Does the Property Management Agreement meet the Association’s needs?
A FEW SIGNIFICANT ISSUES TO FOCUS ON IN CONDOMINIUM, HOA and TOWNHOME ASSOCIATION PROPERTY MANAGEMENT AGREEMENTS
One of the most important individuals involved in keeping many condominium, homeowner and townhome associations going on a day-to-day basis is the property manager. Professional property managers often provide invaluable service to these associations, whose boards of directors are primarily made up of volunteers from all types of backgrounds and professional experiences. In most cases, property managers are not employees of the association they manage but rather the relationship between the property management company and the association is typically created by contract (i.e. the management agreement).
Due to the variety of services a property management company may provide to an association – which can range from having a full time property manager on site that works exclusively for the association to having a property management company serve a very limited role such as solely being responsible for sending notices to owners and collecting assessments – it is essential for an association to review and understand exactly what a management agreement contains before entering into the agreement. Therefore it is a prudent step for any association to have its attorney review a management agreement before the association enters into it as there can be a significant number of items that can be included within a management agreement that could affect the association’s rights. A few of these items that could arise in a management agreement are:
- Access to Association Funds:
Management agreements often identify what individuals have access to association funds. This can be as specific as listing within the agreement the individuals, by name, who will be able to write checks or otherwise withdraw checks from the association’s account on behalf of the management company. The association should be aware of who will be able to access its funds under the management agreement.
Additionally, management agreements often will detail where association funds will be deposited. For example, a common provision would provide that the funds will be deposited in a bank with branches in Illinois, will be deposited in a bank of management’s choosing, or will be deposited in a bank of the association board’s choosing.
- Insurance/Indemnity Provisions:
Management agreements also often contain language providing that the association will indemnify the management company and property manager in actions related to the property manager’s services performed on behalf of the association. It is crucial for the association to understand what indemnification it will be providing to the management company, and what limitations, if any, there are on that indemnification. It is also important for the association to understand what indemnification the management company may be providing to the association.
- Non-Compete Provisions:
Some management agreements will contain a non-compete clause. For example, this type of clause may provide that after the management agreement ends and the management company no longer provides property management services to the association, then for a period of time thereafter (such as twelve (12) months) the association may not have any former employees of the management company provide property management services to the association. It is critical for an association to understand such restrictive covenants as violation of such clauses may impose steep penalties for an association.
Management agreements often provide that the association pays a fixed amount to the management company each month in exchange for property management services. However, additional fees can also arise that are not included within that fixed monthly amount. These can be fees related to mailings, attendance at meetings, attendance in court for collections, note taking, etc. Associations should understand all of the potential fees that they could be charged under a management agreement.
While many associations enjoy long lasting relationships with their management companies, inevitably there are some associations that desire to terminate the services of their management company while the management agreement is in place. Before an association enters into a management agreement, the association should be aware of how, if at all, it could terminate the management agreement early. For example, is termination possible only for cause, meaning the association would likely have to identify a reason for wanting to terminate early? Or, is early termination available “without cause”, meaning no reason must be given. Further, does the management agreement contain any penalties for early termination?
As an additional note on this topic, some association declarations and/or bylaws contain specific provisions that must be included within any management agreement the association enters into. For example, some governing documents may require that any such management agreement contain a provision permitting the association to terminate the agreement upon sixty (60) days’ notice without cause. Prior to entering into a management agreement, an association should therefore make sure that the management agreement it plans on entering into complies with any such provisions in the association’s governing documents.
Having a professional property manager can greatly enhance the effectiveness and efficiency of an association. Considering the vital role that professional property managers can play for an association, associations may want to verify that the management agreement is consistent with the role and services the association desires from the property management company it wants to retain. Since management agreements are contracts, a prudent association may also want to have its attorney review any management agreement prior to signing it.
This article is being provided for informational purposes only. This article does not constitute legal advice on the part of Keay & Costello, P.C. or any of its attorneys. No association, board member or any other individual or entity should rely on this article as a basis for any action or actions. If you would like legal advice regarding any of the topics discussed in this article and/or recommended procedures for your association going forward, please contact our office.