Commercial Real Estate Service Agreements: What to Know

December 20, 2011

When you decide to rent your commercial real estate property, most people just going into the business realize the process takes a lot of time and work. In fact, a good Landlord managing his own commercial real estate property likely has to be on-site or visit the location at least once a week if not more. This may sound burdensome, but the amount of Tenant contact, management, repair, issues, and site issues that occur are numerous. The work only grows exponentially if the rental location is a multi-unit structure. 

To reduce personal involvement, many Landlords choose the option of hiring a commercial property management service via a commercial property management agreement. This kind of contract essentially lays out the terms and conditions a third party will perform for a landlord on the property in return for payment. The compensation is typically a share of the rent collected from the Tenant in the property. 

A commercial property management agreement has a number of benefits. First, the Landlord doesn’t have to be present at the site for most, if not all, of the issues that arise. Second, the commercial property management company can manage multiple aspects of the property, including rent collection, eviction, and marketing for new Tenants. Third, the commercial property manager can monitor the commercial real estate regularly, leaving the Landlord free to spend time on other unrelated issues. 

While a Landlord may prefer to be anonymous to Tenants, the actions of the commercial property management company still represent the Landlord. Many services are fly-by-night operations, skimping on what they can to maximize profits. Such services give other property managers a bad name and ultimately upset the Tenants. Screening for the right service is essential to avoid this kind of situation. 

A commercial property management agreement represents a legal contract between a Landlord and a service manager. The document should spell out what the Landlord needs from the service for a specific commercial real estate and its Tenants. This can include rent collection, monitoring, management, administration and paperwork, accounting, tax paperwork filing, renting, maintenance, and evictions if necessary. In some cases, commercial property management services will even provide legal services for an extra cost. In return, a commercial property management company will want payment through a cut of the rent collected, an outright payment, or both. 

It is critical for Landlords to understand that a commercial property management company acts as the Landlord’s legal agent and proxy under a commercial property management agreement. This means the Landlord can be held legally responsible for the service’s actions. For instance, if a service manager turns out to be a freak and starts peeking in the windows of Tenants, the Landlord can be sued for invasion of privacy and harassment due to the commercial property manager’s actions. Thus it is important for Landlords to make sure that indemnification language is included in the commercial property management agreement. 

A good commercial property management company will also provide a comprehensive package for a Landlord needing third party servicing. Many times a commercial property management agreement will come with options for the Landlord to choose from. The greater the amount of services, of course, the higher the cost from either rent collected or direct payment. 

Most services will have their own default commercial property management agreement already written. A Landlord is not bound to accept these default terms as any such contract is completely negotiable until agreed to by both parties. However, some services will demand that their default agreement be used or no service. It’s likely a good idea to skip such a business as many reputable commercial property management companies will be more than willing to customize a commercial property management agreement to add a new customer to their portfolio. Landlords should not be afraid to push for terms that are favorable to their own needs first. 

Once the draft commercial property management agreement is ready to go, a Landlord should have it looked over by a property attorney versed in both contracts and Landlord-Tenant law. This review will help identify any exposures or concerns the Landlord should be aware of prior to turning over daily management to the hired service. You don’t want to find out about a legal problem well after the fact when the contract is executed. 

Finally, a commercial property management agreement can be with an individual or a business. Sometimes a property just needs one on-site commercial property manager. Whichever option is chosen, Landlords just need to remember to specify all their requirements in the commercial property management agreement. It becomes the guidebook and checklist for what the commercial property manager has to do with the property. 

Source: Property Management Direct

 

DISCLAIMER: This blog has been curated from an alternate source and is designed for informational purposes to highlight the commercial real estate market. It solely represents the opinion of the specific blogger and does not necessarily represent the opinion of Pacific Coast Commercial.