LEASE AGREEMENT REFERENCE GUIDE 1100: DRAFTING THE PRO-OWNER MANAGEMENT AND LEASING AGREEMENT $49.95
DRAFTING THE PRO-OWNER MANAGEMENT AGREEMENT
This LARG looks at the negotiation and drafting of the pro-owner management agreement for a commercial property. The first section lists several business points the owner should consider before and during the negotiations. The Lease Clause Critique contains extended excerpts with comment from a management agreement favorable to the owner. The agreement gives the manager the right to manage the property exclusively, and to receive leasing commissions under certain circumstances.
Dialing the Right Components into the Management Agreement from the Owner's Point of View
Negotiating a management agreement for a commercial property is serious business for the property's owner. Good building management is crucial to tenant retention and to long term profitability. How can the owner be sure that the manager will take good care of the property? The owner can start by negotiating a thorough management agreement, which adequately covers the specific business issues critical to the property. There are several of these, but the ones that almost always pop up during negotiations are:
Term and Termination Rights. What is a reasonable term for the agreement? This obviously depends upon the track record and reputation of the management firm. If the owner has done business with the manager in the past, the owner will have a clear idea of the manager's abilities to manage and lease commercial space. If the parties agree upon a term spanning several years, the owner may wish to negotiate termination rights in the agreement if things don't go well.
Designated Personnel. Is the owner relying upon a specific person or principal of the management company to oversee the management of the property personally? If so, the owner may wish to specify in the agreement that that principal will actively manage the property. If the designated principal departs from the firm, the owner would benefit from approval rights over the new manager, and rights of termination if the owner is not satisfied with the replacement.
Leasing versus Management. Does the agreement include leasing the space as well as managing it? If it does, what if the leasing part doesn't work? The owner should consider whether language giving it the right to hire a different third party leasing firm during the term of the management agreement--while retaining the existing manager--is appropriate.
Compensation Details. What is the business deal concerning compensation for the management function? While percentage deals based upon the minimum rent collected from tenants are common in management agreements (e.g., 2.5% of minimum rentals), there is no reason the landlord can't consider alternate arrangements such as fixed fees, or fixed fees plus bonus compensation if certain operating targets are met.
Renewal and Expansion Commissions. Even if the management firm is not primarily responsible for marketing space to new tenants, it may make sense for the owner to pay some leasing commissions to the manager for renewals and expansions of existing tenants. Keeping existing tenants happy and accommodating them with additional space when they grow is a fundamental business objective of the owner--the owner may be wise to pay extra when things go well. The owner may want to consider a two tiered arrangement--one commission level for renewal and expansion options negotiated prior to the commencement of the management agreement, and another level for renewals and expansions negotiated by the manager itself.
Commission Exclusions for Owner Deals. Many owners have several properties in markets across the country. What if the owner is able to take one of its existing tenants in, say, Los Angeles, and make a deal with the same company to lease space in the owner's building in Denver? Should the manager get a commission for this kind of deal when it was the owner who did all the work? Maybe not. It may make sense for the owner to bargain to exclude such deals from the compensation arrangement in the agreement.
Reimbursable Expenses. What expenses must the owner reimburse the manager for under the agreement? Direct and indirect costs of employees managing and leasing the property? Telephone, fax, and routine office expense for the on-site management office? If the manager is also responsible for leasing new space, and receives a leasing commission for new deals, should the manager bear the office expenses allocable to the leasing function? Do any on-site office expenses relate to other properties or other clients served by the manager? All these are factors that the owner should consider when the agreement is drafted.
Exclusivity. Can the manager have other clients? If so, can the manager use the on-site management office to service them? This obviously depends upon the size of the management firm, and its existing management base. Does exclusivity apply to both the management and leasing functions for the property?
On-site Management Office. Is the manager entitled to a rent free management office located upon the property? Rent free deals are common, because if the manager has to pay rent, the rent will probably be an expense reimbursable under the agreement anyway. Is the location or relocation of the management office subject to the owner's approval?