Contract Concerns

Before you sign on the dotted line, review your management agreement - or you may be headed for trouble.

For Daniel Kohs, treasurer of a 41-unit co-op in lower Manhattan, the main management contract issues were money and manpower. “We were looking for an all-inclusive fee. The company that we had been with was nickel-and-diming us for every piece of paper and fax and phone call. And it was horrendously expensive. We didn't want to have to think about how much copies cost or how many notices went out,” he recalls. “It was also a question of how many buildings our [site] manager was going to handle. While we started with the expectation that he would handle about four buildings, and we would be one of the four, over time that's grown to about one of six or seven buildings.”

But to Harley Bassman, another board treasurer of a medium-sized Manhattan co-op, the main concern was even simpler: “The only thing with the contract that was salient was how fast can I get rid of him? Do I have a one-year minimum or can I fire him for cause within a month? That's the only thing you really should care about.”

But is it? The contract is the first element that you use to construct your (hopefully) successful relationship with a management firm. It is also your safeguard against liability and a blueprint for effective operations at your building. Attorney James Samson, a partner at Bangser Klein Roca & Blum, notes that people “never read the management agreement until they have a problem,” and if you are among those, it may be time to review the basics.

The Negotiator

Few boards these days are as comfortable as the one at the first co-op apartment building attorney Steven Troup bought into in 1984. The 175-unit Soho property was “unusual,” admits the lawyer, a partner at Tarter Krinsky & Drogin, “because we had a handshake agreement.” Troup himself warns that working without a contact is like tightrope-walking without a safety net.

How, then, does the process work? When you hire a management firm, you will usually get a proposal outlining fees and what is expected from both parties. For some firms, this is where the most intense negotiating takes place. “We thoroughly negotiate all the business-related matters, such as fees, at that time,” says Dan Wurtzel, chief operating officer at Cooper Square Realty. “If the schedule of ancillary fees has been provided, those should be known to everyone before a contract goes out. Otherwise, boards will get upset later on when they think you're hammering them with fees that weren't disclosed during an interview process.”

After this, the board is presented with a contract. Many agents employ a standardized document, often using or adapting the one developed by the Association of Cooperative & Condominium Managers (ACCM) in 1996. The ACCM contract is divided into 19 sections, with such headings as “Duties,” “General Authority,” “Expenses,” “Indemnification,” “Duration of Term; Termination,” and “Agent's Compensation.” Attorneys often have their own contracts and the negotiation can be a matter of reconciling the differences between the two. Tailored to the needs of the firm and the building, a typical agreement will run anywhere from 10 to 15 pages, depending on how much you want to spell out, and could take as long as 10 days to iron out.

Some boards negotiate the details themselves. “Our board president's a lawyer,” says Kohs. “I don't think there was anything in the contract that we felt was beyond what we could understand and deal with. It was a reasonably simple commitment: 'This is what we'll do for you, here's the fee.'”

Nonetheless, many lawyers - and even some board members - say that it is a good idea to get an attorney involved in the process at some point, since boards can sometimes miss the nuances of a contract - or become too detail-oriented. “You shouldn't be signing anything that has not been reviewed previously by your corporate attorney,” asserts Aymara de Cardenas, long-time board president of a 108-unit Westchester co-op.

Indeed, one veteran lawyer recalls the problems he encountered when a board got overly involved. “I had a loony bin board that started rewriting a contract that I have used successfully for 20 years. The managing agent's jaw dropped, and he said, 'What is this nonsense?' The most glaring [items] were the number of hours to be spent every day by the site agent at the building and at least 20-odd things that the managing agent was supposed to do. My contract is as detailed as anybody could want, but they went beyond that.”

The danger, explains this attorney, is that such a level of detail makes the manager a bona fide employee of the building rather than an independent contractor. The difference is important. “If both parties acknowledge that the managing agent is an independent contractor, it limits the building's responsibility for the employees of the managing agent,” says the attorney. “Being an independent contractor means that they are not under our direct control as far as each employee of the management company is concerned. It reduces liability.”

Devil in the Details

Whether you do it yourself or hand it over to an attorney, it is useful for a board to understand the key points. They include:

Indemnification. A main area of concern is the indemnification clause. “Gross negligence” and “willful misconduct” are the standards that the managing agents usually use, while most attorneys want the phrase to read “agent's negligence or misconduct.”

“Under the agent's standard, if it's a simple mistake, the board cannot sue the managing agent,” notes attorney Troup. “The difference between negligence and gross negligence is that gross negligence shocks the conscience. It has to be something really, really bad like financial mismanagement where they don't have internal controls, for instance, and one of their employees steals money.”

In other words, if the standard holds to what agents want, which is gross negligence and willful misconduct, then it sets a legal yardstick that something especially wrong has to take place for the agent to be liable. “It's a much broader standard,” explains Don Levy, an account executive and vice president at Brown Harris Stevens. And, on this point, most firms are intractable - for good reason, adds Levy: “Negligence could be so easy to prove that managing agents, for having done virtually nothing wrong, can lose the protection of the co-op's indemnification and insurance and everything else should the co-op choose to cut the managing agent loose in a particular case.”

Expenditure Limits. If a contract is about blueprinting and safeguarding your building's future, then you should be concerned about spending limits. Many boards are. For instance, De Cardenas's Westchester cooperative initially had a thousand-dollar cap on what the agent could spend without approval but later lowered it to five hundred dollars because “a prior management company had authorized work that wasn't really desired” and the board wanted more control.

From the board's point of view, such restrictions provide important protections. At Kohs's co-op, for instance, the board did not insist on caps, and its “previous agent spent a lot of our money in ways that we were not too happy about. We went over budget and had all sorts of financial issues as a result.”

A $500 or $1,000 limit, however, is rare and generally too restrictive. “I won't manage a building with a spending cap of $500,” says Jerry Picaso, president of Gerard J. Picaso Inc., a management firm. “With a cap that low, you spend all your time talking to board people and they end up being the [de facto] managing agents of the building.” Many attorneys and most managers agree that a $2,500 limit on what can be spent without prior board approval is adequate.

Emergency spending. Emergency spending is a special case, however. Although it is difficult to limit funding when a pipe ruptures or a fire breaks out, provisions can be made to ensure that the agent doesn't go too far. “I had one contract which said that emergency spending was at the discretion of the agent and that he could do whatever he deemed necessary to make repairs,” recalls attorney Stuart Saft, a partner at Wolf, Haldenstein, Adler, Freeman & Herz. “Such broad language concerned me. For instance, what if there was a leak and he deemed it necessary to replace all the pipes in the building? So I put in a stipulation that the repairs not exceed $10,000 without board approval.”

“I have an elaborate procedure that says in an emergency the management firm can spend money as necessary but they have to make an effort to call the president, treasurer, or secretary of the corporation,” adds Arthur Weinstein, a co-op attorney in private practice. “In the unavailability of any of those three, they must coordinate with the attorney for the building.”

Check-signing. Check-signing is another thorny issue. While many boards want to co-sign all checks, generally that is a logistical nightmare. “I see it as impractical,” says Troup, the attorney. “I can't see a professional managing agent company going to co-ops with 35, 40, 50, or more units to get checks co-signed.” Instead, the treasurer should receive a detailed report, including all of the invoices and copies of the checks for that month. “Nowadays,” notes Troup, “all the big agents have such a sophisticated bookkeeping system that you can see right down to the penny what's been spent.”

Building Ops

Building Visits. Presence is important. Some boards acknowledge this by insisting on a set number of building visits per month. That can cause disputes. One board president requested that the managing agent guarantee that the site agent would visit the building a certain number of hours per week. The managing agent felt that was an unreasonable request because that number of hours varied from week to week depending on the needs of the building.

“You want to give him some degree of latitude,” Weinstein notes. “One week, for instance, he may have to spend two full days at the building while there's plumbing work going on, and the next week not spend any days.”

Site Agent. Equally controversial is the clause naming who your site manager will be. Some managers argue that this restricts their ability to put their agents where they can do the best work. But some attorneys and board members say it is a crucial point. “You need to know who will work for your building,” argues Marleen Levi, president of a 75-unit Brooklyn co-op. “And it is very, very important to know the on-site manager who is coming to your building is not a rookie. I know a rookie has to start somewhere, but I don't want it to be at my building.”

Hiring and Firing. Similarly, the question of hiring and firing of employees should be addressed. The contract should state that the employees of the building are the co-op or condo's employees, not the manager's. “I've often heard of supers being transferred by the managing agent when they need a super in another building,” says Weinstein. “It happens.”

Extra! Extra!

A major irritation to many boards are unexpected - usually because they didn't read the contract - charges for services that the directors may have believed were part of the management fee. These include the costs of copying and mailing, shareholder charges for processing sale applications, lease-sublease applications, and alteration applications, among other things.

“I've been president of two different co-ops myself and sometimes we'd get a bill at the end of the month where the management fee is $3,000 and postage is $1,100,” recalls Troup, the attorney, who no longer lives in a co-op. “I don't feel postage should be charged as an extra [on mailings of maintenance bills, notices, and other similar items]. If they have to do a special mailing at the request of the board, then it's okay to charge extra.”

Some fees are seen by the agent as a way to earn extra income and make up for a relatively low management fee. Three areas where lawyers and managers don't always agree are:

Refinancing agent (broker) on the underlying mortgage. Contracts often offer the services of a management firm as a refinancing broker on a non-exclusive basis. The manager can do one of two things: simply act as an administrator of paperwork for deals negotiated by a mortgage broker or attorney, for which the agent typically receives from $750 to $2,000, or he can act as a full-fledged mortgage broker, getting bids, negotiating, and then closing the deal, for which he usually receives one percent of the loan amount.

Some lawyers recommend against letting the agent charge a fee as an administrator because, for the fee, “they don't do that much,” according to Troup. “When I represent a building on a re-fi, the managing agent will give me a rent roll and provide financial statements - which you can do with a couple of flicks of a key - and e-mail them someplace. Then he has to attend the closing with the corporate seal and sometimes a checkbook. It really is not that much to do. The agents I work with don't charge a fee for administrative work.” Nonetheless, Cooper Square's Wurtzel says that an administrative fee is justifiable because such work is outside the normal scope of management.

If you use managing agents as brokers and they are any good, they are generally worth the price. They shop for mortgages, negotiate deals, and handle the entire project “from soup to nuts,” as Picaso notes. He adds: “The advantage is that we have the knowledge of the building and it's easier to get it to the lending institutions. If the lawyer does it, we're going to have to answer all the questions and do all the paperwork anyway. So why not use the agent as the broker?”

Wurtzel agrees: “If the manager has the resources to do it, by all means let him [be the broker]. Use a mortgage broker, too. Just define the lending institutions the manager is going to in advance so the broker doesn't duplicate offers. You want more options so you can get the best deal.”

Agent at apartment closings. Apartment sales and the closings necessary to seal the deal are additional work - and can be lucrative. Managers typically charge from $550 to $700 to act as transfer agents; attorneys charge from $500 to $1,000. If a building has 10 sales in a year, that adds up to a few thousand dollars.

Some lawyers, naturally enough, warn against employing the manager as the agent at closings, which is sometimes a requirement in contracts. “I recommend very strongly that closings and other legal-type activities be handled by the building attorney,” Weinstein notes. “The managing agents like to play attorney and get attorney's fees for having non-attorneys do this work. Banks come in with a variety of documents that they ask co-ops to sign, and often the managing agents just sign them without understanding their legal impact.”

Picaso disagrees: “The manager is in contact with the board and he gets the job done a lot faster. It's not that complicated. Besides, he knows the building better. Very few of my properties use the attorneys to do the closings, and for those that do, it is always a big deal. The attorneys don't send us the paperwork after it's done, so we don't know if it's closed, or we get the stuff two weeks late and miss the billing cycle. That sort of thing.”

“The actual closing is just an administrative process - signing documents and collecting checks,” Wurtzel adds. “And if there's an issue about balance owed on an account or history of repairs in the apartment, the information is right there in your office [where the closing takes place]. That allows the flow of the closing to move faster. If there is a hitch, you can use the resources in the management office to resolve it.”

For the board, there are a few practical considerations, too. The co-op does not pay the fee for the transfer agent; the shareholder does. Therefore, at no extra cost to the property, the board can sweeten the manager's deal and offer its management firm supplemental income.

Capital project supervisor. This is an area where lawyers - and even some managers - say boards should be especially careful. If the manager requires that he be the supervisor on capital projects, the board will want to look into his experience and credentials. For instance, how many roof replacements has he overseen? Window replacements? Parapet repairs? Also, you should ask, “How will this take away from the time he devotes to daily operations?” If he is spending a great deal of his time supervising a capital project elsewhere, he will probably have less time for your building. Fees can range from one to three percent of the overall cost.

“I don't see it often, but when I do see it, I try to negotiate it away,” says Troup. “If a property manager has to attend a job meeting once a week, that should be made to coincide with visits that they should be doing at least once a week to the building.”

Picaso notes that it is okay for a manager to check on progress but that the actual project management should be left up to an architect or engineer. “They should guide it,” he says. “That's their area of expertise.”

Irwin Cohen, president of A. Michael Tyler Realty, says his firm does supervise capital projects for a fee, but is very careful to add that he does not work in place of an architect or engineer but as a supplement. “We sit on his shoulder, so to speak, attending site meetings, coordinating the different people (the board, the architect/engineer, the contractor), and overseeing legal requirements and filings. And we generally try to schedule these meetings to coincide with our regular site visits, so that it doesn't take away from our day-to-day duties.”

You're Terminated!

If things don't work out, how can you get rid of your management firm? Lawyers are wary of one-year, ironclad contracts that require termination “for cause.” Many managers and most attorneys say you want to be able to part ways easily whenever either side is unhappy.

Weinstein's termination clause reads: “This agreement shall take effect on [date] and shall continue in force for a period of one year. Either party may terminate this agreement at any time upon 60 days' written notice to the other party.”

“In other words,” the attorney notes, “it's really a 60-day agreement. And the reason for that is, if the managing agent turns out to hate the building or the building turns out to hate the managing agent, you shouldn't be in bed together. I think it's crazy for either side to insist on a contract that has no way out for either side.”

Typically, contracts run for a year. In a large building, requiring that long makes sense because the agent is loading a great deal of data into various computer programs and the firm should have a period of time to recoup its investment. Martha Goupit, managing director and principal in Caran Properties, makes this argument in her response to Habitat's annual management survey: “The most troublesome provision we've seen proposed is a cancellation clause that allows 'termination without cause' at any time. The initial takeover and startup is the most labor-intensive period in a new relationship with a building, requiring additional energy and commitment on the part of all departments. The investment is well worth it in most cases, but should termination result because a board changes its mind, all of the hard work at the front end of the contract is never financially realized by the management company.” She adds: “It is important for boards to realize that the commitment is two-sided and that the first year, being a transitional one, will require the most work.”

Sometimes, however, a long termination waiting period may work out. Steve Greenbaum, director of management at Mark Greenberg Real Estate, recalls a contract with a six-month's notice clause. “We were about to sign a contract [as their new agent] when their current manager said, 'What are you talking about? We have a six-month cancellation policy. You have to give us six months.' The long and short of it was they were brilliant because what they did in those six months turned it around. They changed their on-site agent and repaired their reputation with the building. They were re-hired.”

Few contracts allow the board to retain the site manager and fire the firm. “Generally, the property manager will have the on-site manager sign a restrictive covenant, where basically they can't solicit the account for themselves,” explains attorney Geoffrey Mazel, a partner at Hankin, Handwerker & Mazel. “It makes sense. Who's the closest to that account? Who's with them every day? I, as the management firm, hire a great on-site guy. I give him a great salary and he decides, 'I'll form my own company.' Or, 'I'll hook up with another company and I'll bring these people with me.' So, invariably, the management company will have him sign some sort of restriction against doing that.”

In the end, having a contract is about defining roles, about who's the boss, and who's liable for what. It must be spelled out clearly. It is important that the board be involved and knowledgeable about the contract. A good contract keeps its members informed and ready to make decisions. “The detour I often see is where buildings are taken over by the managing agent, and the managing agent runs the building,” says Weinstein. “Every decision is made by the agent. That should not be. The board is the boss.”

Picaso says the question of a contract should hinge on the relationship between the board and the manager and that the contract is merely a formal recognition of that. “Once you're running the building, no one ever looks at the contracts, or shouldn't. Because, if they get them out, everybody ought to go home. The relationship should be based on trust. If there's a problem where you have to refer to the contract, then that means the marriage is over.”