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Property Management Q & A

Question:  With all the new regulations on landlord-tenant relations coming at both the state and local levels, we are getting lots of interest from DIY rental property owners looking into professional management. However, interestingly, these same potential clients often push back on our management agreements — specifically the indemnity provisions, standards of care, etc… It seems that when an owner switches to third-party management, they think they will avoid all risks of liability and never have a “care in the world” again. Any tips in working with these sorts of clients?

Answer:  I regularly present clock hour classes on how to draft a solid management agreement. The first point I make in the class is that rental real estate is an inherently risky business. My google search just confirmed that approximately 54% of all injuries occur in the home. The reality is that every time someone becomes injured on property you manage (not just tenants, but guests, invitees, even trespassers), that is a potential lawsuit. While I am sure you feel yourself reasonably compensated as a property manager, that is enough to cover your time and expertise handling the day-to-day duties of management — it doesn’t come close to compensating you as the “insurance company of last resort” every time something goes wrong. I recommend reminding your current and potential clients of this simple fact. 
Turning to the specifics, most management agreements contain clauses requiring the owner to indemnify, defend and hold the manager harmless “except in cases of gross negligence or Agent’s intentional misconduct.” Intentional misconduct is easy to define, its something you intended to do. So, for example, if you are a racist and intentionally discriminated against a tenant or potential tenant because of their protected class status, you are on your own as relates to the consequences of your actions. Gross negligence is a little tougher but is typically defined as “deliberate and reckless disregard for the safety and reasonable treatment of others.” A good example of gross negligence would be, not simply a careless mistake (not knowing the law), but purposely choosing to perform asbestos abatement using unqualified personnel, knowing that this presents a serious risk of injury to building occupants. 
When it comes to the owner’s indemnity obligations to the manager, this is typically covered by the owner’s insurance when they name you as an additional insured on their policy. Being named on the policy is a very important step, not to be forgotten (in fact I recommend that your management agreement not be effective, even if signed, unless the required insurance policy is effective). You see, another concept in insurance is subrogation, which is where an insurer pays a claim, but then “steps into the shoes of the insured” and attempts to recover against some third party. An example would be a roofer who is inattentive to their blowtorch, who accidently starts a fire. In such a case, your insurer would cover the fire damage, and then “subrogate” to the claim and go after the roofer (or the roofer’s insurer). The good news is that an insurer is prohibited from bringing a subrogation claim against a co-insured. 
I could go on and on (as I do for three full hours in my class on management agreements). Suffice it to say that I strongly urge you never to modify or water down the indemnity or insurance provisions in your management agreement.