Court holds that property manager breached its own contract

A Cleveland Heights property manager sued its client to recover management fees but the strategy backfired. Municipal Court Magistrate Gary Benjamin found that the property manager had breached its own property management agreement and rejected the company’s claim for compensation. Instead, the magistrate awarded damages to the property owner on his counterclaim.

The property manager, Transnational Property Investments, manages more than 350 properties out of its office on Fairmount Boulevard. A July 2016 property management agreement provided that Transnational would rent and manage a duplex in Cleveland owned by Rodolfo Encinas, a California resident. The agreement was terminated in October 2017 after both units had been vacant for ten months.

Transnational sued the owner in Cleveland Heights Small Claims Court for $2,230 in management fees and expenses. The owner denied that Transnational’s claims were valid, and argued that Transnational had forfeited any claim because the property manager had breached its own contract.  The owner asserted as a counterclaim that Transnational’s violations caused damages which Transnational should be ordered to pay to the owner. The hotly disputed lawsuit was remarkable for a small claims case, in that the trial persisted over a two-day period and the owner and his wife testified remotely via Skype.

Among the owner’s claims was that the property manager had mismanaged some of the owner’s funds. The agreement provided that all tenant security deposits were to be delivered to the owner. But the evidence showed that Transnational refunded security deposits to prospective tenants without the owner’s permission. The magistrate found that the return of these funds to the tenants without consultation with the owner constituted damages for Transnational’s violation of its agreement, and awarded that amount as a judgement in favor of the owner.

The owner also claimed that Transnational had breached the management agreement by evicting two of the owner’s tenants in January 2017. The agreement provided that evictions are to be performed by the owner. Instead, Transnational brought the eviction lawsuits against the tenants in its own name without the owner’s knowledge and consent. After Transnational evicted these tenants it was unable to recruit replacement tenants. During these months, Transnational sent statements to the owner to pay thousands of dollars in maintenance and repair expenses despite the absence of any rental income.

The management agreement provided that Transnational was required to submit to the owner a complete questionnaire and credit report for all prospective tenants, and that the owner had the sole discretion to approve or reject a proposed tenant. Transnational had failed to pass along to the owner application information for more than a dozen prospective tenants. The magistrate observed that the property manager’s practice of pre-qualifying applicants may have been innocent “but nonetheless, this is a breach.” The owner would have wanted to evaluate every application because of the financial burden of having a vacant duplex for months on end.

The owner presented several other allegations of wrongdoing by Transnational that the property manager successfully overcame. The magistrate’s judgment was issued on July 16, and neither party filed objections to it.

When a plaintiff files a lawsuit, the defendant has a right to assert any applicable counterclaims against the plaintiff. By failing to diligently comply with the terms of its own management agreement Transnational had effectively foiled its own attempt to enforce the agreement against its client.

Douglas Whipple

Douglas Whipple is a 22-year resident of Cleveland Heights; he represented the owner in this lawsuit. He can be reached at dpw@whipple-law.com.

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Volume 11, Issue 9, Posted 10:51 AM, 09.05.2018