Special offer
Home > Blogs > Jordan Muela > Manage My Property Blog
bookmark_border

Dissecting Property Management Contracts Pt. 2 - Terminating the Contract

By
Services for Real Estate Pros with Manage My Property

Make sure to read my introduction to this series on management contracts

In continuation from our last article, here are more items to pay attention to in the property management contracts you review:

Term (AKA "Duration of agreement", "Retainer period")

Most management companies require a 1-2 year contract period with very few offering month to month services. Bear in mind that the contract will be legally binding upon its execution (signing), even though the start date or "effective period" may begin later. After the initial or "primary" term is over, the contract may automatically renew itself for another term repeating the process each time the expiration date occurs. Find out how long of a term the auto-renewal will commit you to, it could be longer that the initial term was for, which would be important to know. Also, in the event that you want to prevent this automatic renewal from taking place, you might have to provide written notice at least 15-30 days before it takes place.

Owner Termination

The termination clause is a very important piece of the contract. It will dictate under what circumstances you or the manager can end the relationship prematurely and what penalties or costs you will incur. Without an exit plan, you might find yourself trapped if the relationship doesn’t work out. Find out how much notice the management company requires before allowing termination of the contract (30 days is normal but some companies require up to 90). Also, does the contract require "cause" as a prerequisite to being able to provide this notice? If so, the agreement needs to spell out what exactly qualifies as "cause".

A pink termination notice slip in tucked in someones coat sleeve

Will there be any fees or penalties for terminating the contract early? Not all managers charge a fee; if they do it’s either a straight forward flat fee (300-500$), or something conditional. Conditions can vary widely, from having to pay a fee if you cancel during the initial vacancy period, to only having to pay a fee if you cancel after a tenant has been landed, or within the first 12 months. Worse case scenario? We've seen contracts that in the event of early termination still require the payment of monthly management fees for the duration of the remaining lease term(s) and others that require the total management fee for the life of the contract (based on scheduled rents) to be paid upfront as a pre-requisite to early termination.

Ideally, you want a contract that allows for termination without cause with 30 days notice. Bear in mind that while this clause is a legitimate way for the management firm to protect itself from making an upfront investment in a property only to have the owner bail, it also speaks to the company’s faith in its ability to satisfy its clients needs. If they are having to implement extreme switching costs (termination fees) in order to retain clients, this is a bad sign.

There should also be some provision to allow you to exit the contract without penalty in the event that the manager is not able to secure a tenant within an extended period of time (3-4 months).

When you do decide to terminate, make sure your written termination date reflects the exact contract term expiration date, otherwise you could be liable for the penalties mentioned above.

Agent Termination

Pay close attention to the circumstances in which the management company cancels the contract, the notice they will give you and the financial implications it will have. Below are some excerpts from real contracts that describe circumstances which allow the management to elect to terminate the contract:

... if the agent in its sole discretion deems the continuation of the agreement subjects itself to liability or is in breach of its duties to the tenants or any other persons. (pdf: rudolphrealestate.com)

If Broker determines that Broker cannot continue to effectively provide leasing and management services to Owner for any reason at any time during this agreement... (pdf: austinlandlord.com)

...should Owner fail to promptly fund repairs required by any city, county, or state law, regulation or ordinance and/or to maintain the condition of the property being rented in a habitable condition as required by either the rental agreement and/or applicable California code sections or appellate decisions, of if the Owner fails to promptly comply with any government issued Notice of Corrections or court orders. (pdf: rmhomes4rent.com)

...Owner has made any misrepresentation of material fact regarding the real property, the tenant, and/or the status of the landlord-tenant relationship, if any, or has been or is not acting in strict conformity with this Express Property Management Agreement and Authorization, or fails in any way to cooperate with the Agent in managing this real property (pdf: rmhomes4rent.com)

Bear in mind that some contracts don't even contain an agent termination clause, but if they do, they can include a very broad and general list of circumstances. Make sure the contract entitles you do adequate notice (30 days) in event that this does take place. Lastly, find out what the financial ramifications of agent termination will be. Worse case scenario, you could be dealing with a situation like the one outlined below:

In the event that this (name withheld) Agreement and Authorization is terminated for cause as allowed by this section, said termination will not release nor relieve Owner of its responsibilities for payment to Agent of expenses and management fees for the full term of this (name withheld) Agreement.

Duties upon Termination

Once you or the management company has decided to sever the relationship, there are still important things that need to happen to make for a clean break. Owners need to make a final payment to the management company to settle the account and the contract should cover the following tasks for the management company:

  • Provide owner with a final financial report along with remaining rents on hand minus agents fees and funds needed to cover all outstanding expenses the manager has incurred in the course of managing the property. There should be some time parameter dictating how quickly this will take place after termination. Also, check if the contract contains a clause giving the manager permission to withhold owner funds, either all or a portion like the reserve, for a certain period of time. This is usually for 30-60 days and is done in order to make sure all expenses are paid, such as those already incurred but not yet invoiced.
  • Provide owner with necessary records and documents. This would include a list of tenant security deposit obligations, copies of tenants’ leases and other instruments entered into on behalf of the owner.
  • Provide owner with a record of tenant security deposit obligations.
  • Transfer security deposits either to the owner, or the owner’s new agent minus the relevant deductions as dictated by the contract.
  • Provide tenants written notice of the exact dollar amount of the security deposit and inform them that the owners or owner’s new agent is now responsible for returning their security deposit.
  • Provide tenants written notice that they are no longer managing the property, and provide them contact information for the owner’s new agent or designee.

Default

If either party breaches the contract, how long will they have to fix the problem before the other party has the right to terminate the contract? (Ranges from 0 to 30 days)

Mediation and Arbitration

Does the contract specify the usage of a mediator or arbitrator to resolve disputes? If so who preside and what is the process? Who pays for their services? Note that there is a difference between mediation and arbitration.

Attorneys fees

In the event legal proceedings are required to settle a dispute about the contract, will the prevailing party be entitled to reasonable attorney’s fees? Check to see if the contract puts a cap this amount, if so the entity with more cash may have an inherent advantage in the event of dispute.

In our next and last article in this series we are going to provide you with a easy to understand description of some of the common legal clauses and concepts covered in the contract.

Next: Indemnification and Boiler Plate Items

Originally posted on managemyproperty.com under, "Contract Termination"

Show All Comments
Michelle Francis
Tim Francis Realty LLC - Atlanta, GA
Realtor, Buckhead Atlanta Homes for Sale & Lease

Jordan, 

Great post.  I've only had to end one property management agreement, as the owners didn't think working heat and air was a necessary item for the tenants.  That's not an environment I am comfortable with, so we parted ways.  Our GA contracts allow us to give notice or transfer property management of the property.  

It is always critical to understand an exit plan for both sides.  

All the best, Michelle

Feb 18, 2010 11:03 AM
Jordan Muela
Manage My Property - Austin, TX
Manage My Property

Thanks for the feedback michelle. I hear you on the termination, no one wants to manage for a slumlord. Its just a lose lose proposition. I am a firm believer that everyone wins when there is clear transparent communication about what to expect BEFORE the contract is signed.

Feb 18, 2010 11:11 AM
Robert Machado
HomePointe Property Management, CRMC - Sacramento, CA
CPM MPM - Property Manager and Property Management

In my experience when the relationship goes bad, it is best to find a way out.  I do not suggest heavy fees to leave early, it will just make a bad thing worse.  Better to part ways and move on to better days.

Feb 18, 2010 05:01 PM
Wallace S. Gibson, CPM
Gibson Management Group, Ltd. - Charlottesville, VA
LandlordWhisperer

Since I do not list property, I have a 2 year management agreement and a $400 termination fee if it is terminated after the first year by mutual agreement.

..and yes, if they want out, I get a signed "release" from the tenant before providing the lease, deposit and move-in condition report to the owner or new property manager.

Feb 19, 2010 10:44 PM
Anonymous
Sabrina Fox, Santa Ana, Ca Owner of property

My property managment company gave me, the owner 30 notice because I would not list my house with them for a short sale I must do on my mothers property. All is well, but the managment company had 30 days to get all inforation together, notify the tenants, and give them and myself a written letter along with final invoice and deposit holdings being transferred to the owener.

I have yet to received anything from the property managment company. I have had to email them about this and then ask for the tenants contact information since the tenants have not contacted me to make arrangements for. Still no rent payment received. They are just now getting the file together to send to me. termination ended for the managment company on July 29th. 

I feel like I have had to do their job for them and remind them what their due dilagence is toward both owner and tenants.

Aug 06, 2010 12:40 PM
#5
Anonymous
socorro Sanchez

My Property Management let me down by not doing an annual check up on the tenants. After the tenant lived in the premises for two years. P/M decided to do one after two years. After coming from vacation finding out my property was being turned into a "grow/pot house".

the house couldn't get so filthy in three months. all the window treatments has nicotine residue. Marijuana odor through out the interior. It was heart breaking. You believe I haven't heard from the Manager at all.

the move-in report and the move-out report says the same "G" Good. I personally believe the personnel never checked the inside of the house. I just painted the exterior. We had everything repaired before renting it out, so we didn't to have any problems.

$20,000.00 later, the home insurance won't cover illegal activity claims I believe it's the "negligence" of the home inspector

I hired Property management to protect my  property.

Any suggestions out there?

 

 

 

 

Nov 10, 2010 06:16 PM
#6
Jordan Muela
Manage My Property - Austin, TX
Manage My Property

Socorro, I am very sorry to hear about your plight. I suggest reviewing the contract that you signed with the property manager to better understand what kind of recourse you might have. Tenants need a close watch and while an owner can outsource this to a PM, the owner still then needs to keep a close watch on the PM until such a point as they are confident that the PM is doing their job well.

Home inspections are a basic neccestity of who ever is stewarding the property and neglecting to do them is completely unacceptable. After you have thoroughly reviewed your contract do your best to get in touch with your PM and take things from there.

Nov 11, 2010 02:19 AM
Sandra Ortiz

I need help.  I hired Homefinder Management Company to manage my Condo.  This one man company is the worst I ever dealt with.  I advised him to add a clause in the Lease Application that if the washer/dryer broke that they would not be replaced nor repair.  He did not do it.  I told him to send me the tenants copy or original Lease Application and he has not done it (6 months have lapsed).  He also tends to disappear for days, weeks at a time and can't find him nowhere.  He never return my calls, I just have to continue calling him until he answers.  Due to the fact that he disappears a lot, I am worry that he will disappear with the tenants deposit, so I asked him to mail me the deposit but he said for me to read paragraph 3 in the Agreement (Mmanagement handles deposits).  When he barely started managing the Condo, he said that he sends rent on every 10th. of the month.  He always send the rent late.  In the Management Agreement it also reads that any repair over $100.00 that he has to get my approval.  He doesn't.  I tell him that I am not paying for any repair over $100.00 and he goes with his merry way and from the rent that he collects, he gets the money and sends me the remainder. 

I feel stuck with this guy.  I have thought about selling but the Agreement reads that I have to give him 3% of the gross sale.  He also added an ambiguous paragraph that reads "This agreement may be terminated at any time by mutual agreement of the parties upon payment of all commissions, fees, and expenses due hereunder to Broker.  Excepting, however, the parties agree that this contract shall remain in full force and effect so long as any tenant placed in said property by Broker shall remain in possession.    

This guy has breech the contract by not getting my approval on a repair over $100.00 and getting the money without my consent.  Can I just fired this bozo with that alone? 

Jan 10, 2011 07:37 PM
Farrah Robinson
Philadelphia, PA

So true! all property managers should have a exsit cluase in their contracts, and owners if you don't have one you are in big trouble...Hopefully there will be no need to leave your property manager, but in the event that you do there are some great forms on line that can make the transition as esay as possible for everyone involved in the rental transaction.

Mar 06, 2011 01:12 AM
Anonymous
Sam

I have a question about the agreement we have with our property manager.  We are ready to move on to another PM for several reasons, but are willing to let our PM agreement expire.  It's a tricky situation, and I'm trying to figure out how we can do it.  Our management agreement with our PM ends in November.  We currently have tenants, who's lease agreement ends in February. 

The agreement we signed with our PM says that "...the agreement will automatically be renewed for successive 1 year periods unless canceled in writing by either party with at least 30 days notice prior to expiration of this Agreement", and says "...Upon termination of this Agreement by Owner, the Agent has the right to maintain all existing leases until their expiration.  Agent shall be entitled to its management fee for the duration of the lease term, including renewals, of tenants procured for Owner by Agent."

So, If we cancel our agreement with the PM in November, they are still entitled to management costs of our tenants through the end of the lease, February, but they will not be actively managing our property.  Doesn't make sense.  Can I somehow tell them, 30 days before the management agreement expires, "We do not wish to automatically renew our agreement with you for a full year.  We would like the agreement to remain in force until January 31st, which is when the lease agreement ends with our tenants.  We will then manage it ourselves, or have another PM manage it for us.".

Can I do that? If so, what would the legal way of requesting this be?  We feel stuck, but surely there is a way to move on to another PM without getting hosed for 3 months? Thanks.

 

 

Aug 17, 2011 07:43 PM
#10
Back to Top

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?