Avram Turkel, Partner, Ballon Stoll in Legal/Financial on October 5, 2023
Retaining a new management company is not unlike getting married, but instead of romance, there's a management contract. Each company has different clauses in their standard contract, and it's important to understand the scope and limits of these terms. You should also know that you can negotiate a property management contract. Keep in mind, however, that a bigger building paying a larger management fee will have a better chance of securing more favorable terms.
There are three key areas to pay attention to in a property management contract:
Scope of employment. This outlines the tasks the management company will handle. They are not going to do more than what's in the contract and your building must decide what that scope is. Do they handle everything, including supply orders, inspections, and supervision of staff, or does the co-op board want to have more control? Sometimes the scope of employment will be specifically delineated and sometimes it will be broadly stated in the contract. In order to fulfill your fiduciary duties to your shareholders, the board must make sure each and every role the management company will fulfill is in the contract.
Finances. Because your board has a fiduciary obligation to your shareholders and will bear the brunt of any claims of mismanagement, it’s important you have authority over payments and expenses. A reasonable approach would be to cap payments made by the managing agent at a certain amount, say $2,000, unless they have board approval. This allows the board to watch the inflow and outflow of money, but also make determinations as to whether or not they believe an outside vendor is the right one. Another option is to require board approval for every invoice, but that may be inconvenient for board members who have busy lives and other commitments.
Termination clause. The two big ticket items here are the notice you have to give to end the agreement and, under that subheading, there's cause and not for cause. A for cause termination is when the contract is terminated due to the bad acts of the managing agent. If they steal funds from the building, that is a for cause termination. If you just don't like them and want to find a new managing agent, this would be a not for cause termination. This might require that your board give 30 or 60 days notice to the management company. Before you sign the management contract, it’s important to identify whether or not there is a penalty for a not for cause termination. The best case scenario is that you avoid any payment. There should never be a penalty for a for cause termination. You should also ensure the management contract states unequivocally that, upon termination of the contract, the managing agent will return all cooperative documents to the board in a timely manner.
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