Form-of-the-Week: Property Management Agreement – Form 590

Short-form vs. long-form property management agreements

Brokers in the property management business need to enter into highly detailed management agreements which specifically identify and clarify the performance of the property manager and the expectations of the landlord. Generalized “short-form” property management agreements do not contain this degree of necessary detail. Instead, short-form agreements, by omission of certainty, permit the property manager to follow perceived industry customs — whatever those unregulated customs might be or become.

These implied standards, while familiar to the broker, are often details about management that are misunderstood or unknown to the landlord. Disputes usually result when landlords have high expectations due to lack of details. In turn, they receive less than they believe they bargained for when they employed the property manager.

Management obligations detailed in a “long-form” agreement provide greater protection for a broker from claims they have breached their duties to the landlord. Surprises are eliminated and client (landlord) expectations are more realistic as the agreement clearly states the duties of each party. Of course, the broker’s failure to comply with the detailed provisions in the agreement (and broader real estate law) is a breach which may cause the landlord a monetary loss and impose liability on the broker.

Authority to operate a rental property

A property manager’s authority to take possession and control of income-producing real estate and manage its leases, rents, expenses, mortgage payments and accounting in expectation of a fee is established in a property management agreement.

The Property Management Agreement published by RPI (Realty Publications, Inc.) is used by a broker or their agent when entering into an employment to act as a property manager for an owner’s residential or commercial rental property. The Property Management Agreement documents the employment and sets out the specific rights, responsibilities and expectations of the property manager and the landlord, including authorized activities, performance standards and expense limitations. [See RPI Form 590]

Landlord responsibilities include providing the property manager with the information and items necessary to manage the property and its tenants, such as:

  • lease/rental agreements;
  • service and maintenance contracts;
  • utilities information;
  • keys and security devices;
  • security deposits; and
  • information on hazard and worker’s compensation insurance for the property and employees.

The Property Management Agreement authorizes the property manager to:

Trust accounts for the landlord’s funds

The Property Management Agreement spells out which maintenance expenses, insurance premiums, utilities, loan payments, management fees and property taxes are to be disbursed by the property manager, and which are to be separately paid by the landlord. [See RPI Form 590 §§6-7]

The receipt and accounting for cash reserves, security deposits, rent and other sums received from tenants, coin-operated machines and concessions will be handled as trust funds owned by the landlord. Trust funds by their nature need to be deposited into a trust account in the name of the property manager as trustee. [See RPI Form 590 §5]

Further, accounting provisions in the Property Management Agreement:

  • authorize the property manager to pay, out of the income and reserve funds held in the trust account, obligations incurred in the management and ownership of the property;
  • specify the bank to be used in the course the managing the property; and
  • call for remaining funds held on behalf of the landlord in the trust account to be disbursed to the landlord periodically and on termination of the agreement. [See RPI Form 590 §5]
Periodic accounting by the manager

The Property Management Agreement sets the amount of cash reserves the landlord will deposit in the property manager’s trust account as a minimum balance for payment of operating expenses and fees.

A landlord is entitled to a statement of accounting:

  • at least once a quarter; and
  • when the property management agreement is terminated. [Calif. Business and Professions Code §10146; see RPI Form 590 §5]

The Property Management Agreement states the time periods for the property manager’s delivery of the statement of accounting to the landlord. While not mandated for delivery on a monthly basis, a property manager can efficiently provide a monthly statement to the landlord since they need to reconcile trust account balances once a month for each client.

The accounting provisions instruct the property manager to disburse to the landlord, with each accounting, any surplus funds exceeding the minimum balance held for reserves. The property manager’s authority to withdraw their management fee from the trust account is included. [See RPI Form 590 §6]

A property manager’s failure to give the landlord a timely and accurate accounting faces loss of their real estate broker license on a complaint to the California Bureau of Real Estate (CalBRE) from the landlord. [Apollo Estates Inc. v. Department of Real Estate (1985) 174 CA3d 625]

Broker fee enforcement for management services

Under the Statute of Frauds, property managers cannot enforce collection of their management fees without a written agreement with the person agreeing to the payment, typically the landlord.

Thus, a prudent property manager will not orally agree with the landlord to the payment of management fees. When a landlord fails to pay fees or interferes with the manager’s disbursement of fees, the property manager is unable to enforce their collection without a signed fee agreement. [Phillippe v. Shapell Industries Inc. (1987) 43 C3d 1247]

Accordingly, the Property Management Agreement spells out the fees due the property manager. The broker’s fees are not set by law and are agreed upon through negotiation. [See RPI Form 590 §4]

The property manager needs to also keep all documents connected with any transaction requiring a real estate broker license for three years. These documents include all property management and accounting files. [Bus & P C §10148]