What are your rights when a lease is with property management co?

Question

We recently listed for sale an investment property with 3 units cash flowing $2700 a month. All three tenants were 6 months into a 1 year lease. When we notified the management company of the impending listing we had to buy out the remaining 6 months of their fee and take over the management. There was a clause in our agreement that stated we had to list the property with them or buy them out. The leases were in the name of the management company. PM Co. sent a letter to all tenants notifying tenants they could be released from their leases. No where in our agreement or lease does it state this is an option. Then they proceeded to place the tenants in other properties they manage, some they may own. The buyer has applied for a commercial loan based on cash flow.  Does anyone know the legalities of this? We have 9 other properties currently managed by this company. They claim they have to protect their reputation and a sale upsets the tenants. I can understand that and we agreed to only show the property upon inspection and not disturb the tenants as much as possible. It seems like they should be just as concerned with their reputation with the owners that pay them.

Ross Denman · Answer

I don't know that I have a legal answer to your question, but our company is similar in our desire to protect the convenience of a tenant and ask to keep showings to a minimum. The tenants are protected by their lease and anyone purchasing the home will have to honor that lease (they won't have to necessarily renew though.) We always ensure that the tenants know their rights so that the performance is not hindered by the sale of the property.

While I do believe that a landlord has the right to allow a tenant out of their lease as long as both parties agree upon the termination of the contract... my biggest problem is that they are agents of the owners. I would scour the management agreement. Most likely they are positioning themselves as your agents. If that is the case, they violated their fiduciary responsibility to their clients by interfering with your investment goals of the property. I would consider talking to an attorney about a civil suit for damages... especially if this impacts the sell.

As your agents, their primary responsibility is to take measures to ensure the profitable performance of your investment properties. Everything from protecting the home to managing the home and tenants in a way that will retain your tenants. I believe that releasing the tenants from their leases without consulting you has done your investment harm and was done without just cause if your rendition of the scenario is accurate. In my mind, that violation of their responsibilities terminates their position as agent and should relieve you of your termination fees. If these actions caused the sale to fall through, it likewise has caused you even more damages. You went from having a performing property, to a non-performing property, to a property that will not sale because of its non-performance.

Please know that I am not an attorney and not giving legal advise, but I would consider consulting an attorney on this matter. It appears that they may have breached the fiduciary responsibilities of being your agent. For every month that this continues, you are losing thousands of dollars and your money is tied up in a non-performing investment property without the ability to liquidate and place your investment capital elsewhere.

Robert Melcher · Answer

As your manager, at least in Texas, they would be agents of the landlord only, and they do NOT hold the lease with the tenants. The PM Agreement probably states this, as it is one of the principal ways PMs offload liability to the landlord. Unless your PMA leases the property to the PM and he pays you per unit regardless of occupancy.

The tenants would be breaching the lease, which is legally superior to the sale (in Texas) and which transfer with the sale. The PM as a (presumably) licensed real estate professional would (at least in Texas) be breaching his responsibilities to you as his client.

I would say you have a strong and defensible position legally should you tell the tenants they have to stay and honor the lease.

Gavin Carlson · Answer

@Ross Denman Great response and totally agree with you!

Also not a lawyer, but there does seem to be a conflict of interest if the PM is moving tenants from your property to other properties as soon as you inform them that you are ending your management with them. A PM, usually but not always, is listed as an agent of the owner an as an agent has responsibilities to act in the best interests of their client, not their own pocketbook. I'm assuming the PM is also collecting placement fees from the transition of these tenants, meaning that they have all of the financial incentives in the world to move the tenants to increase their revenue.

There was also no reason to move these tenants, as leases survive the transfer of title. The tenants can be notified that a change in ownership has occurred, and that they now need to sent their rents to a new address. If tenants have a lease in effect, rents stay the same and usually there aren't too many problems.

Being a Property Manager is not easy, in upholding the wishes of owners you are going to inevitably upset a tenant. That being said, a PM shouldn't do something that financially harms their clients just because they don't want an angry phone call from the tenants.

Best of luck with everything, hope you are able to go through with the sale.

Alex Craig · Answer

It seems like your PM could have left the tenants in place, but maybe they are simply protecting the tenants since they do not know the buyer and have nothing in writing from the buyer stating his intention.  Or maybe they are just being vindictive. Most PM agreements will have some sort of exit fee during a lease or they will charge a certain % of the sale upon closing.  Our mgmt agreement has a 3% fee if the property is sold, but we waive that as we have in house real estate agents who can list the property and capture the RE commission--some sort of fee is necessary because of all the work that goes into selling a deal. A real estate agent IMO earns their commission once the property goes under contract.

In TN, the tenant has certain rights, so the property is sold with the tenant in place and it would be up to the buyer whether or not they want to get the existing tenant to sign their lease or simply keep the current lease in place. When we bring on a property from another mgmt company, we always get them to sign our lease just in case we need to go to court.  The PM should make the sale of a property transparent, which is easy to do.  He is right, tenants do get a little spooked at a property sale as they do not understand the biz we are in, but with effective communication and relationship building with the tenant through excellent customer service would certainly minimize that or eliminate it all together. So long as the PM company is not going to change, the sale should not be a big deal. Whether or not it is legal to move a tenant, it probably is.  There is nothing illegal about moving a tenant from a house to another house, but if they are breaking the lease, they should be held responsible for the lease break fee.  Read your lease carefully and PM agreement to make sure there is not an clause saying the lease break fee is waived if the owner is selling the home or any other reason why the lease break fee would be waived.

As for your buyer, he should still move forward with the transaction if the property is able to be re-rented at the same amount. I guess the issue for the buyer is accepting an vacant home that will need to be fixed up for the next tenant. If I were you, I would go ahead and do that and start to market the property yourself. If marketing the property yourself if not an option, then go ahead and bring another mgmt company on board that you and the buyer can agree upon, form there, they can coordinate the fix up and the tenant placement. The buyer should not be backing out over this, 1 tenant is not going to make or break his investment; he should understand the long term investment aspect.

It is sad the PM company is not being helpful here.  As a PM myself, I understand that any property can be sold at any time.  These are investments and the owner must do what is in their best interest. I always felt our job as a PM is to do the obvious, manage the day to day operations, but also assist our clients to achieve their real estate goals.  Really, we are their "Merrill Lynch" for their Real Estate portfolio. They should be happy to assist you with the sale.

What are your rights when a lease is with property management co?

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