When was the last time you read your property management agreement? Likely: years ago, when you first used it; occasionally when an Owner asks questions or requests changes; or if a problem arises. With all the changes to landlord tenant laws, rent control and especially the actions of the City of Portland, it is time to dust off and review your agreement.
Your property management agreement covers three basic issues: compliance, performance and protection. I am going to focus on performance and protection, assuming your agreement is compliant with applicable licensing laws.
Performance issues may be the easiest to cover, namely, what is your authority and what tasks are you performing for the owner. Collection of rent, keeping accurate records, and depositing funds into your trust accounts are obvious tasks. Does your agreement adequately cover: creating, approving and following a budget; hiring and firing employees (and whose employees are they); ability to file eviction actions and retain attorneys; can you file collection actions and enter into settlements or payment plans; ability to make emergency repairs without prior approval; does the owner require renter’s insurance (and clearly identifying when renter’s insurance cannot be required); and how often will you inspect the unit(s). Equally as important, what tasks are you not going to perform, such as, will the owner perform maintenance, or does the owner have final say on any termination/eviction. To be safe, your agreement must be comprehensive on what you can and cannot do on the owner’s behalf.
In today’s environment, the protection clauses may be even more important than performance clauses. Insurance, indemnity and limitations on liability, if not adequately covered, may spell the difference between staying in business and having to shut down because of a claim.
Your agreement should identify what insurance the owner must obtain (types and limits), and expressly provide such insurance will be primary and the agent named as an additional insured on the liability policy. What insurance must the agent obtain and whether the owner will contribute to the premiums: such as fair housing coverage as part of an employment acts policy. If you do not have a trusted insurance agent with whom you work, I strongly recommend one be obtained, and regularly consulted. Insurance is a complicated specialty and the right advisor will steer you properly and even help draft language for your management agreement to protect you.
Indemnity and limitations of liability should be reviewed in light of the recent law changes. Remember, you are an agent of the owner, not the owner’s insurer. There are risks the owner should bear because they have elected to own rental property. There are also risks you should bear as a real estate professional. Clearly, if you breach the management agreement by exceeding your authority, you should be prepared to stand up and take the consequences. However, as we all know, a tenant or applicant can file a baseless fair housing claim by simply picking up the telephone and calling BOLI or HUD. If the proposed City of Portland screening ordinance passes, it may be impossible to comply because of its complexity and unrealistic requirements. In these situations, the owner should be responsible to pay for defense of the claims and any ultimate liability (unless caused by the agent’s gross negligence or intentional misconduct). Carefully worded indemnity provisions reasonably allocate risk between the owner and agent, and dovetail with the insurance provisions. Finally, limitation of liability clauses can place an outer limit on the agent’s liability in all events.
If you have not reviewed your property management agreement recently, now is the time to dust it off and fix any issues. We regularly review and revise our client’s management agreements. We also have a “standard” agreement available for purchase which many clients have found appropriate for their needs.