EPMEPM: Best Practice & Legislation

The Risky Business of Property Management

We’ve all heard the perilous tales of agents who faced litigation with detrimental outcomes to their livelihood and their reputation, but there are some important steps you can take to minimise legal risks in your Property Management department. Story by Lisa Jemmeson.

In today’s litigious society, agents who fail to meet their contractual obligations under the terms of their management agency agreements, expose themselves to costly litigation, or at the least very time consuming actions through the Consumer Trader and Tenancy Tribunal (CTTT) or state/territory equivalent.

Litigation is rife. More and more landlords are litigating against agents for failing to perform their contractual obligations even though each month a management fee is charged. There are five primary considerations:

  1. The legal costs defending an action
  2. Time spent away from core activities whilst you are defending the agency
  3. The effect on professional indemnity insurance
  4. The agency’s reputation in your local community
  5. Complaints made to the industry regulator

The legal costs. Hmmm, what can I say here other than “money well spent”… but you get my drift, it is an additional impost on the business to pay for legal advice.

Agents are required to hold professional indemnity insurance. Insurance policies impose a positive duty of disclosure. This duty requires an agent to report to the insurer any claims made, or actions commenced against the agency. When the agency is frequently advising their insurer about potential claims, it may affect the agency’s ability to either obtain future insurance or have the agency assessed as a higher risk, which would increase the yearly premium.

In a recent matter commenced through the NSW Consumer Trader and Tenancy Tribunal a landlord sought an order of $3,153.30 as compensation for the failure of the managing agent to undertake their contractual responsibilities.

In this case the landlord claimed, that the agent had failed to undertake quarterly inspections of the premises, failed to maintain the premises at the market rent, furthermore, that the agent had not advised the Landlord about a water leak at the property.

At the hearing evidence was produced regarding market rent. Evidence was produced by the agent that at the point of sale, the landlord had a building report conducted. This building report addressed the water damage, so essentially the landlord was on notice of the water damage. The tribunal accepted the agent’s evidence in these respects. This left one remaining issue, the contractual obligation to inspect the premises every three months. The agent had undertaken two inspections in the 21 month period that the property was under management. However, the landlord maintained that agency had contracted to undertake quarterly inspections.

Agents should be mindful of the risks associated with making representations to a landlord about levels of service, if the agency does not genuinely intend to offer that service or they fail to maintain that same level of service during the agreement.

The underlying issue here is that at some stage a representation is made to the landlord that the agency will inspect the property every three months, the maximum prescribed under the Residential Tenancies Act. Common situations where these representations are made to landlord clients include; the salesperson makes the representation when they sell the property to an investor, or, the property manager makes the representation. It may be that at the time the representation was made, the agency had a small management portfolio and it was possible back then to do quarterly inspections, or, the representation may be contained in the likes of a presentation folder given to landlords when the agency was pitching for business.

So what should a property manager do to minimise the risk to the agency if you have a contractual obligation on foot to conduct quarterly inspections? Well a good place to start is to communicate with your landlord client. The agency needs to communicate to the landlord that it would be appropriate in the circumstances to change the inspections to bi-annual or annual, provide your reasons for the change to the frequency of the inspections then, here is the clincher, get their approval before you cease undertaking any of your contractual obligations.

Consider the amount of time defending these types of matters. It is not just the time you spend in front of the member, rather it is leading up to the hearing, collecting evidence, exchanging documents, obtaining legal advice, compulsory mediation and then the actual hearing. Now work out the property manager’s time, the licensee in charge’s time, plus anyone else who is involved in the office. It all adds up and it is non dollar productive time that is drawing you away from your core business, which is selling and managing property.

Then there is the situation whereby a complaint is made to your local regulatory authority which may elect to investigate the matter. This may mean that the agency is paid a visit from the regulatory authority to investigate the complaint and have a look around whilst they are in your office.

While everything is going smoothly with a tenancy, it is our experience that landlords do not start litigating, they will generally address concerns at the agency level to the property manager or the licensee in charge. When landlords suffer a loss or damage, they look for someone to blame and pay, and that someone is often the real estate agent. When things go wrong, the landlord may start scrutinising the performance, or lack thereof, of the estate agency entrusted with the management of their property investment.

Going back to the case mentioned earlier, the NSW CTTT found for the landlord and ordered the agent to pay to the landlord the sum of $800 as compensation. Member Lennon said “I do accept that the respondent did fail to undertake the three monthly periodic inspections as contractually required and therefore compensation is payable to the applicant in that regard. The applicant paid a management fee and one of the services to be provided by the respondent was the regular inspections of the property with appropriate reports to the applicant.”

To minimise risks to your property management department and maintain a good reputation in your local community as an ethical and professional agency, here are some quick tips to keep on track:

  1. Be mindful of the types of representations you make to prospective and actual clients, verbally, in marketing or promotional material and in agency agreements about service levels.
  2. Have a business plan in the property management department. Use KPIs to ensure you have enough staff servicing the properties under management. If you plan to grow the portfolio by 100 managements in the next twelve months, consider whether you will be able to maintain the level of service your landlords are currently receiving and if not, consider employing more staff.
  3. Finally, communicate with your clients regularly, keep them informed about what you are doing, why you are doing it and make sure they are happy with the overall management your agency is providing.

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