The Perfect Fit

When hiring a new management company, there is a typical process that most boards follow. They research, they invite companies for interviews, they check references, and then they make their final choice. This is a story about what happens after that: the polishing and refinement of the management contract to meet a board’s specific needs.

The Devil Is in the Details

There are similarities among contracts but also a number of differences, and the true test is in the details. “A lot of times, [contracts are] not really discussed in great detail when you go on an interview or in a proposal,” says Steven W. Birbach, president and CEO of Vanderbilt Property Management.

Those details – such as when the manager will be at the building, or how much the property pays for specific tasks above and beyond the management fee – must be hammered out by the board attorney and the management attorney before the contract is signed. “Your managing agent is going to be doing many, many things for the board, and you want to make sure the relationship is clearly defined,” says attorney Deborah B. Koplovitz, a shareholder at Anderson Kill.

The initial contract usually originates with the management company. “It’s very rare that a board asks us to create one,” says Koplovitz, citing the high cost of having the board’s lawyer write a contract from scratch. Contract review generally takes one to two weeks, possibly three weeks if extended negotiations are required. Depending on the contract’s complexity, legal fees for the review can differ tremendously, attorneys say. But generally, expect the cost to be no more than about five to ten billable hours.

During negotiations, the co-op’s or condo’s attorney will consult with the board. But if the board is contemplating a capital improvement project or is involved in renovation or restoration, the board should check with an architect or engineer about the best way to handle project management. The board should speak with its insurance professionals if it has any complicated insurance issues on its agenda. Any relevant information should be passed on to the negotiating attorney.

Which parts of the contract deserve special attention? According to many management executives and attorneys, the five prime areas are:
•    The ancillary fee schedule
•    Insurance and indemnification issues
•    Terminating the contract, and any automatic-renewal language
•    The limit on non-recurring expenses
•    Attendance at the building and related duty issues

Ancillary Fees

Ancillary fees are the menu of additional charges a board agrees to pay for duties not included under the general management fee. These can include administrative fees for handling sublets, resales, and alterations; preparing questionnaires and surveys; sending and compiling window-guard notification and fire safety plans; project management; even court appearances. “If we’re spending the day at an Environmental Control Board hearing, we have to be compensated,” Birbach notes.

The ancillary-fee schedule is not only about fees but also about who will handle certain duties. Should the attorney or the property manager be the transfer agent when apartments are bought or sold? That should be spelled out. Same goes for project management on capital projects: is the property manager to do it on a case-by-case basis at the board’s discretion, for a specified ancillary fee, or is an architect/engineer or some other expert going to manage the project? Some boards, notes David Baron, president of Metro Management, want an all-in-one price. “They don’t want to be nickel-and-dimed,” he says. The fee will be higher for such all-inclusive service.

Insurance

The next biggest issue is indemnifying the managing agent. This means that if the agent gets sued for something related to his duties at the co-op or condo, then the board agrees that the building’s insurance will pick up the defense costs and, optimally, any damage claims as well. This doesn’t apply if the managing agent has done something grossly negligent or has committed willful misconduct.

“The indemnification clause is the most serious and most negotiated,” says attorney Andrew P. Brucker, a partner at Montgomery McCracken Walker & Rhoads. “It’s about who is going to have the black mark against them with the insurance company and who’s going to pay the deductible. Every company is different. One big management company in the city takes the position that it’s not going to negotiate this at all. On the other hand, most of the medium-sized ones recognize there’s nothing wrong with negotiating.”

The other major point regarding insurance is including the management company as an additional insured. “It’s not a negotiating point,” says Baron. “If I’m not an additional insured I can’t take the job. Otherwise, I can’t protect myself from every lawsuit where someone trips and falls. We as a company have our own insurance, of course, but that covers our employees on our own property. If someone at a co-op or condo slips on a banana peel, they sue everybody.”

“We attempt to have the agreements provide that the building’s obligation to indemnify the agent is satisfied by agreeing to name the agent listed as the additional insured on the building’s insurance,” says attorney Scott Greenspun, a partner in Braverman Greenspun. Birbach notes that since the management company is often transmitting sensitive information from prospective tenants or subtenants to the board via email and other electronic means, boards frequently ask the management company to carry cyber-insurance.

Termination

What if the management service is unsatisfactory? Most contracts are for a one-year term, which is generally the minimum necessary for the board, residents, and staff to get to know management and see if it’s responsive, communicative, and doing its job. But if the board opts for a change, is it locked in by the contract’s “automatic renewal” provision? That provision typically contains language saying the contract automatically renews at the end of the term unless one party gives the other notice within, for example, 60 days before the contract expires. Automatic renewals may also include language such as “retaining all the existing terms but with a 20 percent increase in management fees.”

“Boards should not sign contracts with automatic renewals,” says Koplovitz. “It should be a deal-breaker. After the first year, it should be terminable on 30 or 60 days’
written notice.”

The term of the contract should not be overly long. “Sometimes these contracts come in, and the first thing I see is a three-year lock-in,” says attorney Seth M. Sahr, a partner at Novitt, Sahr & Snow. “They’re putting you in a position where if after a year you don’t like the company, you’re still married to them another two years.” The alternative can be getting rid of the manager – but still paying for the remaining two years’ worth of management fees.

The contract should avoid having to give a cause for termination, since, as Brucker puts it, “What does ‘cause’ mean?” That vagueness as to what’s acceptable cause can land the building in court. “You want the right to terminate for any or no reasons,” Brucker says.

Limit on Expenses

When there’s an emergency – frozen pipes burst in the middle of the night, for instance, and plumbers are needed immediately – management companies generally are authorized to spend what’s necessary to deal with it quickly. But there are often unexpected events that are not in the budget and need to be handled just as fast even if they’re not emergencies.

To address this, boards give the management company a dollar limit under which it can pay for non-recurring expenses without needing a check signed or countersigned by a board member. “There are so many little things that need to get done that if you don’t give the manager some authority up to a certain amount, you can really gum up the works,” says Sahr. There should be no delay in getting sidewalk salt during an icier-than-expected winter, for instance. The figure, which depends on the size of the building, generally runs from $1,000 to $5,000.

Boards should not give managers the right to spend the management firm’s money with a promise to be reimbursed by the board. “I don’t like that because that’s when you get abuses,” Brucker says. “You could get a phony invoice. Just spend the board’s money.”

Management agreements usually provide that the board will receive regular financial reports, but the frequency and detail of these can vary widely. “The board should review samples of reports before retaining a management company,” says attorney Robert Tierman, principal in the Tierman Law Firm.

“The contract should require that the management company commits to providing comparable ones on at least a monthly basis,” he continues. “In addition, I believe that the agreement should provide that the board should have ready access to the management company’s itemized records of building accounts, receipts, and expenditures. While co-op/condo auditors are given this access, boards also should have the opportunity to readily spot-check them when they see fit. And ideally, this access would be available online for both auditors and boards, subject to adequate security.”

Attendance

One section of the contract should specify how often the agent will be at the property, what meetings he or she will attend, how staff hiring and discipline will be handled, and other day-to-day duties. Here the board is walking a line: the contract has to be specific enough for a particular building’s needs without micromanaging every detail.

“I like to make sure that the site person is going to be there certain hours,” says Brucker. “A lot of contracts say ‘as necessary’ because the manager may have six to eight buildings in their portfolio. I like to say something like, ‘The manager will be there Wednesday and Friday 9 A.M. to noon.’ Typically, a management person will say, ‘We like to surprise the staff to make sure they’re on their toes.’ You then can say something like, ‘They’ll be there a minimum of six hours a week including Wednesday from 9 to noon.’”

The contract should specify how the agent will handle complaints from residents. Koplovitz suggests language saying, “All complaints must be responded to within 24 hours,” or if it’s a second complaint about the same issue, the agent must notify the board.

When it comes to terminating other employees, the agreement should specify what rights the managing agent will have to do this, says Greenspun. It should also include a broad clause stipulating that if bills, taxes, and the like are not paid in a timely fashion, the agent is responsible for any penalties or late fees. This helps incentivize the agent to pay on time.

The contract should also specify that bank accounts are properly named, with the co-op or condo’s corporate name part of it. Otherwise, if the management company goes bankrupt or has a judgment against it, the creditor can seize the account as an asset.

If the board is selecting the firm because it wants a particular property manager, that should be in the agreement. “Such a designation is reflected in the agreement, and we advise clients to include a prohibition against the favored manager’s removal without the board consent,” says Greenspun.

“The agreement should also contain the management company’s commitment that the agent will at no time be assigned to more than a mutually acceptable number of buildings and apartment units,” says Tierman. “While some of these provisions might be difficult to police and the board’s remedies might be limited to termination for cause, I believe that having them in writing will, at the very least, leave the management company compelled to provide a very good reason for any failure to honor them.”

In the end, says Koplovitz, “you’re going to try and negotiate the best terms you can. Once the contract is done, you don’t usually go back and ask for amendments. You could, but it’s not usually done.”