What to look out for in property management agreements in the UK and Europe

Commercial landlords with multiple residential or commercial properties (or both) often appoint a third-party property management company, a managing agent, to manage their portfolio. The scope of the managing agent's role can vary widely and will be documented in a property management agreement (PMA) that sets out the basis on which services will be provided in respect of the buildings and their tenants.

Given the nature of the services that may be provided, the applicable regulatory framework and – crucially – the (often significant) amount of data and technology that managing agents will control or have access to, there are some critical issues that need to be addressed in these types of contract.

Scope of services and agent's authority

More than in many other agreements for the supply of services, the scope of the services and the property manager's authority have a significant bearing on the legal provisions that need to be incorporated into property management agreements. For example, depending on the nature of the engagement, the managing agent may interact extensively with tenants, including for the purposes of rent collection or write offs, entering into leases, building management and security, and health and safety compliance. As such, it is critical that the extent to which the managing agent can act for or on behalf of the property owner is clearly defined. It would be typical to call out activities that the managing agent is – or is not – authorised to carry out on behalf of the owner, as well as any applicable financial thresholds with which the managing agent must comply.

Data protection

Where the managing agent's authority extends to interactions with tenants – for example, in connection with lease renewals or rent collection –  it will likely have access to significant amounts of personal data about those tenants. In that case, the PMA will need to contain obligations governing the use of personal data and, in the case of a controller to processor relationship, to ensure compliance with the General Data Protection Regulation (GDPR).

This will require a detailed understanding of the way in which data will be collected (and by which party) and how it will be used, as well as whether the data will be shared between the parties or transferred overseas. The analysis of the ways in which the data will be used will determine the data processing provisions that need to be included. This issue is often overlooked or is not given the considerable attention it deserves. A failure to include the relevant provisions could expose the parties to significant reputational damage and/or regulatory enforcement action.

Data, compliance and sustainability

There are increasing regulations and penalties related to building safety and sustainability; for example, the UK's Sustainability Disclosure Requirements and European Sustainable Finance Disclosure Regulations. Data will play a key role in demonstrating compliance, so building owners must ensure that PMAs allow for the collection of relevant data for that purpose.

There are also increasingly frequent instances of "green" leases that aim to promote sustainable practices and reduce a building's environmental impact. They typically require tenants to share data about energy use, so the scope of services provided by the managing agent must include the collection of this data and rights for the building owner to access it, especially if the supply is contracted directly to the tenant.

Green leases also place restrictions on alterations to the building that may harm its energy performance or sustainability. Regulators are cracking down on "greenwashing", so building owners who make "sustainable" claims will need to have appropriate policies in place to avoid potential fines and reputational damage. Property managers will likely be responsible for policing those policies, so appropriate obligations must be included in the scope of services; for example, checking the tenant fit-out to ensure compliance with sustainability requirements.

Statutory compliance

Provisions around statutory compliance more generally are another aspect that may need greater thought than was perhaps given in the past, with the increasing regulatory burden on building owners and managing agents, particularly with the coming into force of the Building Safety Act 2022. Parties should ensure they are clear on what their obligations are and provide for them in the contract to avoid disputes further down the line.

Property management tech

Property managers are increasingly deploying tech (for example, tenant engagement and digital concierge apps) to support the delivery of their property management services. In some cases, that technology is procured directly by the managing agent (sometimes on behalf of the owner) and in other cases it is procured by the owner for use by the managing agent. It will be critical to ensure that the functionality of the tech is appropriate to facilitate the delivery of the relevant property management services. And, as under the property management agreement itself, if any personal data will be processed via that technology, the owner and managing agent will need to ensure that the tech vendor is subject to appropriate data protection and data security obligations. Even where the owner is not party to the agreement related to the technology, it will (working with its managing agent) want to ensure those terms are appropriate and afford adequate protection for the owner, its reputation and its data.

Tenure considerations

The tenure mix at a property needs to be considered carefully, as there are different statutory obligations a building owner will need to comply with depending on whether the lettings are residential or commercial, on long or short leases.

Where a property comprises flats that are sold off on long leases, there are various statutory provisions around the collection of service charges and ground rent, for example. Ensuring the managing agent complies with the specific lease terms and statutory obligations is key and parties will want to make sure that this has been covered off in the PMA. Where the flats are used for short-term rentals, there are a myriad of regulatory requirements, such as checking the immigration status of occupiers, that need to be covered with provisions for outsourcing where applicable.

Liability caps

Market practice in respect of liability caps is less well-established in property management agreements than under many other supply of services contracts. For example:

• Parties often agree to indemnities or uncapped liabilities that would typically not be found in other commercial agreements. In particular, it would generally be unusual to see indemnities or uncapped liability for any material breach of the agreement. Instead, these tend to be limited to specific risks, such as third-party intellectual property infringement or breaches of applicable law and confidentiality obligations.
• PMAs often include uncapped liability for breaches of data protection law or contractual obligations. Since the introduction of GDPR, uncapped liability for such breaches is less common, given that the potential exposure and regulatory sanctions are so much more onerous than under the previous regime. As such, it would be far more common for those liabilities to be subject to a separate (typically higher) liability cap.
• Property managers' liability caps are often hotly negotiated, for good reason. The value of the fees a property manager receives under a PMA tends to be quite low compared to the potential amount of damage they can cause a landlord, for example if the managing agent causes significant damage to the building or portfolio in respect of which it is providing services. On the other hand, property managers typically work to tight profit margins and so are generally reluctant to accept higher liability caps.

Ultimately, liability caps are commercial decisions for the parties. However, regard should be had to the type and extent of loss and damage that may result from a breach, the value of the agreement, the insurance cover available to either party and the extent to which it is reasonable for either party to bear certain risks. This will clearly be linked to the scope of the services that the managing agent is providing and the extent to which it could cause harm in the event of a breach of contract or defective performance.

Energy and decarbonisation

The increasing amount of tech and energy consumption that logistics require – set against the drive to decarbonise – is creating particular pressures. Building owners are increasingly providing additional services related to energy generation, storage and technology to create a long-term relationship with occupiers. Some of these activities may be regulated or highly technical, so the property manager's responsibilities should be clearly defined, including obligations to cooperate with the building owner's other technical contractors. As buildings become more sophisticated, management risks grow, so this should be factored into any liability caps and professional indemnity insurance requirements imposed on the property manager.

Logistics assets are often located near residential communities, which can create disruption from traffic, noise and pollution. Building owners increasingly recognise the need to benefit local communities; for example, by providing biodiversity space, community gardens, electric vehicle charging points and more. These community initiatives need to be factored into the scope of services (and reflected in the building owner's public liability insurance cover), as they may require management outside usual business hours.

Osborne Clarke comment

Given the growing complexity in the nature of the relationships between owners and their managing agents, the terms of PMAs require careful consideration and tailoring for the circumstances and specific arrangement. These include issues relating to technology and the use of data, as well as building safety and broader regulatory considerations. The parties will also need to consider how best to establish the property ownership structure and the relationship between owner and managing agent, and there may well be other legal issues that require additional thought, notably the application of TUPE. We will cover those topics in further publications but if you have any queries about them or the issues raised in this note, please contact any of the authors.