There are elements of board service that can vex even the most committed, most intrepid volunteer—and negotiating a building’s management contract is probably at the top of that list. Vexing or not, however, the extent and quality of services available to your building community hinges on what’s in that contract; managers and management companies are obligated to provide what’s agreed upon in it—nothing more, nothing less. That’s why securing the appropriate terms for the appropriate price is an essential component of maintaining a sound, properly functioning building.
The Nuts & Bolts
“Management agreements are the basis from which managing agents assist and help operate properties on a day-to-day basis,” says Mark Hakim, an attorney with Manhattan-based law firm Schwartz Sladkus Reich Greenberg Atlas. “A management agreement is intended to be ‘soup to nuts,’ providing a roadmap of the agent’s duties and responsibilities, including administrative and financial matters. The agent is intended to be the arm of the board, generally handling all matters during the term of the agreement, while the board continues to make the actual material decisions. Some ministerial decisions, like purchasing of supplies and so forth, are delegated to the managing agent so the board can focus on the bigger-picture items.”
And while “management agreements for co-ops and condominiums contain many boilerplate provisions,” points out Dennis Greenstein, an attorney with the New York office of global law firm Seyfarth Shaw, “the devil is in the details. There may be unique physical, financial, and staffing considerations that should be considered and provided in the agreement to cover them.”
And while there are certain elements that are pretty much universal from one contract to the next, “it’s not a standard real estate contract—every management company has its own form,” says Scott Piekarsky, an attorney with Phillips Nizer in Hackensack, New Jersey. That being said, “items that should be included and should be standard include, but are not limited to: the fee, whether the fee may change and when, and by what fee schedule the client is to be charged for services outside of what the contract specifies. It’s also important to define when the contract ends, whether it’s cancelable with or without cause, and what the potential penalties for doing so might be.”
Ellen Shapiro, an attorney with Marcus, Errico, Emmer & Brooks in Boston, adds that once finalized, “management contracts are often sacrosanct—very little can be changed.” She explains this to her clients when they seek her expert advice before entering into a management agreement. “Like any contract, though, the standard management contract should contain start and end dates and financial considerations, as well as the role and duties of the manager.” The expectations of the client—in this case a co-op corporation or a condominium association—should be clearly delineated.
What’s Typically Included
The scope of the managing agent’s or firm’s work, including their compensation and any caps on decision-making authority they may have, must be included in the contract. “Management agreements are used to exclusively appoint the agent to run and operate the building,” says Hakim, “from payroll, to transfers and sales, to repair matters, to the supervision of employees. For example, many boards will allow agents to enter into contracts—for repairs and supplies costing up to $2,500, say—without the board’s involvement, though that figure may vary depending on the size of the building. Not having to stop and revert back to the board for small decisions facilitates more efficient and effective operations.”
Greenstein recommends that a contract “designates the individual to be assigned to the building by the management company,” along with “a provision giving the board the right to demand a change if it is not happy with that person after [they’ve had] a reasonable time and chance to correct any deficient behavior.”
Piekarsky agrees. “You will be assigned a specific manager,” he says, “and you will like or hate that manager—so you want to include in your agreement the ability to interview your replacement manager, not just simply be given one—especially if there was a poor relationship with the previous one. It’s also important to consider that managing agents leave companies, and if your building is faced with that situation, you want to retain the right to interview a replacement as well.”
“Another essential provision,” says Greenstein, “is requiring the managing agent to notify the board of violations placed on the property, and of any condition in the building or property which is known to be unsafe, or would be a violation if noted by any governmental agency.”
Also, “a board should be very specific as to what they want and need, particularly with respect to inspections and site visits,” adds Piekarsky. “You won’t get more property visits than what the contract dictates.”
The length or term of property management contracts is usually one to three years. Shapiro notes that in Massachusetts, the state limits the length of management agreements to no more than three years. Services can run from basic, ‘no-frills’ type contracts to all-inclusive. Fees for management are generally flat, and not based on percentages of any kind. As mentioned earlier, some contracts allow for certain services outside the contract to be rendered, but may charge the corporation or association additional fees for those services. The legal pros we spoke to for this article all agreed that renewal provisions should definitely be included in any management contract, but should definitely not be automatic.
Breaking a management agreement is never an easy decision. “Before doing so,” says Hakim, “we always suggest having a frank conversation with the upper management of the company, and perhaps even having the property manager reassigned. However, when it becomes necessary, the exit agreement must be reviewed to ensure that a timely termination is sent. Generally, a building will have a right to terminate upon 30- or 60-days’ notice without cause. The building is generally only liable for the costs to the date of termination. It’s quite rare in a management agreement for a co-op or condominium to see any penalties, but again, the agreement must be reviewed.”
Greenstein points out that “breach of the terms of the agreement, such as the agent acting outside the scope of their authority under the contract, mismanagement (or worse) of funds, or willful default of the agreement,” can lead the board of a co-op or condominium to dissolve a management agreement before its end. As to what legal or financial penalties might be incurred, “someone can always assert a claim against another person or entity,” Greenstein says. “The board would have to prove there was a breach or default and then damages. And if successful, then they would have to seek to enforce a judgment if obtained.”
Massachusetts regulations provide termination of an agreement upon 60-day notice, explains Shapiro, adding that “if the termination is for cause, there is a 10-day notice requirement with an opportunity to cure.”
Piekarsky notes that disagreements over broken management contracts rarely end up in court. “Ninety-nine percent of the time, there can be a negotiated resolution. Both management and the condo board would have to hire lawyers to go to court. Litigation isn’t cost effective.”
Proceed with Caution
When changing managing agents or firms, say the pros, keep in mind that you’re seeking a seamless—or near seamless—transition. Hakim relates one not-so-seamless example that demonstrates why it’s important to keep things cordial:
“One of our condominiums terminated its managing agent,” he says. “The old company refused to assist in the turnover/transfer process, and didn’t deliver the books and records of the condominium to the new agent. So for an extended period, the association was unable to access its bank accounts. Imagine a condominium unable to pay its bills? Or not having access to its own books and records? We worked with the board and new management, and the bank, and we were ultimately able to assist in facilitating the transfer of the accounts, and the books and records—but obviously, it took the threat of legal action to do so.” To minimize the chance of such headaches, Hakim says, “Especially in this day and age of digitized records, we recommend that a board have real-time access to its files, and also that a current board member always be a signatory to any account.”
Management contracts are a critical cog in the co-op/condo machine. Even if your board includes members with contract negotiation experience, it’s always wise to seek the advice of legal counsel—and to always read the small print. Most importantly, identify your wants and expectations and make sure they all get into the document in clear, concise language to avoid troubles later.
A J Sidransky is a staff writer/reporter for New England Condominium, and a published novelist. He can be reached at firstname.lastname@example.org.