The leasing and management of real estate for a fee or compensation requires a real estate broker license and must be conducted through a licensed brokerage. Licenses are issued by the Colorado Department of Regulatory Affairs, Division of Real Estate with oversight by the Colorado Real Estate Commission. C.R.S. § 12-10-201(6). Property Managers (“PMs”) generally does not need additional licensing or education beyond what is required for a real estate broker, independent broker, or employing broker .
The Colorado Real Estate Commission considers property management to be a complex area of practice. C.R.S. § 12-10-217(1)(q). Hence, a PM must be competent and worthy in the performance of their professional duties to avoid endangering the interest of the public. CP-27. If the PM does not possess the knowledge, experience, and training necessary to perform PM duties and comply with federal, state, and local laws, regulations, rules, and ordinances, the PM must either decline an assignment or seek assistance from someone with the necessary experience to ensure the competency requirement is satisfied.
To provide property management services, a PM must have written permission from an employing broker if associated with a brokerage,. It is then the responsibility of the employing broker to ensure the proper level of supervision, either a reasonable level or a high-level of supervision, and that the PM is competent among other compliance items.
The PM and the employing broker should discuss competency, regulatory compliance, accounting practices, use of forms, office policy manual provisions, and any other concerns before engaging in property management.
The employing broker will be responsible for compliance with all legal requirements, including but not limited to maintaining all trust accounts and all transaction records. The employing broker will have an ongoing duty to review all contracts to ensure they have been competently prepared and that all required documents exist.
PMs must satisfy the continuing education requirements for whatever type of broker license they hold. PMs should be aware that Colorado’s licensing cycles include the anniversary year, calendar year, and a transition period. PMs also should review the required hours of continuing education for a licensing cycle (currently a total of 24 hours), including the Colorado Real Estate Commission’s “Annual Commission Update”.
The PM should be aware of the distinctions between leasing and property management. Leasing is a one-time activity in which the broker acts as a special agent who is not required to perform PM duties, such as accounting. Once a lease is signed, the broker’s duties are complete. If acting as a PM, the broker’s duties continue beyond the formation of the lease. The PM is also responsible for one or more of the following activities: maintaining the property’s physical condition, communicating with tenants, and collecting rent and/or security deposits. If the PM’s duties are ongoing after the lease is entered into, that the PM should communicate clear expectations between the tenant and landlord.
Property Management Agreements:
It is not only the best practice but also a legal requirement that if a broker intends to provide property managements services, there must be a written property management agreement (“PMA”).
In Colorado, the PMA must be drafted by an attorney. There is no Commission approved PMA form. PMs are not authorized to practice law by drafting PMAs. Therefore, PMs must, at their own expense, retain an attorney to draft the PMA and train the PM in its use.
The minimum items that must be addressed in the PMA include the following items:
Duration of the relationship;
Identity of the property to be managed;
Identify the property to be managed;
General duties performed by the PM, including the signing of leases;
Fees for the PM’s services, including disclosure of any mark-ups;
Before a mark-up can be charged, the PM must obtain prior written consent to assess and receive mark-ups and/or other compensation for services performed by any third party or affiliated business entity;
Tenant selection criteria. If the decision to lease will be based on criminal history or financial worthiness, the property management agreement should indicate who is responsible for collecting this data and what sources will be used. Additionally, the PM must ensure compliance with the Fair Housing and Fair Credit Acts.
Posting of eviction notices. If a Forcible Entry and Detainer (a/k/a eviction) is necessary, an attorney should represent the landlord in the filing of the Forcible Entry and Detainer. A PM that files a Forcible Entry and Detainer without the assistance of an attorney may be practicing law without a license;
Ownership Interest. The PM must disclose a PM’s direct or indirect ownership interest in any company which will be providing maintenance or other services to the landlord, and any other conflicts of interest;
Identity of the entity responsible for holding the security deposit, and if interest is earned on security deposit escrow accounts, who benefits from such interest and consent to transfer the interest to the beneficiary;
Process to be followed for any subsequent transfer of the landlord’s monies, security deposits, keys and documents; and,
Requirement that the landlord receive regular monthly accounting of all funds received and disbursed.
See the “Property Management and Leases” chapter in the Colorado Real Estate Manual for further information.
PMs should discuss with the attorney drafting the PMA about incorporating express defense and indemnification language requiring the property owner to defend and indemnify the PM, the employing broker, the brokerage and unlicensed assistants against all claims and suits.
The PMA should also address and require the property owner to name the PM and the brokerage as additional insureds.
The PMA should clearly state that the PM will be entitled to choose legal counsel and set forth satisfactory liability limits.
The property owner’s liability insurance should be identified as the primary policy of liability insurance for both defense and indemnity.
Before engaging in any property management activities in Colorado, whether as a leasing agent or a PM, the broker must disclose in writing the different brokerage relationships that are available to both the landlord and the tenant. The broker should use the Commission approved “Brokerage Disclosure to Tenant Definitions of Working Relationships” to disclose to the tenant the brokerage relationships available. The Disclosure should be signed by the tenant.
The broker also should use the Commission approved “Brokerage Disclosure to Landlord Definitions of Working Relationships” form to be signed by the landlord.
The PM should provide the appropriate Commission approved forms once a year to each tenant and landlord, document this in the PM’s files, and maintain these records for a period of at least 4 years.
The Brokerage Disclosure form to landlords and tenants is not a substitute for a PMA.
Before procuring a tenant, the PM must either (1) hire an attorney to draft a lease form for the PM to use, or (2) the landlord will need to designate a lease. The PMA should clearly state which party will be responsible for drafting the lease and the associated attorney’s fees, if any, for drafting the lease.
If the deposits are held by or transferred to the landlord, the PMA must specify that the landlord is responsible for the security deposit’s return and, that in the event of a dispute, the broker is authorized to reveal the true name and current mailing address of the landlord.
Please see additional CRES website materials regarding PMAs in particular and property management in general.
Colorado’s unique recordkeeping and accounting requirements can cause PMs significant problems, especially because PMs are subject to random audits. The accounting requirements and types of recordkeeping do not lend themselves or convert easily to the QuickBooks format. Many PMs find themselves struggling to explain entries and are often suspected of comingling or converting client funds. Please review the following tips for avoiding issues related to rent or security deposits.
All PMs in Colorado who are responsible for collecting and distributing rent or security deposits must be familiar with the Real Estate Commission’s rules and regulations for trust accounts and record keeping. These rules and regulations are specific to Colorado and can be confusing to PMs, tenants, and landlords coming from out of state. Education on accounting and recording keeping requirements is critical.
All money belonging to others which is received by a PM must be deposited in the PM’s brokerage’s escrow or trust account within 5 business days of receipt.
Who and how money is received must be documented and disclosed. A PM may deposit rent monies or security deposits directly into an account owned and controlled by the landlord. If the landlord is to receive rent and security deposits directly, this must be set forth in writing and proper disclosure made to the tenant.
The PM may not use any portion of the security deposit for the PM’s benefit nor may the employing broker and brokerage.
If the PM is to receive deposits or rent into the employing broker’s trust account, the PM is required to keep detailed records and follow precise accounting practices.
A PM who receives security deposits is prohibited from delivering those deposits to the landlord unless the tenant’s written authorization is given in the lease or written notice is given to the tenant by first-class mail. The notice must identify who is holding the security deposit and the procedure the tenant must follow to request the return of the deposit.
All money belonging to others accepted by the PM must be deposited in one or more accounts separate from money belonging to the PM, the employing broker or brokerage entity.
Separate trust accounts must be maintained in the name of the employing broker, or the employing broker and the licensed business entity. The maintenance of the separate accounts is the employing broker’s responsibility.
A brokerage firm that engages in property management must deposit rental receipts and security deposits and disburse money collected for such purposes in separate trust or escrow accounts, a minimum of one for rental receipts and a minimum of one for security deposits.
Colorado law requires the return of a security deposit to the tenant within 1 month after a lease is terminated or the premises have been vacated and accepted, whichever happens first.
The lease may provide for a longer period of time, but no longer than sixty days.
Security deposits may not be retained to cover normal wear and tear.
Wrongful withholding of a security deposit may subject the landlord, the PM, the employing broker and the brokerage entity to treble (triple) the amount of any wrongfully-withheld funds, plus reasonable attorney’s fees and court costs.
What is normal wear and tear often becomes the central issue of dispute in landlord-tenant disputes. Therefore, the PM should be prepared to document the condition of the property before, during, and after each tenancy concludes.
Security deposits may be kept for nonpayment of rent, abandonment, nonpayment of utilities, repairs, or cleaning contracted for by the tenant per the terms of the written lease agreement.
If cause exists to retain a portion of the security deposit, Colorado law requires that the tenant be provided with a written statement.
The written statement must list the exact reason(s) why all or a portion of the security deposit is being retained.
The written statement must be delivered with the difference between the amount of the security deposit and the amount retained.
The written statement must be delivered to the tenant’s last known address.
The right to retain the security deposit or a portion of it will be forfeited if the written statement and any difference is not delivered to the tenant within 30 days (or the alternative deadline specified in the lease) of the lease terminating or the surrender and acceptance of the property, whichever occurs later.
Forfeiture of the security deposit does not mean the landlord loses the right to pursue the tenant for damages or for past rent owed.
If the tenant pursues litigation to recover the security deposit, the landlord or the PM will bear the burden of proving that retention of any portion of the security deposit was not wrongful.
The PM does not need to possess a separate license to handle funds. The employing broker will be held responsible for the handling and accounting of all funds.
Individual trust accounts for each client are neither required nor prohibited. Depending on the size and nature of the PM’s practice and client needs, individual trust accounts may serve a benefit. The risks and benefits of individual trust accounts should be discussed with the client(s), the employing broker, accounting staff, and the banking institution if warranted as an option.
A PM is required to supervise and maintain a record keeping system at the broker’s licensed place of business.
Colorado law on recordkeeping is very specific and unique. PM’s must implement and maintain a record keeping system that consists of three components that must all be kept current. The PM must also maintain supporting records that detail all cash received and disbursed under the terms of the PMA and lease.
The three components of the Colorado regulatory recordkeeping are:
An escrow or trust account journal;
A ledger; and
A bank reconciliation worksheet.
If the PM deposited personal funds into the trust account to open or maintain the trust account, both the journal and ledger must contain entries documenting this money. The PM’s personal funds also must be included in the bank reconciliation worksheet.
Money from one landlord cannot be used to supplement operating capital or to finance expenditures of other landlords or the PM.
Mark-ups must be accurately accounted for in the records, including verification of the disclosure and consent to any and all mark-ups that are assessed. There must be a full accounting for the amounts or percentages of compensation assessed or received.
The “cash basis” of accounting is required unless stated otherwise in the PMA.
Records may be stored electronically provided they can be printed in a legible format.
Records must be kept and maintained for a period of 4 years.
The best practice is to have an attorney handle evictions. However, a PM might be able to initiate the forcible entry and detainer process on behalf of the landlord provided the PM is not engaged in the unauthorized practice of law. Due to how broadly the practice of law can be interpreted in Colorado, the best practice is to advise the landlord to engage an attorney for evictions or for the PM to directly engage an attorney to pursue a forcible entry and detainer action per client instructions.
See the CRES updates and other articles regarding the impact COVID-19 is having on evictions and lifting of bans on evictions in Colorado.
Maintenance and Repairs:
Although yearly inspections are not required, such inspections are allowed in Colorado consistent with the terms of the written lease.
Yearly inspections should be identified in the written lease with the tenant. Who, when, and how the inspections will be conducted, the reasons for the inspection, the types and how any testing will be conducted, whether the tenant will receive notice in advance, how far in advance, whether the tenant will receive the results of any inspection, and the means of documenting the property, e.g., visual, photos, video, etc., should be spelled out in the lease.
The lease should identify and distinguish the difference between exterior or drive-by-type inspections and other interior and intrusive-type inspections.
The lease also should provide a process for inspections requested by the tenant or special circumstances entailing the tenant’s cooperation for the landlord to request an inspection.
Although it may not be considered an inspection, the lease should set forth expectations and the tenant’s duties with respect to (1) showings, in the event the landlord lists the property for sale and (2) due diligence inspections or repairs requested by any buyer, in the event the landlord goes under contract.
It is recommended that yearly interior inspections and more frequent exterior curbside inspections also are addressed in the PMA, including how inspections are to be accomplished, the frequency of inspections, what is to be inspected, who is to do the inspection, how the costs of the inspections will be paid, if any costs, and how the condition of the property will be documented among other essential terms.
A PM has no duty to inspect the condition of the property for the landlord unless the PM voluntarily takes on that duty.
A PM must advise the landlord to obtain expert advice as to material matters about which the broker actually knows but the specifics of which are beyond the expertise of the PM.
It is, therefore, the best practice to refer the landlord to an independent, professional service to perform the yearly inspections the landlord deems necessary and appropriate.
Expectations and the responsibility for repairs should be addressed in both the PMA and the lease.
Ideally, the lease will also provide for a procedure on how the PM will communicate and coordinate with the tenant for repairs, including on an emergency basis.
The PM should discuss with the landlord whether there will be a discretionary amount for repairs that does not require landlord approval. The process for approving any amount over the discretionary limit should be clearly communicated in the PMA, including the amount, the person to contact on behalf of the landlord if an entity, who may select and contract with vendors or contractors, work-comp coverage, bond or license requirements for any third-party service provider, responsibility or authorization for any insurance or property damage claim, emergency authorization, etc.
It is recommended that any third-party service provider for repairs be licensed as the case may be, provide their own work-comp and liability insurance, and, if the work is significant, for example in instances of mold mitigation, be bonded or insured, including for any damage to the tenant’s personal property and personal injury to the tenants themselves.
A PM must be alert to and on guard against issues of habitability. The PMA and the lease should make clear that it is the landlord who is responsible for providing a habitable premise and those associated costs, and not the duty of the PM.
In Colorado, a lease may be nullified or voided due to the landlord’s failure to repair a hazardous condition attributed to a gas appliance, piping, or other gas equipment.
The landlord of the PM must deliver all, or the appropriate portion of, the security deposit plus any rent rebated owed to the tenant for the time period that the tenant vacated the property.
Payment must be made to the tenant within 72 hours of the tenant vacating the property or by noon the next day that is not a Saturday, Sunday or a legal holiday.
If any portion of the security deposit is retained based on the condition of the property, the tenant must be given a written statement listing the exact reasons why all or a portion of the security deposit was not returned.
Failing to do so may entitle the tenant to treble damages, and reasonable attorney’s fees.
Other information Colorado PMs should know:
The path of the Colorado PM is beset with traps for the unwary and pitfalls for the unprepared. Every Colorado PM must be informed as to the risks that will arise on a daily basis, including those raised by tenants, landlords, and regulatory compliance entities. Constant education, vigilance, and accessing the available risk management tools will assist PMs to navigate this field. Even the most professional, experienced and vigilant PM will be confronted with the unforeseeable and unexpected event. Therefore, it is critical that each PM and brokerage work with their E&O insurance carrier to be prepared to manage the risk of such an event.
James M. Meseck, Rachel E. Ryckman, E. Catlynne Shadakofsky, and John C. Matthews White and Steele, P.C. 600 17th Street, Suite 600N Denver, CO 80202 303-296-2828 www.whiteandsteele.com
This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.
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