Dissecting Property Management Contracts Pt. 3 - Indemnification and Boiler Plate Items

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:

Liability and Indemnification

All contracts will have a section that addresses what the management company can and cannot be held liable for.

Some contracts are broader and more comprehensive than others in terms of what the firm requires the owner to indemnify them from.

Indemnify: To compensate for loss or damage; to provide security for financial reimbursement to an individual in case of a specified loss incurred by the person. (legal-dictionary.thefreedictionary.com)

To get an idea of what the management company may ask you to hold them harmless from, here is an excerpt from a contract with a pretty comprehensive liability and indemnification clause:

Liability and Indemnification:

  1. Broker is not responsible or liable in any manner for personal injury to any person or for loss or damage to any person's real or personal property resulting from any act or omission not caused by Broker's negligence, including but not limited to injuries or damages caused by:
    1. Other brokers, their associates, inspectors, appraisers, and contractors who are authorized to access the property;
    2. Acts of third parties (for example, vandalism, theft, or other criminal acts);
    3. Freezing or leaking water pipes;
    4. A dangerous condition or environmental condition on the property; or
    5. The property's non-compliance with any law or ordinance.
  2. Broker is not responsible or liable in any manner for:
    1. Any late fees or other charges Owner incurs to any creditor caused by late or insufficient payments by any tenant in the Property; or
    2. Damages to Owner caused by a tenant's breech of lease.
  3. Owner agrees to protect, defend, indemnify, and hold Broker harmless from any damage, costs, attorney's fees, and expenses that:
    1. Are caused by Owner, negligently or otherwise;
    2. Arise from Owners failure to disclose any material or relevant information about the Property;
    3. Are caused by the Owner giving incorrect information to any person; or
    4. Are related to the management of the property and are not caused by Broker, negligently or otherwise.
  4. Owner is responsible and liable for all contracts and obligations related to the Property (for example, maintenance, service, repair and utility agreements) entered into before or during this agreement by Owner or by Broker under Broker's authority under this agreement. Owner agrees to hold Broker harmless from all claims related to any such contracts. (pdf: austinlandlord.com)

While the contract almost always holds the management company liable its for acts of negligence, as you can see above, they are not liable for the negligent acts of those whom they hire to work on their (your) behalf. While it would be unreasonable to expect them to be responsible for all the actions of the 3rd parties they hire, they should at least be held responsible in the event that they hire someone who has a history of bad work and they either knew about it or should have known. This can be accomplished by adding a reasonable care clause like the one below

"Agent may perform any of its duties through Owner's or Agent’s attorneys, Agents, or employees and shall not be responsible for their acts, defaults or negligence if reasonable care has been exercised in their appointment and retention." (pdf: investorschoicepm.com)

Bookshelf with legal books

Boiler plate legalese

The following are common clauses found at the end of many contracts.

Entire Agreement

This provision establishes that regardless of what you talked about with the management company before hand, this contract is the final version of the agreement and supersedes all prior written and oral proposals.

Modification

The contract should contain a clause stating the contract can only be modified by a written agreement executed by both parties.

Assignments

Could the management company transfer their contract with you to another management company without your consent? Some contracts allow for this, so make sure there is a requirement that your approval is a perquisite for the management company transferring or "assigning" your contract to another firm.

Time is of the essence

"A phrase that, when inserted in a contract requires that all references to specific dates and times of day noted in the contract be interpreted exactly.

Failure to act within the time required constitutes a breach of the contract. The general rule is that time is not of the essence unless the contract expressly so provides. As a result, with respect to real estate transactions, the modern view is that time is not of the essence unless the parties have manifested such an intent." (answers.com)

Governing Law; Venue

This clause determines which states’ laws will govern the interpretation of the contract, and may also specify the jurisdiction (county) in which all disputes are to be initiated and resolved.

Severability

This clause allows the contract to remain valid and enforceable even if a specific clause is found to be otherwise. This way a legal error in the contract does not require the entire agreement be done away with.

Your comments are appreciated!

This concludes both our overview of property management contracts, and our series on what to look for in a property manager.  I hope it has been helpful.

As always, if you disagree with a point we've made, or have something to add, let us know in the comments!

Originally posted on managemyproperty.com under, "Indemnification and Boiler Plate Items"

Comments (3)

Wallace S. Gibson, CPM
Gibson Management Group, Ltd. - Charlottesville, VA
LandlordWhisperer

The indemnification is the BIGGEST sticking point I have found.  I have to explain it more often than any other clause.

My explanation is that it puts us BOTH on the SAME SIDE of the COURTROOM when the TENANT SUES.....then if owners do not understand, I say that if that part is not in the management agreement, if I am sued, I'll settle with the tenant to be their witness so having me and covering me by their insurance puts us both on the same side of the courtroom....that then makes sense to them.

Feb 19, 2010 06:36 AM
Robert Machado
HomePointe Property Management, CRMC - Sacramento, CA
CPM MPM - Property Manager and Property Management

Without a solid indemnification clause a property manager should not accept the property to manage. 

Feb 19, 2010 08:18 PM
Jordan Muela
Manage My Property - Austin, TX
Manage My Property

@Wallace - Thats a good way to explain it. I think people just have an inherent distrust of contracts becuase of how difficult they can be to read. This is why its so important to make things as plain and simple in the document itself. Granted there is a bit of tension between using common speech and using precise legal terminology that won't be misconstrued or considered ambigous in a court of law. Using an addendum can help with this.

@Robert - I read through 20+ contracts while writing these articles and HomePointes agreement stood out for being comprehensive, yet brief and easy to understand. I really like how you used the addendum to provide an easy to read explanation of what you do and why you do it. I think alot of contracts would be well served to have an accompanying addendum that kind of interprets and justifies the legalese in the contract itself. How often do you update your companies agreement? I assume it has changed over time to reflect the different needs and experiences you have had over time.

Feb 20, 2010 07:11 AM