Many condominium and community association boards use the same group of vendors year after year after year. The same landscape company, snow removal company, maintenance man, accountant, management company, painter and more. They find their service to be fairly priced and of high quality. When presented with a contract to sign, boards assume (knowingly or unknowingly) the agreement is fair, reasonable, mutually beneficial and appropriate to sign without further review. So long as the pricing remains stable and level of service acceptable, the relationship carries on without much thought.
Sometimes, however, pricing changes or the level of service plummets. Either scenario inevitably triggers a comprehensive Board search to replace the vendor and careful scrutiny of the vendor’s contract. Unfortunately, often times this examination occurs too late. A close review of the contract, usually done by association legal counsel, reveals its flaws. Specifically, provisions found within the agreement make it near impossible to terminate. Either the termination window is exceedingly narrow, nearly impossible to determine or termination triggers payment of a penalty in some outrageous amount. At this time moment the board collectively experiences the proverbial “Uh Oh” moment. The board finds itself “stuck” in a contract - sometimes for an extended period of time – with a non-performing and disgruntled vendor. The board underestimated the significance of the contract because it became complacent. It lost its guard, dropped its defense and was outmaneuvered by the vendor. Could this have been avoided? Should this have been avoided? Yes!
Agreements between parties are memorialized in writing and signed by the parties for a reason. Written contracts exist because parties forget the specific terms of their agreement as time passes. Life circumstances change that sometimes cause parties to regret previous agreements they have made. Without written contracts establishing the terms, either party can stop honoring the agreement any time. The importance of carefully reviewing vendor contracts before signing them cannot be overstated. Although boards may have high comfort levels with a particular vendor, their contract must still be scrutinized. Vendor contracts have been prepared by their lawyer for the purpose of protecting the vendor. While reasonable, the Board needs to ensure the Association's interests are equally protected.
The opportunity to negotiate contract terms with a vendor is rare. It exists when the agreement is originally presented to the board for review and usually not again until the term is nearing expiration and requires renewal. These moments are extremely valuable as they provide an association with negotiating power. The threat of losing an existing or potential client is always in the back of a vendor’s mind. Vendors are significantly more willing to negotiate contract terms before the contract has been signed, not afterwards. Waiting until after a contract has been signed to negotiate new terms is a mistake because a board has no leverage with which to negotiate.
Many aspects of a vendor contract require close scrutiny and review by a legally trained eye. Does the agreement clearly articulate the scope of work to be performed? Does it outline in detail the materials to be purchased and include a timeframe in which the work will be completed? Does the agreement require the vendor to provide sufficient insurance to the satisfaction of the association? Does it require the vendor to provide notice before performing work on association property? Imagine a window washing company hired to wash every single window on a large high rise building in Chicago. The contract should outline the specific day, time and location that work will be performed. This allows management or the board to provide advance notice to owners of such work in case they desire privacy or simply want to reduce the interruption.
Does the agreement allow either party to terminate if dissatisfied? If yes, must the association have ‘cause’ to terminate or may it terminate ‘without cause’? Does the contract contain a liquidated damages provision or require the payment of a penalty for early termination? If yes, in what amount and is that amount reasonable? Does the agreement require notices to be sent in a specific manner to a specific address? If yes, is it feasible and reasonable to deliver notice in the manner set forth in the contract? When disputes arise between the parties to the contract, can either party recover its legal fees from the other party? If not, does only one party have the right to recover its legal fees and costs, such as the vendor?
These questions are not intended to overwhelm. They are designed to reveal the numerous pitfalls that exist when signing contracts with vendors. An association board of managers is not expected to have a mastery of contract or community association law. It is, however, expected to act responsibly and in the best interests of the association. This “fiduciary duty” imposed as a matter of law requires board members to seek professional advice when faced with association decisions such as contract negotiation and execution. Securing counsel to review vendor contracts accomplishes two objectives. First, it ensures the interests of the association are adequately protected from a legal perspective. Second, it safeguards the individual board members against breach of fiduciary duty claims resulting from a contract gone awry.
For the reasons articulated above, a "best practice" for any condo or community association board is to have all contracts reviewed by legal counsel regardless of size, scope, cost or contractor. Asking management to review an association contract is not an acceptable replacement for having it reviewed by legal counsel. Although skilled, property managers have not undergone the legal training required to practice law and it is unfair to expect them to perform this service. It may also constitute the unauthorized practice of law, which should be avoided. Next time that landscape contract comes up for renewal, be sure to have legal counsel review it before agreeing to its terms.
