Negotiating Management Contracts It's Best to Outline Expectations Before Signing

Negotiating Management Contracts

 Drawing up a contract for management services looks at first glance like a  simple task. Such contracts usually follow a particular format and outline  similar services. But what about contract areas where there’s room for negotiation? How can a condominium board and a management company  arrive at a contract that helps foster a cooperative relationship?  

 Communication is the key. The discussions that take place before anyone signs on  the dotted line can help fill in the gaps on boilerplate contracts. It’s also helpful to understand what expectations each side brings to the table.  

 Condominium board members today have more awareness of the state of their buildings and a more sophisticated understanding of the challenges facing a property manager, says David J. Levy, PCAM, president and owner of Sterling Services, a management company in Holliston, Massachusetts. The current  economic climate has also had an impact. “People in general expect morein a recession,” he says.

 Condo association boards increasingly seek out property managers who go outside the box for solutions to diminishedrevenue but who don’t jeopardize the look and feel of the property that residents have come to expect.  

 In an economic downturn, management companies are also more likely to experience high turnover, says Walter Williamsen, PCAM, of Reserve Strate-gies, LLC, in Harwinton, Connecticut. Homeowners may blame the current property manager for perceived problems, when the real cause may be years of deferred maintenance and flat condo fees. Levy agrees, noting, “If homeowners are angry, the board will churn[turn over], and so will the management company.”

 A Lengthy Process

 With so much at stake, choosing a management company has become a more lengthy  and detailed process. Potential management companies are often called back for multiple interviews and boards frequently delve into specific line items in contracts. Each side is going beyond the basic checklist of services, Levy says. “It’s more nuanced.”

 Boards usually begin with a basic contract provided by either the condo’s attorney or the management company and customize it to meet their circumstances. The contract, which can be as few as three pages or more than 30, covers the  following areas:  

 Compensation– spells out what routine services the company provides for a base rate, and delineates  non-routine or extra services that require additional payment, often calculated  by the hour.  

 Manager’s availability – explains howoften the management company’s representative will be on the property, what meetings he or she will attend,  and how emergencies will be handled.  

 Authorization– determines what the management company is allowed to do and under whose  authority (and whose signature is required).  

 Indemnification – involves the condo association’s responsibility to cover a management company in the course ofdoing its job. This is the most negotiated area of management contracts,  according to attorney Stephen Marcus of Marcus, Errico, Emmer & Brooks, PC, in Braintree, Massachusetts.  

 Termination – provides guidance for canceling the contract based on state law.

 Routine vs. Special Services

 Most management companies offer similar routine services, including bookkeeping,  community mailings, and other administrative work.  

 They expect to spend a certain amount of time onsite, doing work such as  inspections, overseeing insurance claims, and attending meetings with the board  and homeowners. It’s important to remember that the property manager is likely overseeing more than  a single property. The management company must engage in a delicate balancing  act. It needs to manage enough complexes to make a profit, but not so many that  it cannot service them properly.  

 A management company will also try to learn upfront whether a condo association’s board has had frequent turnover, which may signify some dysfunction, and whether the residents make frequent demands, which wouldrequire more of the manager’s time.

 Typically, a property manager will contract to attend one board meeting each  month and one homeowners meeting a year. He or she will want to limit the  duration of those meetings, say to 1.5 hours. “If the meeting looks like it’s going over, the manager can say, ‘I’ll stay, but the association will be charged the hourly rate we’ve agreed on,’” says Louis Laudati, owner of RomeManagement in Bristol, Connecticut. This usually results in a rapid conclusion  to the meeting, he says.  

 Claim resolution and court appearances in lawsuits involving the condominium are  two of the biggest black holes of time for property managers. Contracts should delineate exactly how much extra the manager expects to be compensated for his or her time. For example, an appearance in claims court might be billed at $75 to $100 an hour.

 In cases in which the manager is coordinating the resolution of an insurance  claim, the management company may charge an additional 10to 20 percent of the adjusted claim, which is billed directly to the insurer.  Condo associations should be aware of these situations and decide in advance  how they will handle them.  

 The contract should also make clear a property manager’s role when contractors do work on the premises. Usually, he or she is involved  in the administrative aspects, such as searching out contractors for bids,  helping the board facilitate financing paperwork, or collecting extra fees.  Other duties may involve coordinating accessto the construction site and fielding complaints from owners. But this is  project management, not a hands-on role. If the condo board wants a more direct  supervisory role of contractors, it would pay extra for that individual to  serve as construction manager.  

 Williamsen sounds a cautionary note about extra services that aren’t specifically named in the contract. “These can really add up,” he says, with management companies tacking on all kinds of fees that aren’t listed in the contract. “My feeling is, if it’s not in the contract, it’s not billable,” he says.

 Another aspect of routine services involves inspections. The property manager is  responsible for common areas, not for the inside of individual units. Laudati  says he makes weekly inspections of common areas and writes up a report after  each visit. He also documents each time he goes into the complex. At the end of  the month, he gives the board a copy of all onsite reports.  

 Managers agree to be available 24/7 for emergencies, and many contracts include a window of time in which theyshould respond to calls. Routine business is handled during business hours.  

 Authorization

 Contracts should spell out the limits of a manager’s authority. The association should have in writing what management can do without board approval, and under  what circumstances, says Williamsen. Requiring dual signatures on checks or  purchase orders – the manager’s plus a designated board member’s – is a good idea, he says, butit can also be a pain to chase people down. But if dual signatures aren’t required, the board needs some other financial oversight mechanism.  

 Management companies will also ask that one person from the board be appointed  as their contact, so information is funneled efficiently through that one  individual.  

 Once the routine services and authorizationhave been sorted out, a condo association will want to look carefully at  indemnifying their management company.  

 Insurance companies are increasing the number of exclusions in their liability policies (especially around hard-to-pin-down issues such as discrimination or even mold). Some will pay a claim but not the judgment, says Marcus. In most cases, when unit owners bring suits, they include everyone as defendants – including property managers and board members. He recommends that, at minimum, the policy name the manager along with the  individual board members of the association. The gold standard of coverage, he says, is  insurance that covers not just negligence but “errors and omissions,” but this can carry a high premium.  

 From a manager’s perspective, the preferred wording in an insurance policyis “gross negligence,” rather than the lower standard of proof, “negligence.”  

 Termination

 Most contracts are good for one year and are usually in place for about three  years. In Massachusetts, condo associations are allowed to terminate a contract  immediately in situations where fiscal mismanagement is suspected. Either side is allowed to terminate without cause with 60 days written notice. Other New England states allow 60 to 90 days’ notice.  

 Some management companies build a rollover into their contracts, says Williamsen. This means their contract is automatically renewed each year, which protects them from being caught short if an association board stalls on renewing the contract and then cancelsit at the last minute.  

 When the relationship deteriorates so far that termination is being discussed, it’s usually too late to fix things. But some managers want the option of 60 days to address any problems. Levy says, “Shame on a property manager who doesn’t know his clients are unhappy,” but he still argues that managers shouldtry to improve a flawed relationship. Other managers echo the sentiment of  Williamsen: “If they’re not feeling the love for you, you’re gone.”  

 The contract’s termination clause should stipulate how financial and otherrecords will be handed over, if any confidentiality agreements need to be  signed, and how to conclude business with the management company.  

 Like a prenuptial agreement, it’s always a good idea to lay out every possible situation – and then have a lawyer sign off on the final wording.

 April Austin is a freelance writer and a ­­frequent contributor to New England Condominium magazine.  

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