A property management agreement governs the relationship between the property owner and the management company that operates the rental property. For DFW property owners working with management companies, the management agreement is the foundation of the operational relationship, and the typical DFW management market (national management companies, regional operators, and local boutique managers) produces different agreement structures depending on the size and type of the portfolio. The agreement is more than a routine business arrangement. It allocates substantial responsibilities (lease execution, rent collection, maintenance, eviction filing, vendor selection, regulatory compliance), authorizes the manager to bind the owner in significant ways, and structures the financial relationship through management fees, leasing fees, and various pass-through charges. Poorly drafted property management agreements produce disputes about manager authority, fee calculations, performance obligations, indemnification, and termination. What follows is a walkthrough of the key provisions of property management agreements, the typical fee structures, the indemnification framework, and the practical issues that arise during the management relationship.
The basic agency relationship
A property management agreement creates an agency relationship between the property owner (principal) and the management company (agent). The agent acts on behalf of the principal in managing the property.
Implications:
Fiduciary duty. The manager owes fiduciary duties to the owner: loyalty, care, good faith, fair dealing.
Authority. The manager has the authority to act on behalf of the owner within the scope of the agreement.
Liability. The owner may be liable for actions taken by the manager within the scope of authority. The manager is also potentially liable for breach of duty.
Termination. The agency relationship can be terminated by either party (subject to the agreement’s terms).
The agency relationship affects the structure of the agreement and the analysis of disputes.
Manager’s typical authority
Property management agreements typically authorize the manager to:
Lease the property. Negotiate lease terms, execute leases on the owner’s behalf, screen tenants.
Collect rent. Receive rent payments, manage trust accounts, distribute net rents to owner.
Address maintenance. Authorize repairs and maintenance up to specified thresholds, hire vendors, oversee work.
Pay property expenses. Pay property taxes, insurance, utilities, vendors from rent collected (with appropriate accounting).
Address tenant issues. Respond to tenant complaints, address lease violations, file eviction (with owner approval for major actions).
Maintain records. Keep books, records, and documentation of property operations.
Comply with applicable law. Address fair housing, FCRA, local ordinances, and other regulatory requirements.
Report to owner. Provide regular financial and operational reports to the owner.
The specific authorities vary by agreement. Major actions (eviction filing, capital improvements above thresholds, lease modifications) often require owner approval.
Fee structures
Property management fees can be structured several ways:
Percentage of collected rent. The most common structure. The manager receives a percentage (typically 8-12%) of rent actually collected.
Flat fee per unit. A specific dollar amount per unit per month. Simpler but doesn’t align manager incentives with property performance.
Hybrid. Combination of base fee plus percentage.
Performance-based. Fees tied to specific performance metrics (occupancy, rent growth, etc.).
Additional fees beyond the management fee:
Leasing fee. A separate fee for placing a new tenant (often a percentage of first month’s rent or a flat amount).
Renewal fee. A fee for renewing an existing tenant.
Setup fee. An initial fee for property onboarding.
Maintenance markup. The manager may charge a markup on maintenance work performed by vendors.
Eviction fee. Fee for handling eviction proceedings.
Inspection fees. Fees for property inspections.
The total cost of property management can be substantially higher than the headline percentage fee. Owners should evaluate the total fee structure when comparing managers.
Trust accounting
Most property management agreements involve trust accounting:
Separate trust account. Rent collected and security deposits held in a trust account separate from the manager’s operating funds.
Owner’s funds. Owner’s portion of rent (after deductions for fees and expenses) distributed to owner periodically (typically monthly).
Security deposits. Held in trust account or separate deposit account. Texas law generally requires deposit segregation, though specific requirements vary.
Accounting. Detailed accounting provided to owner, typically monthly.
Audit rights. Owner’s right to audit the manager’s books.
Trust accounting failures can produce regulatory consequences (Texas Real Estate Commission for licensed managers) and tort liability for breach of fiduciary duty.
Indemnification and liability allocation
Property management agreements typically include indemnification provisions:
Manager indemnifies owner for claims arising from manager’s negligence or breach of duty.
Owner indemnifies manager for claims arising from owner’s actions or property conditions outside the manager’s responsibility.
Insurance requirements. Both parties typically required to maintain insurance.
Limitation of liability. Some agreements limit manager liability to specific amounts or types of damages.
The indemnification provisions are heavily negotiated. Both parties want broad indemnification from the other while limiting their own exposure.
For tenant claims (slip-and-fall, fair housing, lease disputes), the agreement typically allocates responsibility based on whose conduct caused the issue. Manager-caused issues are the manager’s responsibility; owner-caused issues are the owner’s.
Termination provisions
Property management agreements typically include termination provisions:
Term. Initial term (often 1-3 years) with automatic renewal unless terminated.
Termination for cause. Specific events (manager’s breach, fraud, regulatory violations) allowing immediate termination.
Termination for convenience. Either party may terminate on specified notice (typically 30-60 days).
Termination fees. Some agreements include termination fees for early termination by the owner.
Wind-up procedures. The manager’s obligations during the transition period (transfer of files, accounting, etc.).
Tenant communication. Notice to tenants of the management change.
Termination is a common source of disputes. Owners who terminate without proper procedures face claims for unpaid fees; managers who refuse to wind up properly face claims for property damage and tenant losses.
Common property management disputes
Fee disputes. Disputes about specific fee charges, percentage calculations, or unauthorized fees.
Authority disputes. Manager took action beyond authorized scope.
Trust accounting disputes. Owner claims trust funds were mishandled.
Maintenance cost disputes. Owner claims maintenance costs were excessive or unauthorized.
Vendor selection disputes. Manager selected vendors with improper conflicts (manager’s affiliated companies, etc.).
Tenant claims. Tenant claims arising from manager’s conduct, allocated to owner under agency.
Termination disputes. Disputes about termination procedures, fees owed, wind-up obligations.
Performance disputes. Owner claims manager underperformed.
Manager licensing in Texas
Texas property managers may be required to be licensed under specific circumstances:
Real estate license. Most property managers acting as agents for owners require Texas real estate licenses (administered by the Texas Real Estate Commission).
Specific exemptions. Some narrow exemptions apply (managing one’s own property, certain types of management activities).
Licensing requirements. Educational, examination, and continuing education requirements.
Trust accounting standards. Licensed managers are subject to specific trust accounting standards.
TREC enforcement. The Texas Real Estate Commission enforces licensing requirements and trust accounting standards.
Working with unlicensed managers (when licensing is required) creates risks for owners: potential regulatory consequences, claims of unauthorized practice of law (for evictions), and other issues.
Special considerations for residential vs. commercial
For residential property management:
Fair housing compliance. The manager bears substantial fair housing responsibility.
Tenant interactions. Frequent interactions with tenants on operational matters.
Maintenance issues. Habitability obligations under § 92.052.
Lease standardization. Standardized residential leases.
Rent collection. Tenants paying monthly rent.
For commercial property management:
Lease negotiation. Each commercial lease is typically substantially negotiated.
CAM and pass-through. Commercial leases involve complex CAM and pass-through accounting.
Tenant relations. Tenant relations are often less frequent than residential but more substantive.
Specialized expertise. Different commercial property types (office, retail, industrial) require different expertise.
Larger transactions. Commercial transactions are typically larger in value than residential.
The agreement provisions should reflect the type of property being managed.
Common property management agreement mistakes
Vague authority provisions. Unclear scope of manager authority creates disputes about whether specific actions were authorized.
Inadequate fee disclosure. Manager fee structures (markups, separate fees, etc.) should be clearly disclosed up front.
Missing trust accounting standards. Specific trust accounting requirements should be clear.
Inadequate indemnification. Indemnification provisions that don’t address common scenarios (tenant claims, vendor disputes, etc.) leave gaps.
Unclear termination procedures. Termination procedures, fees, and wind-up obligations should be specified.
Missing performance metrics. Without specific performance metrics, evaluating manager performance is subjective.
Outdated leases used by manager. Manager using outdated lease forms can produce compliance issues for owner.
Inadequate reporting. Without specific reporting requirements, owners may not have visibility into property operations.
Frequently Asked Questions
What is a property management agreement?
An agreement between the property owner and the management company governing the relationship. Allocates authorities, defines fees, establishes the agency relationship, and specifies obligations on each side.
What authorities do property managers typically have?
Lease the property, collect rent, address maintenance up to specified thresholds, pay property expenses, address tenant issues, maintain records, comply with applicable law, and report to owner. Major actions (eviction filing, capital improvements above thresholds, lease modifications) often require owner approval.
How are property management fees structured?
Common structures: percentage of collected rent (8-12% typically), flat fee per unit, hybrid, or performance-based. Plus additional fees: leasing fee for placing tenants, renewal fee, setup fee, maintenance markup, eviction fee, inspection fees.
Are Texas property managers required to be licensed?
In most cases, yes. Texas property managers acting as agents for owners typically require Texas real estate licenses through TREC. Some narrow exemptions apply. Working with unlicensed managers creates regulatory and other risks.
What is trust accounting?
Separate handling of owner funds (rent collected, security deposits) in a trust account separate from manager's operating funds. Owner's portion distributed periodically. Detailed accounting provided to owner. Subject to TREC standards for licensed managers.
How is indemnification handled?
Mutual indemnification typical, manager indemnifies owner for manager-caused issues, owner indemnifies manager for owner-caused issues. Insurance requirements for both parties. Some agreements include limitations of liability.
How can a property management agreement be terminated?
Termination for cause (manager breach, fraud, etc.), termination for convenience (with specified notice, often 30-60 days), or expiration of initial term. Some agreements include termination fees. Wind-up procedures specify the manager's obligations during transition.
What's a leasing fee?
A separate fee for placing a new tenant, typically a percentage of first month's rent or a flat amount. In addition to the ongoing management fee. Common in Texas property management.
What about vendor markup?
Some managers charge a markup on maintenance work performed by vendors. The markup is the manager's compensation for handling the vendor relationship. Should be clearly disclosed in the agreement.
What if the manager has a conflict of interest?
Conflicts of interest (manager's affiliated companies as vendors, etc.) should be disclosed and addressed in the agreement. Undisclosed conflicts can support breach of fiduciary duty claims.
Should owners audit their property managers?
Yes, periodically. The agreement should include audit rights. Periodic audits verify trust accounting, fee calculations, and overall manager performance. Annual audits are common.
What's the most common property management agreement mistake?
Vague authority provisions. Unclear scope of manager authority creates disputes about whether specific actions were authorized. Specify authority levels (dollar thresholds for maintenance, requirements for owner approval, etc.) clearly. Specific authority provisions prevent most authority disputes.