HOAs Should Not Blindly Enter Into Property Management Agreements

When a homeowners association decides to retain professional management it is typically provided with a standard form management agreement that is utilized by the management company. Because those agreements have been drafted by lawyers who are retained by property management companies or associations comprised of property managers, they are understandably drafted in a manner that is designed to protect the interests of the property manager. As such, there are many terms contained in the document that are not in the best interest of the homeowners association and which should be renegotiated and modified as desired. The extent to which a prospective property manager will agree to modifications in the terms of the property management agreement is typically a function of the size of the property management company and how much they desire to take on the particular homeowners association as a client. Smaller property management companies that are controlled and operated by one or two people will probably be more receptive to modifications than larger more independent companies.

Important items that should be evaluated by the homeowners association before signing a prospective property management agreement include:

1. Authority to enter into the agreement. The governing documents (i.e. bylaws and CC&Rs) of a homeowners association will frequently contain provisions relative to the authority of the association, acting through its board of directors, to retain a property manager and the extent of director responsibilities that can be delegated to a property manager. Such governing documents must be thoroughly reviewed and understood so that any action that is taken complies with the terms of the governing documents. It is also a good practice to review state statutes that pertain to the retention of property managers by a homeowners association to ensure compliance with those as well.
2. Have a clear understanding of the scope of the services that are to be provided by the property manager. The association’s board of directors should prepare a written list of all of the items that it wants a property manager to perform (i.e. bookkeeping and accounting, dues collection, enforcement of rules, property maintenance and repairs). It is also important to have a sense of the amount of time that is required for the performance of those responsibilities to make a determination of whether or not the proposed manager has the necessary personnel and resources that will be required to properly perform their duties under the management agreement.
3. Verify the prospective manager’s status. A homeowners association’s property manager must be properly licensed and credentialed. As the actual requirements can vary from state-to-state, a qualified representative of the homeowners association (i.e. attorney) should advise the association of the state’s licensing, certification and registration requirements. In addition, the prospective property manager should have a current business license as well as professional liability and workers compensation insurance (if the company has employees). There may also be specific insurance requirements regarding insurance contained in the association’s governing documents. It is also important to inquire of the prospective management company as to whether it conducts criminal background checks of its employees that will provide services for the association. If not, the association should conduct background investigations on the key personnel that will be involved in the management of the association’s business operations. These items should be updated and reviewed on an annual basis as it is not unusual for conditions to change and the association not be provided with any notification of the changes. Finally, when considering a new manager, an association should request and verify references – preferably board members of other homeowners associations that the prospective manager provides services for.
4. Have the prospective contract reviewed by a qualified professional. A proposed agreement provided by the prospective manager should be carefully reviewed and discussed to make certain that the association’s directors fully understand the content and the ramifications of same. It is always best to have such documents reviewed by experienced legal counsel as there are typically numerous provisions that can have a significant impact on the association concerning items such as: fees and expenses payable to the management company; duties of the manager; the term of the agreement; renewal and cancellation provisions; insurance and indemnification provisions. Experienced legal counsel can suggest modifications for provisions that are deemed unacceptable. If a prospective manager will not negotiate terms of the management agreement that are deemed unacceptable by the association, it is wise to consider a different management company that will.

Decisions on the retention of a property manager will impact the operations of a homeowners association. Taking the necessary steps to insure that the right decision is made is in keeping with sound business judgment and following the above procedures before retaining a property manager should eliminate prospective managers that are not qualified or the right fit for a particular homeowners association.