Tailoring the Management Contract

No co-op or condo board should sign a boilerplate contract with a management company. Here are the primary areas where a board’s attorney should negotiate terms so that the management contract is tailored to fit the building’s unique needs: 

Ancillary Fees
These are 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. 

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.

Insurance
The next biggest issue is protecting, or indemnifying, the managing agent. 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 negligent or has committed willful misconduct. Since the management company is often transmitting sensitive information to the board via email and other electronic means, many boards also ask the management company to carry cyber-insurance.

Termination
Most contracts are for a one-year term. Boards should not agree to an “automatic renewal” provision, which typically says the contract renews at the end of the term unless one party gives the other notice within, for example, 60 days of the expiration date. 

The term of the contract should not be overly long, and it should avoid a requirement to give a cause for termination. A board wants to have the right to terminate the contract for any or no reasons.

Limit on Expenses
When there’s an emergency – frozen pipes burst in the middle of the night, for instance – management companies generally are authorized to spend what’s necessary to deal with it quickly. To address this, boards give the management company a dollar limit – usually from $1,000 to $5,000 – to pay for non-recurring expenses without needing a check signed or countersigned by a board member. Boards should not give managers the right to spend the management firm’s money with a promise to be reimbursed by the board. It’s an invitation for abuses. 

Financial Reports
Management agreements usually provide that the board will receive regular financial reports. Boards should review samples of reports before retaining a management company, and the contract should require that the management company commits to providing comparable ones on at least a monthly basis. In addition, the agreement should provide that the board has access to the management company’s itemized records of building accounts, receipts, and expenditures.

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. The contract has to be specific enough for a particular building’s needs without micromanaging every detail.

The contract should specify how – and how promptly – the agent will handle complaints from residents. When it comes to terminating other employees, the agreement should specify what rights the managing agent will have to do this, plus a clause stipulating that if bills, taxes, and the like are not paid on time, the agent is responsible for any penalties or late fees.

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. The management company should agree that the agent will at no time be assigned to more than a mutually acceptable number of buildings and apartment units. While some of these provisions might be difficult to police, having them in writing will, at the very least, compel the management company to provide a very good reason for failing to honor them.