Black’s Law Dictionary basically defines ” Fiduciary” is a term derived from Roman law, which means, as a noun, a person or legal entity, holding the character of a trustee, concerning the trust and confidence involved as scrupulous good-faith and candor towards another’s affairs. A fiduciary also has duties described as involving good-faith, trust, special confidence, and candor toward another’s interests. Typical fiduciary duties are imposed on and include such relationships as executor, administrator, trustee, real estate agents, attorneys, and, of course, property managers. A person or company manages money or property, i.e., the manager, for other people must exercise a standard of care in that the interests of the money or property owners are placed above and beyond those of the property manager. In some states, like California, a property manager is statutorily defined as an individual or entity with the same duties as a trustee, i.e., a fiduciary.
The way I always explain it to clients, using my hands to demonstrate, is that my interests end at the top of my head (one hand at the crown of my head), but the client’s interest rise above and beyond my head and take precedent over my own (holding both of my hands above my head in a clasped position). Most people understand the gesture and comprehend that my interests are much lower than those of the clients in our relationship as a property manager and a lawyer.
Common Fiduciary Duties Owed by Property Managers
Since a property manager is a fiduciary, they must act with the highest good faith and fair dealing concerning the owner’s asset, disclose all material information that may affect the owner’s decision-making concerning that asset, and can’t in any way, shape, or form act adversely to the owner’s interests. This may sound easy, but some situations arise that tempt even the best property managers to sometimes not act in their client’s best interests to suit their own self-interested convenience. Unfortunate as that may sound, it happens regularly.
The following is a shortlist of common sense duties, rights, and wrongs when a fiduciary relationship exists between a manager and an owner.
A manager should have a written agreement with their clients and may even be legally entitled to profit from services they provide to the owner. However, a manager may not secretly profit from this relationship. For example, a manager may charge an eight percent markup on vendors’ materials and services to the owner’s property. This is legal and acceptable, provided that the agreement between the parties is in concert with the markup. If this markup was not in agreement, then the law requires a property manager to disgorge or relinquish any secret profits derived from the relationship. There are so many possible examples of this. Still, a common one is a manager making a percentage profit on work and services provided to their clients but not disclosed, like a new roof, bathroom remodel, repairs to interior walls, etc.
A property manager is required to disclose any rental offers received along with documentation of those offers such that the property owner is well informed about all potential tenants. It is easy for a manager to fail to provide names of potential tenants that don’t necessarily qualify or are poor credit risks as this would involve more work for the manager.
A property manager is statutorily required to act for the asset owner’s sole benefit in matters that evolve from the relationship, whether or not those matters are seemingly insignificant or they are significantly material.
Information about a tenant who falls behind on their rent must be immediately communicated to the asset owner. If your management company uses a software system that allows an “Owner Portal,” this information is readily available to see, and anytime one has access to the internet.
If a manager receives information that a tenant has caused damage to a property, the owner should be notified as soon as possible. It is easy for the manager to not disclose this information for fear of confronting the disgruntled owner or just not wanting to deal with the conflict associated with that situation.
Trust Account Duties
A trust account that holds deposits and rent monies for the asset owner’s benefit is a common ground for fiduciary duty breaches. The law precludes a manager from the client trust funds’ commingling with the broker or manager owned funds.
Additionally, it is a breach of fiduciary duty to make mortgage payments on broker owned properties from a trust account even if the broker quickly reimburses the account for the payments. The statutory prohibition against conducting personal business from trust accounts is strictly enforced.
Surprisingly another common example of commingling of funds occurs when the property management fee is not timely withdrawn from the trust account. Sometimes a delay of twenty-five (25) days could be considered commingling.
Trust funds must also be deposited with expediency. Some states require that deposits must be deposited by no later than the next business day.
Commingling of Trust Funds is a Serious Offense
Commingling of trust and broker funds is such a serious offense; it can be grounds for revocation or suspension of a broker’s license in most states. Thus, this sole issue must be of paramount importance to a manager and property management company.
Conclusion
Managers owe fiduciary duties to their clients – this is the minimum standard owed. There are many ways to breach these duties, which form the basis for the relationship between the manager and the client. It is important to hire a property manager who understands and abides by the statutory framework, understands fully what a fiduciary duty entails, and can both clearly communicate those duties and at the same time live up to them. Owners need to make sure they hire property managers who abide by these minimum standards.
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