When property owners outsource the management of their rental properties to a professional company, they sign a "Management Agreement. This is an important contract that clearly defines the roles, scope of work, and cost burdens of both the owner and the management company in the rental management of the property. If the contract is concluded without a full understanding of its contents, it may lead to problems later on. This article provides a comprehensive explanation of points to be confirmed before entering into a management contract, from its purpose and importance to the scope of work, fees, cancellation conditions, division of responsibilities, examples of problems, and how to select a reliable management company. We hope you will find this information useful so that owners who are about to enter into a contract with a management company can entrust it with peace of mind.
The purpose of a management contract is for the property owner to entrust the management of the rental property to a professional management company, and for both parties to clearly stipulate the contents and conditions of the contract. By clearly stating "who is responsible for what tasks" in the contract, it is possible to prevent misunderstandings about the division of roles and realize stable rental management. Management companies are also referred to as partners in rental management, helping to resolve day-to-day issues such as vacancy countermeasures, property management, and income/expense management. By entrusting the work to a professional, the owner's own workload is greatly reduced, and the owner can devote his or her time and effort to other important tasks.
The most important aspect is the prevention of problems. Since the actual management work is performed in accordance with the contents of the management consignment contract, a thorough understanding and agreement on the contents of the contract can prevent disputes at a later date. On the other hand, a lack of understanding of the contractual contents can lead to the risk of unexpected mistakes and losses. For example, in recent years, with the enforcement of the Rental Housing Management Business Law, management companies are required to provide a written explanation of important matters, such as business details and costs, prior to the conclusion of a contract. This system is designed to reduce discrepancies between the owner and the management company and to support sound rental management. The importance of the management contract is increasing due to these legal developments.
There is a wide range of services that can be outsourced to a management company, which can be broadly classified into two categories: "agent services for lease contracts" and "management of the property itself. The contract will determine the scope of work to be outsourced, and the wider the scope of outsourcing, the higher the management fee will generally be. The following are examples of major management tasks
Tenant Recruitment and Selection: Recruit new tenants, conduct advertising activities, respond to previews, and conduct tenant screening. Once a desired tenant is found, the manager also acts as an agent for the owner to sign a lease agreement.
General tenant relations: This includes handling tenant complaints, responding to various inquiries, handling neighborhood problems, etc. Some management companies provide a 24-hour emergency contact service.
Rent management (collection and arrearage reminders): Collecting monthly rent and common-area maintenance fees on behalf of tenants and reminding tenants when they are in arrears. Depending on the contract, this may include cooperation with the guarantor company and support for legal procedures in the event of nonpayment. However, since each company handles delinquency reminders differently, it is necessary to clarify in advance who is responsible for this and to what extent.
Building and facility maintenance: Daily management of the property, including periodic cleaning of common areas of the building, facility inspections, replenishment of consumable supplies, and handling of breakdowns. Arrangements can also be outsourced to specialized contractors for statutory inspections of elevators, water supply and drainage systems, fire equipment inspections, etc. We also arrange and attend to repair work as necessary.
Contract renewal and cancellation: We handle contract renewal procedures (e.g., exchange of renewal contracts, receipt of renewal fees, etc.) at the end of the tenancy period, as well as cancellation procedures upon receiving a request to vacate. In witnessing the move-out, we check the state of wear and tear in the room and determine the scope of restoration work.
Arrangement for restoration and remodeling: We arrange for restoration work and necessary remodeling after the tenant leaves. Generally, the cost of the work is borne by the owner, but depending on the contract, the management company may make arrangements on behalf of the owner and charge the owner for the work afterwards. In this case, there have been some cases reported that the cost is far from the market price and becomes expensive, resulting in a trouble. If you are unsure, it is a good idea to confirm the approximate cost in advance and include in the contract that the owner can arrange for the contractor himself/herself if necessary.
Income/expenses reporting and various procedures: This includes preparing monthly rent income/expenses reports, remitting money to the owner, and providing income calculation data at the end of the fiscal year. Administrative procedures related to the property (e.g., notification of fire plans, etc.) may also be handled on behalf of the owner.
The scope of work can be freely set according to the contract, but the important thing is to clarify what is entrusted to the owner and what is to be done by the owner himself/herself. If the owner lives nearby and is able to do only the cleaning himself, he may choose to partially outsource only the rent control and tenant relations. In this case, the management fee will be lower, but if you entrust a full package (from tenant recruitment to daily management and handling of cancellations), the fee will be higher. Recently, there is a choice between a "general management contract (i.e., management consignment contract)" and a "sublease contract" in which the management company leases the entire property and guarantees a certain amount of rent. In a sublease contract, the owner does not bear the risk of vacancy and receives a fixed monthly income. However, depending on the contract, there may be a clause that exempts the owner from paying rent for a certain period (exemption period) or that the owner bears all restoration costs when vacating the property. Since the terms and conditions of a sublease differ greatly from those of a regular management contract, it is especially important to check the details of the contract and to negotiate and confirm any points that are unclear before signing.
A management fee is an expense paid by the owner as compensation for outsourcing work to a management company. The general market rate is said to be around 5% of the monthly rent income. For example, for a property with a rent of 100,000 yen, the standard monthly fee is about 5,000 yen. However, this percentage will vary depending on the scope of work to be outsourced and the size and type of property. In some cases, when only a portion of the work is outsourced, the percentage can be as low as 3%. Conversely, when a wide range of work or extensive services are included, the percentage can be as high as 7-10%. Although this is a special case, there are cases where the fee exceeds 10% depending on the services provided, and in some sublease contracts, the actual fee may be equivalent to 15-20%.
It is also necessary to confirm how the commission is calculated. Most management companies use the formula "monthly rent x commission rate," but whether or not common service fees (management fees) are included differs from company to company. Generally, for office buildings, the commission rate is multiplied only by the rent portion, while for apartments and condominiums, the commission rate is multiplied by the rent plus common service fees in many cases. The owner's income will vary depending on whether or not the commission is also applied to common service fees, so be sure to confirm this before signing a contract.
The breakdown (service content) included in the management fee is also a point to check. Even if the commission is the same 5%, the range of services included in the commission varies from one management company to another. Usually, daily management services such as rent collection, complaint handling, and periodic inspections as mentioned above are included in the commission. On the other hand, it should be noted that the following services are generally charged separately.
Cost for recruiting new tenants: When a property becomes vacant, an advertising fee for recruiting new tenants and a brokerage fee (contingency fee) to a real estate brokerage firm will be charged. In many cases, the owner bears the cost of the brokerage fee, which is legally capped at one month's rent plus consumption tax (in some cases, the owner collects half a month's rent from both the tenant and the owner).
Commission at the time of contract renewal: When a tenant renews the contract, the management company may receive a percentage of the renewal fee as a commission if the management company handles the renewal procedures on behalf of the tenant. For example, it is up to the contract to determine what percentage of the one-month renewal fee the management company will take, so it is important to understand the agreement at the time of renewal.
Actual expenses for repairs, cleaning, etc.: The actual expenses for minor repairs on a daily basis and for cleaning when moving out will be charged as incurred. If the management company arranges for a contractor, it is a good idea to confirm in advance whether or not the contractor's estimate andfees will be added.
Other optional fees: Some services, such as 24-hour emergency response service, mailing costs for periodic reports, and rent guarantee options, may be treated as optional and require additional fees, depending on the company.
As mentioned above, it is important to clarify not only the "rate" of the management fee, but also how much it is in exchange for what. Before signing a contract, be sure to receive a detailed explanation of the breakdown of services included and not included in the commission. In particular, the cost of advertising when recruiting and thecost of dealing with delinquent payments are points that can easily cause trouble, so it is a good idea to ask for clarification in the contract or to confirm it in writing if it is unclear.
When concluding a management contract, it is necessary to confirm the contract term and cancellation conditions. Contract terms vary from one-year renewals to two-year contracts with automatic renewals, but generally, the contract will include provisions for early termination. For example, there are cases in which the contract stipulates clauses such as " If you wish to terminate the contract, you must give written notice at least X months in advance," or " If you terminate the contract for the owner's convenience within the contract period, you must pay X months' worth of management fees as a penalty fee. In fact, it is common to find provisions in the contracts of major management companies that allow for cancellation with "3 months' notice. Therefore, it is important to confirm how many months' notice is required for mid-term cancellation, and whether or not there is a penalty fee and the amount of the fee.
The following points should be kept in mind when cancelling a contract.
Cancellation procedure: Confirm the method of notification of intent to cancel (in writing or by e-mail, etc.), the destination of notification, and the procedure to be followed until the contract is terminated. In most cases, written notification is required, such as by content-certified mail, so be careful not to just verbally contact the company.
Observe the notice period: Know the starting date of the notice period specified in the contract (e.g., three months in advance), and work backwards to give notice of termination in a systematic manner. Cancellation less than the notice period may be subject to a penalty charge.
Penalty and cost burden: If there is a penalty clause as described above, you will be required to pay the prescribed fee at the time of termination. Generally, it is in the form of an amount equivalent to the last month's management fee orrent for XX months. However, it is difficult to change the clause after signing the contract unless you request it before signing the contract.
Treatment at expiration of the contract: Check whether the contract will be automatically renewed when the contract expires, or whether you will have to re-sign the contract. Note that in the case of automatic renewal, the contract will continue unless the owner gives an explicit notice of termination.
Impact on tenants: When terminating the management contract and changing to another company, arrangements must be made to inform the current tenants and ensure that the transfer of security deposits, keys, etc. will be carried out without problems. The contract itself for existing tenants will continue between the owner and the tenants after the cancellation, so be sure to notify the new management company of the change in contact information and to properly settle and transfer any money (security deposits and unearned rent) that the old management company kept with the new company.
Although it may be difficult to initiate a "termination" at the time of signing the contract, it is important for sound rental management to be able to smoothly terminate the contract in the event that you become dissatisfied with the management company. In order to avoid being stuck in a situation where you later feel that "the story is different," be sure to first thoroughly confirm the termination terms and conditions, and only sign a contract after you are satisfied with the terms and conditions.
In rental management, the owner and the management company each have their own roles and responsibilities. The key to preventing problems is to clarify the division of responsibilities and clearly state this in the contract.
The main responsibility of the management company is to carry out daily management based on the aforementioned scope of consignment. For example, if the management company is responsible for the initial response to rent arrearages (i.e., promptly issuing a demand for rent by phone or letter), it is obligated to do so appropriately, and if it receives a notice from a tenant that a facility is broken, it is obligated to take prompt action. It is also part of the owner's responsibility to ensure accurate accounting when remitting rent to the owner each month, and to provide management reports as necessary.
On the other hand, the owner's main responsibilities include measures to maintain the legality of the property and to bear the costs. The owner's scope of responsibility includes the cost of major repairs to the building and equipment as they deteriorate over time, purchasing disaster insurance, and filing and paying taxes on real estate income. The fact that the property is outsourced to a management company does not exempt the property owner from legal responsibilities (e.g., the obligation to provide a safe living environment for tenants). For example, if an accident occurs due to structural defects or deterioration of the building, the owner is basically held responsible. Therefore, the owner also has responsibilities to fulfill, such as promptly making repairs when the management company receives a report of a serious defect.
It is important that the scope of responsibility for both parties be agreed upon in advance and clearly stated in the contract. If the responsibilities are unclear, discrepancies may arise, such as "I thought the management company would take care of this," or "No, I thought it was the owner's responsibility since it is not in the contract. In fact, there have been cases in which both parties mistakenly believed that they were in charge of responding to rent delinquencies, and when the delinquency occurred, there was a delay in responding and a dispute ensued. To avoid such a situation, include as many details as possible in the contract and avoid making verbal promises. As mentioned in the previous section, in the end, the contents of the contract will be the basis for judgment in the event of trouble. In other words, it is highly likely that you will not be able to claim anything that is not written in the contract. It is important to clearly state important matters in the contract, and to check and correct any ambiguities before signing and sealing the contract.
In addition, due to legal revisions in 2021 (enforcement of the Rental Housing Management Business Law), it is now mandatory for the management company to provide a written explanation of important matters to the owner before entering into a management contract. This document includes information such as the party with whom the contract is concluded, the period of validity, the content and implementation method of the management services, matters related to remuneration (management fees), and matters related to the cancellation of the contract. Although the explanation of important matters itself can be provided by a non-qualified person, the fact that the explanation is provided in advance in accordance with the law means that it is that important to understand the contents of the contract. Please do not hesitate to ask questions if anything is unclear. If you feel that the division of responsibilities is lacking, you should be prepared to ask for additional information.
This section introduces examples of actual problems that tend to occur in management contracts and checkpoints that can be used as preventive measures. By checking these points before signing a contract, many problems can be prevented.
Misconceptions about how to respond to rent arrears: Because the contract did not specify what to do in the event of rent arrears, the owner assumed that themanagementcompany would remind the owner, while the management company thought that the owner himself would be responsible for reminding the owner. Due to this discrepancy, the owner did not receive reminders and the delinquency became prolonged, resulting in a breakdown of the relationship of trust between the two parties.
Trouble over restoration costs: This is a case in which the owner mistrusted the management company because the repair costs presented were higher than the market rate after the owner had left the restoration work to the management company. The owner became distrustful because he felt the repair cost was higher than the market price.
Management contract cancellation problem: There was a case in which the owner was dissatisfied with the management company's response and offered to cancel the contract, but was charged a penalty of three months' rent according to the contract. This is a problem that is particularly likely to occur when considering switching to another company because the vacancy is not filled or because it is difficult to contact the company.
Response outside the scope of services: This is a case in which a contract was signed because of low fees, but upon closer inspection, there are many tasks that are not handled by the management company. For example, the contract did not include nighttime emergency response or periodic patrols, and the owner ended up having to handle the situation himself.
Distrust due to insufficient reporting: In this case, the management company tended to delay reporting, and the tenant did not notice the problem until he or she directly complained about it. The frequency of business reports stipulated in the contract was not adhered to, and the owner was unable to grasp the status of the property, which became a problem.
Checks and communication before signing a contract are essential to prevent problems such as those described above. Check the following points.
Read the contract and the important matters description carefully: It may sound obvious, but the first step is to understand all the clauses in the contract. In particular, carefully check the scope of work (what is entrusted to you), fees and cost sharing, contract period and cancellation conditions, and policies on emergency response and handling delinquent payments. If there are any unclear statements or questions, ask the management company on the spot, and if necessary, have them add to or revise the contract. Oral agreements that are not put in writing should be avoided, as they cannot be proven later.
Imagine the workflow in concrete terms: Assuming various kinds of problems, simulate in concrete terms "who will do what in the event of a ________ situation". For example, "What if a tenant reports a water leak?" What if the tenant is in arrears for ____ days? If it is not clear, ask yourself, "In this case, what would your company do? If it is unclear, ask, "Will your company take care of this situation?" If so, have it clearly stated in the contract.
Determine the approval process when expenses are incurred: If there are expenses to be borne by the owner, such as repair costs, it is important to include in the contract a requirement to report estimates and obtain approval from the owner in advance. If you stipulate that expenses over a certain amount require the owner's prior approval, you can avoid a situation where the owner is charged a high amount of money without knowing it.
Negotiate termination terms: Clauses regarding termination do not have to follow the template. If there are long-term terms or excessive penalties that are unfavorable to the owner, consider negotiating before signing the contract to see if the terms can be relaxed. A good management company may be flexible and accommodating to the owner's concerns. If you are not satisfied with the terms, you may need to make the decision to forgo the contract.
Confirm thecommunication system: Confirm in advance the communication system, including emergency contact numbers, how to contact the person in charge, and the frequency of reporting. This is an operational arrangement separate from the contract, but it is important for building a relationship of trust. Ask whether the company can respond to emergencies at night or on holidays, and whether there is a backup system in place in the absence of the person in charge.
If you keep the above checkpoints in mind, you can avoid most problems in advance. In the unlikely event that you feel that something is not as it should be after signing the contract, you will be able to calmly deal with the situation based on the contract.
Finally, we will explain the key points for choosing a trustworthy management company. A good management company will be a good partner for the owner and contribute greatly to the success of rental management. The following points should be considered when selecting a management company.
Compare and consider multiple companies: Since each management company offers different services, fees, and areas of expertise, it is important to compare proposals from multiple companies instead of focusing on just one. In fact, some experts point out that "comparing and reviewing multiple companies is essential. Local companies and large national chains each have their own advantages and disadvantages, so it is advisable to talk to at least two or three companies.
Registration as a rental housing management company: Since the law was revised in 2021, companies that manage more than a certain size of units are required to register with the Minister of Land, Infrastructure, Transport and Tourism (Rental Housing Management Company Registration System). From the standpoint of reliability, it is a good idea to use this registration as a guideline. If the company is registered, it is obligated to explain important matters before signing a contract, and this is proof that the company operates under certain rules.
Confirmation of track record and areas of expertise: Check to see how much experience the potential management company has and what types of properties they specialize in. For example, some companies specialize in the management of single apartments, while others can take care of even a single condominium unit. You can rest assured that the company has a track record that matches your property. It is also a good idea to gather information on occupancy rates (ability to prevent vacancies) and reputation for handling complaints to the extent possible. Refer to any referrals from acquaintances or word-of-mouth from fellow owners.
The politeness of the proposal: Whether the company answers our questions in detail at the initial consultation and estimate proposal stage and whether it explains the details of the contract is also an important factor in determining the attitude of the company. If the company is sincere, they will not hide any disadvantages and will show you a model of the contract in advance. Conversely, be wary of a company that dodges the obvious or tries to reassure you by saying, "Don't worry," without concrete plans.
Do not choose a company solely on the basis of low fees: Although fees are a concern, be wary of companies that charge extremely low management fees. The low commission fee may be accompanied by limited services, or may result in unexpected burdens on the owner. In fact, "it is important to check not only the low commission but also the scope of management services. Cheap contracts may limit the scope of services that can be outsourced, or may place unforeseen responsibilities on the owner. Be sure to select a company that offers services at a reasonable market rate. If you compare proposals from several companies, you will be more likely to notice terms that are unnaturally too cheap.
Flexibility of contract terms: Also look at the contract terms (e.g., cancellation clauses, commission rates, etc.) offered by the potential management company. If the terms are less favorable than those of other companies, you may become dissatisfied after signing the contract. Flexibility in negotiating terms and conditions is also a key factor in determining whether a company is trustworthy.
Based on the above points, select a management company based on a comprehensive judgment. Since a management company is a long-term partner, the secret to success is to focus on trust and compatibility rather than short-term gain or loss. Before signing a contract, ask questions and make requests, even if they are trivial, and see how the company responds to them. Please compare and consider carefully so that you can sign a contract with a management company that you can trust with your valuable real estate.
A management consignment contract is a very important contract for property owners, as it is the foundation of rental management. By understanding the purpose and importance of the contract before signing it, and by thoroughly confirming the scope of work to be outsourced, themarket rate and breakdown of fees, cancellation conditions, and the division of responsibilities between the two parties, you can greatly reduce problems after signing the contract. Another secret to stable management is to learn from actual cases, keep in mind checkpoints to prevent common problems, and select a trustworthy management company.
It is important to clearly state every detail in the contract, and be sure to clear up any points that are unclear before signing. Trouble can be avoided by checking the contract. To maximize the benefits of entrusting your property to a professional management company, please refer to the points explained in this article and conclude a management contract that you are satisfied with. We hope that all owners who are about to entrust their properties to a rental management company will be able to do so with peace of mind, and that their rental management will be better for it.