unless the parties take action. The party who desires to end the agreement should provide a written notice of the same. In this section, you must mention the number of days advance notice the parties must give to end the agreement.

Compensation

The fees that will be charged for property maintenance. It will vary depending on the size of the property, its location, and the management needs of the building. In this, there are two most common arrangements. They are flat fees and percentage fees.

• Flat fee (or fixed fee): In a flat fee arrangement, a set amount will be paid to the manager on a regular basis. It is most appropriate in the management of a condominium or cooperative complex.
• Percentage fee: Under percentage fee arrangements, managers are compensated by payments of some fraction of the rental income from the property. This serves as an excellent incentive for the manager to increase the income of the building. Some contracts call for a minimum amount per unit or account to ensure a consistent (or relatively steady) income stream for the manager. If this fits your arrangement, you need to provide the minimum amount that the manager will be paid. Consider that larger complexes and smaller complexes may take the same time and effort to manage. To account for this, owners sometimes set management percentages at higher rates in smaller properties than in large ones. Ensure that both parties agree on everything that will be included in this percentage fee and (if applicable) everything that will cost extra.
• Additional fees: This optional section allows you to designate additional fees for other activities. For example, some management agreements allow the owner to provide an additional fee to the manager for the signing of a new lease or a bonus for reaching a pre-set goal.

Liabilities and indemnification

This segment states that the owner promises to bear the financial cost of any injury the manager suffers as a result of its management and any lawsuits that may arise from those activities.

Representations and warranties

Details the parties’ promises under the agreement. Each party agrees to enter into the arrangement based on the conditions listed in this section (e.g., that each can enter the agreement and satisfy its terms).

Although each of these is important, one may note a special provision in which the owner is obliged to disclose any property condition that could affect a tenant's health and/or safety.

Termination

Explains that certain actions or events, including written notice or material breach, will cause the agreement to end out of time (i.e. before the services are completed or the end of the term, if any).

• Termination procedures: Provide the notice period a party must give of its intent to terminate or to notify the other of a breach.
• Management fees after termination: This part explains that the property manager will be paid for its pre-termination services after the agreement is ended.
• Funds received by the manager after termination: After the end of the agreement, the manager is still bound by its duty to return any funds received (e.g., rent or security deposit refunds) to the owner.
• Owner responsibility for further payments: This part mentions that the owner will take over all of the manager’s payment and other obligations after the termination. In other words, the manager will no longer be responsible for paying bills or addressing tenant concerns.

Additional agreement terms

If there are additional terms you’d like to add to the property management agreement form, use this space to include those.

Indemnification

Provides that if problems arise in the future and lawsuits are brought based on the manager’s work as a manager, the property owner will pay for all legal fees and any related damages.

Modification

Indicates that any changes to the document are ineffective unless they are made in writing and signed by both parties.

Assignment

This explains that each party must obtain the other’s written permission before assigning its obligations and interests.

Successors and assigns

States that the parties’ rights and obligations will be passed on to heirs or, in the case of companies, successor organizations or organizations to which rights and obligations have been permissibly assigned.

No implied waiver

This section explains that if either party allows the other to ignore or break an obligation under the agreement, it does not mean that the party waives any future rights to require the other to fulfill those (or any other) obligations.

Notice

Lists the addresses to which all official or legal correspondence should be delivered. Write a mailing address for both the owner and the manager.

Governing law

Allows the parties to choose the state laws that will be used to interpret the document. Note that this is not a venue provision. The included language will not impact where a potential claim can be brought.

Counterparts; electronic signatures

The title of this provision sounds complicated, but it is simple to explain: it says that even if the parties sign the agreement in different locations, or use electronic devices to transmit signatures (e.g., fax machines or computers), all of the separate pieces will be considered part of the same agreement. In a modern world where signing parties are often not in the same city—much less the same room—this provision ensures that business can be transacted efficiently without sacrificing the validity of the agreement as a whole.

Severability

Protects the terms of the agreement as a whole, even if one part is later invalidated. For example, if a state law is passed prohibiting choice-of-law clauses, it will not undo the entire document. Instead, only the section dealing with the choice of law would be invalidated, leaving the remainder of the agreement enforceable.

Entire agreement

The parties’ agreement that the document they’re signing is “the agreement” about the issues involved. Unfortunately, the inclusion of this provision will not prevent a party from arguing that other enforceable promises exist, but it will provide you some protection from these claims.

Headings

It states that the headings at the beginning of each section are meant to organize the document and should not be considered operational parts of the agreement.

Use a property management agreement form to create agreements faster and easier  

Having an all-inclusive property management agreement helps in managing your rental properties better. However, it is hard to decide whether the property management contract you create from scratch includes the nitty-gritty of a management agreement. That’s where a template becomes a good reference point for your property management arrangement.

If you’re looking for an online property management agreement template, then LegalZoom can be of assistance. LegalZoom offers an easy-to-use and professionally vetted template that could be used to create your property management agreements.

Answer the provided questionnaire, complete the document, and download your document for free. LegalZoom also offers other form templates that can be used for other property management services.

Before signing the contract, you and the property manager must continue to discuss the terms of your agreement, settling questions about work parameters, payment, and responsibilities. Once you have agreed on contract terms and have signed it, each party can focus on its area of expertise—the property owner on the development of its business and the property manager on the tasks assigned.

Frequently asked questions

What is a property management agreement?

As a landlord, having tenants in your building is exactly what you want. However, showing the property, negotiating lease terms, collecting rent, addressing maintenance and repairs, and managing the property can take a lot of time.

A professional property management agreement gives a manager the authority to address all these things, relieving you of dealing with day-to-day property issues. That way, you can focus on the larger picture of building your business.

What essential information is required to complete a property management agreement?

To complete a property management agreement, you’ll need the following details:

• Who it's coming from: Determine if a business or individual is sending the document and have their name and contact information ready.
• Who it's going to: Know who this document is going to and have their name and contact information ready.
• Responsibilities: Be clear about the duties the manager will perform, such as advertising, showings, rent collection, maintenance, and remodeling.
• Timelines: Be ready to agree on lease terms and payment schedules.
• Payments: Remember what the manager will be paid and how often.