Add Clause to Management Contract Clarifying Who Owns Electronic Files

Many sites store their resident, financial, and other site-related records in electronic computer files at their management company's office. These files include the site's most vital information: resident files, HUD certification and billing forms, maintenance records, income and expense statements, balance sheets, checking accounts, and more.

But what happens when a site owner and its management company end their relationship? Is the owner entitled to receive a copy of its records on disk, or just a hard-copy printout of the data? HUD's Handbook 4381.5 rules require management contracts for assisted sites to specify that managing agents must turn over all sites' files and other records within 30 days of the end of the contract [HUD Handbook 4381.5, par. 2-17].

But HUD's rules are silent about turning over the electronic versions of these files. Therefore, it's up to you to address this in the management contract. By specifying in the management contract who owns electronic files and to what extent, you will avoid disputes later, says Colorado attorney Tom Hindman.

We will give you two Model Contract Clauses_Two Options for Ownership of Electronic Files that clarify this. Check with your attorney before adapting either clause for your own use.

Why Clarification of Ownership Is Important

Ownership of a site's electronic files is important to management companies because many of these companies have spent a lot of money developing software to store data in a way that gives them a competitive advantage, says Maryland attorney Craig Zaller.

For example, large management companies often hire consultants to develop custom software to help them manage such tasks as income certification, maintenance, purchasing, and compliance. If every time a management company's relationship with an owner ends, it has to turn over not only the information contained in its files but also an electronic version that's integrated with custom software, other management companies could gain access to this valuable proprietary software.

From an owner's point of view, ownership of electronic files is important because owners must often pay “setup fees” when they hire a new management company, Zaller points out. These fees cover the time and money the new management company must spend inputting all the site's records into its computer system. If an owner can give its new management company electronic records that are already installed, the owner may be able to bargain for a much lower setup fee.

Alternatives for Ownership of Electronic Files

There's no right answer to which party should own the electronic records. It will be a subject for negotiation between the owner and the management company, and whoever has the most leverage will get ownership. Here are two options:

The owner gets the files. If the owner has enough leverage, it can insist that the management company agree to turn over disks or CDs when the relationship ends. In this case, the management contract, like Option #1, should clearly spell out the management company's obligation to turn over electronic versions of all records of which it usually maintains electronic copies, plus a copy of any software needed to read the files.

If the owner has that much leverage, it is up to the management company to decide how important its proprietary software systems are to it and whether to enter into a contract at all.

The owner gets only the hard-copy records. If the management company has enough leverage, it can insist on keeping the rights to the electronic files. In this case, the contract, like Option #2, should distinguish between information and format, suggests Hindman. The information is the data—for example, the specific amount of money paid last month to the landscaper. The format refers to how that data is grouped, how one can interact with it, which software drives the system, and so on.

Suppose that in the management contract the information belongs to the owner, but the format in which the information is stored belongs to the management company. If the relationship ends, only raw data in hard copy (and disk, if transferred to a nonproprietary accessible format, such as a spreadsheet in Excel) must be turned over to the owner.

This protects the management company's proprietary software while still giving the owner the minimum amount of information it needs. Of course, this means the owner will very likely pay setup fees to its next management company, unless that company can access the format or scan the hard-copy information into its computer system.

If possible, owners should require management companies to make the information available in a nonproprietary electronic format the owners can access, says Jeffrey Sacks, an affordable housing attorney in Boston. Our clauses provide two alternatives: one leaving it to the management company's discretion to turn over information in an accessible, nonproprietary, electronic format, and one requiring them to do so.

Insider Sources

Tom Hindman, Esq.: HindmanSanchez, P.C.; Arvada, CO.

Jeffrey Sacks, Esq.: Nixon Peabody, LLP; Boston, MA.

Craig Zaller, Esq.: Nagle & Zaller; Columbia, MD.