Practical aspects of the property management agreement

Compared to 2023, the first half of 2024 experienced a recovery in the commercial property market and an increase in transaction volumes. Investors are increasingly interested in private student housing, as well as the institutional rental market (Private Rented Sector). One of the keys to ensuring that the income generated by any type of commercial property is maximized and that tenants are satisfied is proper and effective property management This article explains the types of property management agreements, the typical provisions of property management agreements, and the legal responsibility of the manager for the proper execution of management duties.

Basic information of the property management agreement

A property management agreement is a mixed contract, which has been described in law, despite the lack of specification of its essential features. The exception is the obligation arising from the Property Management Act to attach a copy of the mandatory civil liability insurance for damages caused in connection with the management of the property, and the requirement to draw up the property management agreement in written or electronic form (in a form with qualified electronic signatures) under penalty of nullity.

Types of property management agreements

Asset Management Agreement – Strategic Advisory Contract

First, it is essential to address the terminology used in property management contracts. Commonly, the most typical agreements concerning management of a real estate are asset management, property management, and facility management agreements These terms are sometimes used interchangeably, though each of them refers to a different type of service.

Asset Management refers to increasing the value of a particular asset or investment portfolio through making strategic decisions and long-term management. In practice, this means that the Asset Manager will be responsible for advising on the appropriate time to sell the asset (property) or change its use.

Facility Management Agreement – Technical Property Management Agreement

The Facility Management Agreement includes a specific range of services related to the management of the technical infrastructure of a building. The Facility Manager will be responsible for periodic inspections of the technical condition of the building as required by the Building Law and for ensuring that defects reported by tenants are addressed.

Property Management Agreement – Day-to-day Management of the Real Estate

Property Management is the concept most closely related to the traditional property management agreement as understood by the Property Management Act. It involves the day-to-day management of a property, including maintaining contact with tenants. The property manager performs tasks related to the upkeep of the building and ensures that it generates revenue. It ia also responsible for adhering to a budget to maximize the building’s value and its Net Operating Income (NOI).

Typical clauses in a property management agreement

a) Handover protocol

One of the standard clauses in a property management agreement is the correct specification of the method and timing for handover of the property to a property manager based on a handover protocol. The protocol should include photos of the building’s meters, access to management systems, and confirmation of the transfer of legal and administrative documentation necessary for property management.

b) Defining the scope of services provided by the property manager and actions requiring owner approval

The scope of property management is defined in the contract between the property owner, homeowners’ association, or another organizational unit holding rights to the property. Although article 184b of the Property Management Act outlines examples of management activities, the parties can subjectively limit or extend the scope of activities included in the property management agreement.

In addition to the typical management activities, i.e. management of tenant relations, collection of rents and service charges, rectification of defects in the building, preparation of annual budgets and monthly reporting by the property manager, the property management contract may also include provisions for searching of new tenants and to provide active support to the owner during the property due diligence process and for answering questions of the potential purchaser’s advisors. For an additional fee, the manager may also be required to set up a data room where documents made available to the potential property buyer’s advisors are uploaded.

Often, property management agreements include a right of property owner to grant a power of attorney to the property manager to act on the owner’s behalf in connection with the performance of the services indicated in the management agreement, at the same time, the owner might be entitled to revoke the power of attorney or change its scope.

The scope of services will of course vary in relation to the type of commercial property being managed. For example, regarding the management of a PRS property, the scope of services may also cover the construction phase and include branding, advice on the fit-out works of the premises as well as the commercialization of the property itself. In addition, more and more often one of the services offered in the PRS sector is so-called community management. The community management service involves building a strong community with a good atmosphere in the building by organizing events, initiatives, preparing a calendar of events and inviting tenants to them as well as being the first point of contact with the residents.

c) Remuneration

The remuneration of the property manager set out in the property management agreement most often consists of two parts: (i) a fixed remuneration for providing management services as well as (ii) a variable remuneration for activities related to finding a new tenant, negotiating the renewal of the lease by the current tenant. In this case, the remuneration will be equal to a percentage of the annual rent to be paid by the tenant. The property manager may also be entitled to separate remuneration for performing additional activities agreed between the parties that are not covered by the main property management agreement. In addition, the parties may agree in the contract that the manager’s remuneration will be indexed annually based on the HICP or the average annual price index of goods and services announced by the President of the Central Statistical Office.

d) Defining liability of property manager and property owner

The property management agreement should clearly specify which activities of the property management constitute ordinary management activities, for which the consent of the owner is not required, and for which activities the consent of the building owner is necessary. The parties may also indicate in the agreement an amount limit above which it will be necessary to obtain the consent of the property owner, e.g. for the removal of a given defect or the conclusion of a service agreement.

Another typical clause in a property management agreement is the right of the owner to give binding instructions to the property manager on all aspects related to the property management agreement. From the property manager’s point of view, it is important to secure in the agreement the possibility to object to an instruction given by the owner if the instruction given is contrary to applicable law, may cause damage to the property or does not relate to the scope of services provided by the manager under the agreement. In such a case, if the owner, despite the raising of an objection by the property manager, still requires the property manager to comply with the instruction, the manager should be indemnified against liability for damage caused if the property manager complies with the owner’s instruction or if the instruction given is incomplete or misleading.

e) Property manager’s insurance

As indicated in the introduction, one of the mandatory elements of the property management agreement under the Property Management Act is to attach to the property management agreement a copy of the third-party liability insurance document for damages caused in connection with the management of the property valid as of the date of conclusion of the property management agreement. In practice, the property management agreement may include a clause obliging the property manager to have a valid third-party liability insurance policy for the entire duration of the property management agreement, but a copy of the policy does not constitute an appendix thereto In particular, it should be emphasized that pursuant to Article 186(3b) of the Property Management Act, if the property manager fails to present a copy of the insurance document after receiving a prior request to do so, the property owner will be entitled to terminate the property management agreement with immediate effect. In order to avoid termination, an up-to-date version of the insurance policy should in any case constitute an appendix to the property management contract.

f) Contractual provisions in the event of sale of the building

Each property management contract should contain a clause governing the continuation or termination of the contract in the event that the building is sold to a third party. Most often, owners reserve the right to assign the rights or obligations of the property management agreement to the right to terminate the contract.

g) Non-compete and confidentiality clauses

Contractual non-compete provisions may be of two types. In the first instance, the clause may include a prohibition on the owner from employing the property manager’s employees and persons cooperating therewith for the duration of the property management agreement and for a specified period after the termination of the agreement. The second type of clause is designed to protect the property owner and prevent the property manager from using information about the property obtained in the course of performing management activities against a building located in a comparable location to the property being subject of the property management agreement.

Each property management agreement should also contain a confidentiality clause between the parties in respect of any information obtained during the performance of the agreement, in particular information about tenants, prospective tenants or the content of the lease agreement, except where disclosure of the information is required by law or by virtue of a court judgment or by virtue of a decision of a public administration authority. The obligation to keep the confidentiality of information obtained during the performance of the property management agreement should also remain in force after the termination of the property management contract itself.

Property management and ESG

More and more often, property management agreement may contain an ESG and sustainability clauses aimed at implementing sustainability principles into property management agreement (sustainable building management).

In addition to a general cooperation clause, the owner of the property in the property management agreement may impose additional obligation on the property manager relating to performing services in compliance with ESG principles. For example, the property manager might be obliged to install energy-efficient lighting in common areas, to provide property management services in compliance with environmental regulations, to evaluate energy heat and water consumption used by each tenant or to use environmentally friendly detergents for cleaning common areas of the property.

Property manager’s obligations to maintain a building in a proper technical condition under the Building law

Pursuant to Article 61 in conjunction with Article 5(2) of the Building Law, the owner or property manager is obliged to maintain and use the building in a manner consistent with its intended use and environmental protection requirements and to maintain the building in an appropriate technical and aesthetic condition, not allowing excessive deterioration of its performance and technical efficiency.

In addition, pursuant to Article 62(1) of the Building Law, the owner or manager should subject the building to a periodic inspection consisting in checking its technical condition.

The Building Law uses the phrase ‘owner or property manager’ without clearly defining which entity is responsible for fulfilling the obligations under the Building Law with respect to the maintenance of buildings. The view has emerged in case law and literature that the indication of the alternative ‘owner or manager’ in the hypothesis of Article 61 of the Building Law means that the obligations under Article 61 of the Building Law may be imposed on both entities jointly, however, this view appears to be questionable. Identifying the owner and property manager together as the entities obliged to maintain the facility in a proper technical condition may involve the necessity to specify what scope of obligations is imposed on the owner and what on the property manager. In order to avoid any doubts in this respect, we recommend to always indicate in the property management agreement which entity is responsible for rectifying defects, in particular defects that may endanger human life or health, the safety of property or the environment and for carrying out periodic inspections of the technical condition of the managed property.

Summary

The issues presented above are examples only and do not exhaust the topic of provisions that should be included in a properly drafted property management agreement. However, the above examples indicate that each of the parties, i.e. both the owner and the property manager should define contractually their obligations as precisely as possible, as well as the property manager, when negotiating the agreement, should strive to define precisely the scope of its liability and to exclude its liability if it follows the owner’s instructions, which in its opinion are contrary to the law or principles of proper property management.

Please do not hesitate to contact the Hoogells law firm team if you are interested in the above article or have any questions regarding the property management agreement.