PM contract question - balance of fees due, is this normal??

Question

So I'm just about to sign a contract with a PM company and noticed a sentence in their terms that says: " IN THE EVENT OF ANY TERMINATION BY THE OWNER, OR EXPIRATION OF THIS AGREEMENT, BROKER SHALL RECEIVE THE BALANCE OF ANY MANAGEMENT FEES DUE UNDER EXISTING OR LEASES THE TENANT RENEWS."

This isn't part of the standard South Carolina PM contract as best I could find, so is this in line with what anybody else has seen in standard PM terms?? If I decided not to renew the PM contract at the end of the year term we initially sign (I don't expect this to happen, but just want to understand how this will work) but the PM has renewed a lease with a tenant for another year why would I be obligated to pay another year's worth of management fees but the PM wouldn't be obligated to continue to provide the services when my contract with them has expired? That just doesn't seem balanced, or is there something I'm missing?

Maybe I'm over thinking the details here but I like to fully understand a contract before I sign it. What has anybody else seen in their PM contracts?

Henry Murray · Answer

Hey @Troy Gandee! Hope you're doing well man! I can't believe I didn't see your post here till just now... Thanks for the info and background perspective! That's a really good idea to start with 6 months and then extend from there. I definitely see their perspective since it's a large up front investment to find and place a good tenant that they need to make up on the back end for the rest of the contract, it was just a little intimidating going into a pretty binding year long contract without having that personal experience with them first to know how it would go. But at the end of the day it's been almost 9 months now and the PM company has been absolutely great so I think my worry in this case was unfounded and is (thankfully!) moot at this point anyway!

Adam Martin · Answer

I don't have a pm however this is something that I would not accept in a contract. If you had to pay them anyway I can't see a reason you could ever fire them since they are still collecting their fees what would the point be. It also says under any circumstances, this could include you being unhappy with their services or just not doing a good job. In my opinion if you are doing a quality job and taking care of your customers there should not be any reason to have such a clause because they wouldn't want to leave. Also not only are you responsible for the end of the lease but for extensions as well which seems wrong. If this wasn't something they were willing to strike I'd be looking elsewhere. At the very least make sure you are looking up reviews specifically from owners to see what they have to say to ensure you are getting in a long term contract with a reputable company.

Will Gaston · Answer

@Henry Murray Some version of this clause is in a PM contract that I'm currently under in Columbia. I don't love it but I definitely understand it. I'm friends with the BIC and I think it's probably tiresome for her that investors up and move PMs all of the time.

I'd call the BIC and address your concerns. You'll be interacting with and managing them often so now is a great time to see how well that experience will go.

Nathan Gesner · Answer

@Henry Murray this is pretty normal. Just ensure you have a way to step out if they fail to perform to the terms of the agreement.

I would question their need for 60 day notice of termination. That's an awfully long time to notify tenants, transfer documents and funds, and close your account. I require 30 days but usually have it done in 1-2 weeks.

Troy Gandee · Answer

Hey @Henry Murray!

This kind of language is fairly common. It's really just for the agency/management company to try to retain any fees that they won't receive later because they may feel that bringing you that tenant entitles them to their management fee until the lease is terminated or not renewed. It's similar to an agent bringing a "ready, willing and able" buyer to a transaction. Once closed, the agent that brought the purchaser is then compensated for "brokering" the sale or "introducing" the parties. It can be some what similar with managers. If they feel they vetted the tenant and then had them sign a lease agreement for X months, then they could feel they're entitled to their fee until the original lease is terminated. I rarely see these things executed because management agreements are usually for 1 year. They're often just no renewed and then those arrangements are null anyways. If a PM makes a huge mistake, they're not typically going to try to hamstring you into a contractual battle, but you can always ask to start with 6 months and then extend from there.

Hope you're well, man!

Henry Murray · Answer

@Adam Martin thanks for your perspective! They seemed like a really reputable company from everything I could find online about them and they seem really willing to work with me here to get my business so I think I'm going to see if we can reach a common understanding. Like I mentioned above they have a performance guarantee section that I can cancel with 60 days notice if "im not happy with their services" but thats also only if they mess up and can't make something right for me. I wanted it mentioned in the actual contract we sign as well since there's another section in the management agreement that says something to the effect of "this is the entire agreement there are no other written or verbal understandings that shall apply".

Henry Murray · Answer

@Will Gaston thanks for your thoughts! I definitely understand that they want to protect themselves and like you mentioned churn isn't good for their business. That's a very good point too about using this to see how the relationship will go. I talked to them yesterday and it seemed like they understood my concerns and were really willing to work with me and said they'd looking into revising the contract but he'd need to talk to the broker and then their attorney.

They also have a "performance guarantee" where if they do something wrong and can't make it right I could cancel the contract with no fees with 60 days notice, but thats not mentioned in the actual management agreement that we'd sign and also kind of subjective. At the very least I learned that they don't offer renewal to a tenant without my approval so I'd be able to make the decision if I want to stay with them at that point and just not renew the contract if I wanted to move PMs after a year without penalty.

PM contract question - balance of fees due, is this normal??

PM contract question - balance of fees due, is this normal??

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