Many real estate professionals have diversified their business models and become involved in real estate property management. This has been an excellent source of revenue for these professionals, whether they act as property managers or landlords. With this diversification has come a learning curve and the use of different forms for risk management. The key to working successfully in real estate property management is to understand the roles of all those involved, the necessary contracts, and the areas of both that could lead to a lawsuit.
In several risk management calls to the CRES ClaimPrevent® Legal Hotline, we’ve found that many property managers are signing the written lease agreement for the rented property with the tenant as opposed to the landlord signing the document.
- From a risk management perspective, a property manager should never sign a written lease agreement for a property to be rented by the landlord. Rather, any contracts or addendums should have the tenant’s and landlord’s names clearly listed and be signed by them alone. A copy of each contract or addendum should then be placed in the property manager’s transaction file. By following this protocol, the property manager does not get into a situation where he or she, as the landlord’s authorized agent, binds the principal to something he never intended to be obligated to.
- Unless the property manager of a given unit has an ownership interest in the property being rented out, he or she is never the “landlord.” Rather, the person or persons who have a record of ownership with the county recorder’s office where the rented property is located are the “landlord” or “landlords”.
Understanding Roles in Property Management and Lease Agreements:
- A property manager is a person who takes care of the many aspects of commercial, industrial or residential properties for the owner of the properties. The owner is deemed the “landlord” when the property is rented out.
- The property manager makes sure that the rented property is maintained, including managing maintenance of the appearance of the property, and handling other maintenance or repairs. The property manager handles collection of monthly rents from tenants.
- Most property managers act as the liaison between the tenant and the landlord with respect to the rented property over the course of the parcel’s lease.
- Most property managers are charged with potential tenant background, credit, and reference checks. Depending on the property management agreement, the landlord or the property manager may be in charge of selecting or rejecting tenants.
- The property manager should only have written agreements with the landlord and never with the tenants unless they have a financial stake in the property being rented.
- Landlords own the property that is being rented.
- Payment to the property manager can be a flat fee or a percentage of the rents that the property manager collects.
- A landlord does not get paid a salary and will only make money off his or her rentals if they are profitable.
- Tenants enter into a lease agreement with the landlord, not the property manager.
Typical Property Management Agreements Between Landlord and Property Manager Should:
- List all expected duties of both parties
- Specify that the property manager cannot and will not take any legal action against the tenants on behalf of the landlord
- Specify that the landlord will hold security deposits
- Clearly state that the landlord will sign all leases, addendums and extensions with the tenant, and the property manager will not be responsible for signing any such documents.
- Specify that purchases for maintenance and repairs up to a certain dollar amount can be made without the landlord’s written consent
Authorize the property manager to have an annual property inspection conducted by a third party inspector
Insurance Protections for the Property Manager
The property management agreement should have a provision within it that the landlord will name the property manager and his or her real estate brokerage as an additional insured under the landlord’s liability insurance policy with respect to the rented and managed property.
The landlord will then provide the property manager with a copy of the declarations page issued by the insurance carrier for the managed property within thirty days from when the property management agreement is signed. Be sure you get this documentation. See “what happens when property managers aren’t added to landlord insurance policies”.
When in Doubt, Call
As with any contract, if you are in doubt, the best thing to do to reduce your risk of an E&O claim is to contact CRES ClaimPrevent® Legal Hotline to have any agreements reviewed by an attorney.
Edward McCutchan, Jr.
Sunderland | McCutchan, LLP