Property Management Agreement: Questions about Indemnification Clause

[Renee R.]

Hi BP Community,

We’re in the process of hiring a property manager (PM) for our rental property in San Diego, California. In reviewing the contract—specifically a boilerplate C.A.R. Property Management Agreement—our attorney has raised concerns about Sections 4C and 10, particularly regarding liability.

Our primary concern is how responsibility is allocated between the owner (us) and the PM. As written, it seems that if the PM makes decisions that expose the owner to liability, the owner is still fully responsible. While we understand that owners need to indemnify the PM to some extent, there seems to be no middle ground where both parties are accountable for their own actions.

The PM has assured us that this broad indemnification is standard in the industry, but as first-time clients hiring a PM, we have no way to verify that easily. Complicating matters, our attorney is advising against signing the contract as written.

Here are the two clauses we’re particularly concerned about:

Section 4C (Indemnification Clause):
This section requires the owner to indemnify the PM for nearly all claims, even those arising from the PM’s own negligence (though it excludes willful misconduct or gross negligence). This broad indemnification seems to shift nearly all liability onto the owner, even in situations where the PM’s actions caused the issue.

Section 10 (Liability Disclaimer):
This states that the PM is not responsible for any damage to the property or personal belongings, even when caused by third parties such as inspectors, brokers, or prospective tenants. The contract essentially directs the owner to “obtain insurance” to protect against these risks.

Questions for Experienced Owners, PMs, and Legal Professionals:

1.  Is this level of indemnification truly standard for property management agreements in California?
2.  Have other owners successfully negotiated more balanced liability terms, and if so, how?
3.  Are there alternative contract structures that provide fair protection for both parties?
4.  What red flags should we watch for in a property management contract?
5.  Should owner (us) be placed on PM's insurance and vice-versa?
   

Thanks in advance for any advice or guidance!

[Gil Wildridge]

I'm not a lawyer and would ask a lawyer to draft up an alternative agreement that both parties can be satisfied with honestly. I also don't have the text of the management agreement in front of me. I can't say for sure if what you've mentioned here is standard, but I can say this:

The indemnification clause is pretty similar to the one in our management agreement, however ours includes an exception for negligence of any kind. Adding the PM to a liability insurance policy is pretty standard and doesn't mean that PM companies don't carry their own insurance if you wanted to negotiate that they carry the risk entirely via their insurance. That might be possible, but again speak to your lawyer on how to do that. Both parties need to be insured, however, and honestly that's probably not a huge concern. I have never had a situation where it's come up with a client except for one case where a tenant drove a car into a building and one of us was minorly injured on site. But that wasn't a PM's gross negligence kind of situation. 

I would say that the liability disclaimer seems way too broad. We have a liability clause where we state that the PM specifically assumes no liability for issues not disclosed to us, anything the previous management company might have screwed up, laws violated or permits not obtained during construction we were not a part of, or tenant defaults (as in we won't pay to make up for a tenant not paying rent). 

But not being responsible for any damage to property or personal belongings seems wild to me. I'm not sure that would hold up in court honestly. Yes insurance would likely pay for accidental damage for some reason, but the idea that I could just punch a hole in the wall and not be liable is crazy. In fact, our agreement has a section in it that forbids us from making any alterations to the building without the owner's written permission, and I'd recommend that if it isn't in the agreement already.

As far as red flags:

OWNER'S RIGHT TO AUDIT. That is an absolute must. It might be called something different but absolutely make sure you have the right to audit the books relating to your properties at any time. It's reasonable that if there are costs associated with that you would pay part or all of those, but if there is no right to audit you should walk away, full stop.

REIMBURSABLE EXPENSES. These should only be for things like certified mail and if the PM has to travel for a court case for some reason. Make sure there's nothing crazy in there, like covering any professional conferences or anything not related to the management of your property. This might be standard and unchanged since the PM company signed a big client where they actually do a lot of traveling for or something, so make sure to check that. This doesn't count operating expenses for keeping the building running, which should just come out of a specific budget set aside for that.

BUILDING COMPLIANCE AND CODES/ORDINANCES. Make sure that the PM is required to notify you promptly of anything not up to code or any interactions with an inspector where the inspector says something needs to be fixed. Should be within x hours (24 for example) and in writing (email OK). As the owner you are responsible for keeping your building up to code but what happens a lot of time with PMs is they don't say something promptly enough or they don't communicate that the repairs they're requesting are specifically for code issues, so just have something in place to clean up any misunderstanding. 

REPORTS. Make sure it is written in the agreement that the PM must send you certain reports every month by a certain date (we have it as the 15th and try to keep it at that date for simplicity but it can be the 10th or another date that works). Those should include at least a rent roll, occupancy/delinquency, a P&L, and a report on cash balances and reserves. This is another major red flag if absent; if this isn't there, the company is hiding information from its clients and that is absolutely not a good sign. So if there's no requirement for the company to provide you with operational reports on a monthly basis, walk away. And you can ask if they'd have a problem sending you reports when you ask for them. I used to have one owner who asked for reports more often than most people shower, but as long as you're not asking for new reports when nothing has changed, a PM should never have a problem sending those to you.

EVICTION COSTS. This is less a red flag and more a leverage point, but see if you can't get the PM company to give you a flat cost per eviction. It's not always possible, but the idea is that they should be efficient enough that there shouldn't be surprises with evictions. In some markets in some states where working people are just struggling to get by, it might not always be a flat cost, but see if you can get the company to eat a flat fee. If you can't, see if you can get a report specifically on what it's costing to evict tenants. That they should have no problem putting together, even if it's a custom thing.

WORKER'S COMPENSATION. Make sure your LLC/business/self depending on what your lawyer says is insured as an alternate under the management company's worker's compensation just in case. I can't promise it works that way in California though. As to being on each other's insurance, that seems like an industry standard but within reason. It's hard to say more without the text.

There are likely other things, but those are what I as a non-attorney layperson and PM can recommend. Definitely though do not allow a PM to get away with not being liable for their own damage to the property in such broad terms. A PM is supposed to be an expert in the buildings they manage, and while things happen, paying for their on-the-job training is not the best thing for your portfolio.