What is in your property management agreement?
A lot of Chicago landlords will simply glance at the document, but you need to understand some key clauses and expectations. By carefully reviewing this agreement, you’ll establish a good working relationship with your management partner and understand their scope of work and your responsibilities.
Let’s take a closer look at Chicago property management agreements so you know what to expect when you’re preparing to partner with a management company.
Overview of Clauses:
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Property Management Agreement: The Purpose
A well-drafted property management agreement protects both the landlord and the property management company by clarifying each party's responsibilities, expectations, and the terms of the agreement.
For Chicago landlords, it’s crucial to understand the key clauses in these contracts to ensure that they’re not only legally sound but also fair and advantageous to you. With Chicago's unique rental market and regulations, understanding the nuances of a property management agreement can make a significant difference in the smooth operation and profitability of your rental property.
Scope of Services Provided
The first clause to review in any property management agreement is the scope of services. This section should clearly outline the specific responsibilities that the property management company will handle on your behalf. Chicago landlords should ensure that the scope of services covers the following:
Tenant Screening and Placement
The agreement should specify whether the property manager is responsible for advertising vacancies, conducting tenant screenings, verifying employment and credit histories, and selecting tenants. In Chicago, it's also crucial that the screening process complies with local and state fair housing laws.
Rent Collection
The property manager should be tasked with collecting rent on your behalf, including handling late payments and issuing notices for overdue rent. The agreement should state when and how rent payments are due and what actions will be taken if rent is not paid on time.
Maintenance and Repairs
A comprehensive agreement will outline the property manager’s role in managing routine maintenance, emergency repairs, and overseeing contractor work. It should specify how maintenance requests will be handled, response times, and whether emergency repairs outside regular business hours are included.
Evictions
The property manager should have the authority to handle evictions if necessary, but the process and legal requirements must be clearly outlined. In Chicago, eviction procedures can be complex and require strict adherence to both state and local laws, including tenant protections like the Chicago Residential Landlord and Tenant Ordinance (RLTO).
Inspections
The agreement should specify whether the property manager will conduct regular inspections, such as move-in/move-out inspections, or periodic property checks to ensure the property and the building are well-maintained.
Management Fees and Payment Terms
Understanding the financial structure of the agreement is essential to avoid any surprises. The management fee is one of the most critical clauses for Chicago landlords to pay attention to. Typically, property management companies charge a monthly fee based on the rental income of the property, but this can vary.
Monthly Management Fee. In Chicago, the typical management fee ranges from 8% to 12% of the monthly rent collected. This percentage may vary depending on the property type, size, and the services provided by the property manager.
Leasing Fee. Many property managers charge a one-time leasing fee for tenant placement, which is usually equal to one month’s rent or a flat fee. This fee should be outlined in the agreement and specify when it will be due.
Additional Fees. The agreement should list any additional fees that may be charged, such as maintenance fees, marketing expenses, or administrative fees. Be sure to clarify how these fees are calculated and when they will be billed. Some property management companies may charge extra for things like emergency maintenance, legal fees for eviction proceedings, or handling large-scale repairs.
Payment Terms. The agreement should clarify how and when the property manager will be paid. Will they deduct their fees directly from the rental income, or will you need to pay them separately? It’s important to understand the payment process, so there’s no confusion about when payments are expected.
Term and Termination Clause
The length of the property management agreement is another consideration. Property management contracts are typically written for a term of 12 months, but some companies may offer shorter or longer contracts. The agreement should specify the duration of the contract and provide details about how either party can terminate the agreement.
Will your agreement renew automatically? Many property management contracts include an automatic renewal clause, which means the agreement will renew for another term unless either party gives written notice to terminate. This can be problematic if you want to end your relationship with the property management company but forget to provide notice.
What if you want to terminate the agreement? Make sure the agreement clearly outlines the conditions under which you or the property manager can terminate the contract. In Chicago, landlords have the right to terminate the property management agreement if the property manager is not fulfilling their duties. However, there may be penalties for early termination, so it's essential to understand any associated fees or notice periods.
The agreement should specify the amount of notice required for termination, usually 30 to 60 days. Be sure that this clause is reasonable and allows you to make changes if needed.
Liability and Insurance Requirements
In a city like Chicago, where weather conditions can lead to significant property damage and legal issues, it’s important to ensure that both you and the property manager are properly insured. The agreement should specify the property manager’s liability in case of damages, accidents, or other legal issues. There are two specific areas we like to focus on.
The first is our own liability. The agreement should clearly define the property manager’s liability for negligent actions. For example, if the property manager fails to handle a repair issue in a timely manner and it leads to further damage, they should be held accountable.
The second is insurance coverage. Make sure the agreement specifies that the property manager is required to carry adequate liability insurance to cover property damage or accidents that may occur during their management of your property. Landlords in Chicago are required to have certain levels of insurance to protect against potential property damage, tenant injuries, or liability claims.
Owner’s Responsibilities and Limitations
While the property manager will handle many tasks related to the property, you, as the landlord, will still have some responsibilities. The property management agreement should clearly define the landlord's role and limitations in the management process.
Look for information on communication and decision-making. Some property management companies will require landlord approval for significant expenditures, such as major repairs or renovations. Make sure the agreement specifies what decisions require your input and which actions the property manager has the authority to take without your consent.
What will you be expected to pay for, outside of the management fees? The agreement should specify who is responsible for certain costs, such as property taxes, insurance premiums, and mortgage payments. Typically, the landlord is responsible for these costs, but the agreement should clearly state this to avoid any confusion.
Dispute Resolution and Legal Considerations
Disputes between landlords and property managers can arise, so it’s important to have a clear process for resolving conflicts. The agreement should include a dispute resolution clause, specifying how disagreements will be handled. It might be mediation or arbitration. Many property management agreements include a clause that requires mediation or arbitration if there is a disagreement that cannot be resolved through normal communication. This can help avoid costly litigation in court.
Chicago landlords must comply with a variety of local, state, and federal regulations, such as the Chicago Residential Landlord and Tenant Ordinance (RLTO) and the Illinois Fair Housing Act. The agreement should state that the property manager will adhere to all applicable laws, including tenant rights, eviction procedures, and rent control regulations.
Accounting and Reporting
A crucial part of the property management relationship is financial transparency. The agreement should specify how the property manager will handle accounting and reporting, including rent collection and disbursement. The property manager should provide clear statements regarding rent collection and when you can expect payment. The agreement should also specify whether the property manager will send you monthly financial reports showing rental income, expenses, and any deductions for management fees or repairs.
The agreement should indicate whether the property manager will provide you with the necessary tax documentation, such as 1099 forms or detailed financial statements, to help you with your tax filings.
For Chicago landlords, property management agreements are a vital tool in ensuring that your rental properties are managed effectively, legally, and profitably. Understanding the key clauses in these agreements will help you avoid potential pitfalls and protect your interests.
We’re always willing to do a deep dive with owners who come to us looking for property management support in Chicago. Let’s take a look at our own property management agreement and talk about how we might work together. Please contact us at Paragon Property Management Group.
