Managed property developments have become popular for property buyers as they often include useful management services such as security, gardening, pool keeping etc. which allow buyers to fully enjoy their property.
Whenever buying a unit in a managed property development, a buyer should not only but also turn its attention to the management agreements to be executed by the manager of a project and its buyers. Careful review of such management agreements is unfortuantely often disregarded as most buyers usually focus on the sale and purchase or lease agreements giving onwership or lease rights to the chosen unit. Unfortuantely, this mistake my have serious impact on an investment as proper management and transparency regarding use of occuring management fees is of highest importance not only in regard to succesful operation of a project but also when it comes to resale of a property.
Typically, a management agreement should include a provision clearly describing the services which shall provided by the management of a project. Furthermore, not only the services itself but also the scope of such services which are included should be outlined. This should help to prevent a dispute between buyers and the management at later date.
In addition, a sound management agreement should provide transparent fee structure applying to the management fees payable for the management of a project including the servies to be provided. Typically, each buyer has to pay a proportionate split of the total expense calculated on a pro-ratio sqm unit basis. In this regard, it should also be clarfied that the manager must have a right to reasonably increase the management fees in order to ensure that suffient funds are available required to cope with increasing costs for the services to be provided.
Furthermore, a management agreement should include provisions giving the manager the right to collect funds to be paid into a sinking fund. Such sinking fund is required to provide the management with sufficient monies which shall be exclusively used to pay for major repair works and upkeep of the common areas in a development. In this context buyers need to understand that maintenance of such fund is necessary to ensure long term enjoyment of a project. In addtion, it also needs to be considered that a unit which forms part of a poorly managed project with neglected common areas hardly qualifies for a resale. However, transperency regarding use of funds paid into a sinking fund is of highest importance and therefore the management agreement should oblige the management to maintain accounts and keep records in accordance with generally accepted audit principles and provide annual statements to the buyers documenting actual expenses and use of funds paid by the buyers.
Finally, a management agreement should provide a strong instrument to the buyers in case the management is in material breach of contract. Such instrument should be part of a carefully drafted default provision, whereunder the buyers should have a right to terminate the appointed management of a project and/or appoint a third party management company to provide the required services.
In summary, whenever investing in a managed property development, a buyer should carefully review all provided sales and marketing documentation including all agreements to be signed, whereby diligent perusal of the management agreements is highly recommended in order to minimize potential risks and susequent damages occuring from poor management of a project.
This article is written by International Law Office Patong Beach Co., Ltd., a Phuket based law firm. For enquiries, please contact Michael Greth, Consulant, by email (michael@ilo-phuket.com) or phone (+66-(0) 76-222 191-5).
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