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Due Diligence in Association Contracts and Other Easily-Avoided Disasters

09/01/2017 4:05 PM | CAI Rocky Mountain Chapter (Administrator)

By Adam T. Brown, Esq., HindmanSanchez P.C.

As the saying goes, an ounce of prevention is worth a pound of cure. 

Whenever a client asks for our assistance in handling a contract dispute with one of the association’s vendor’s, one of the first discoveries we make is that the client did not request a legal review prior to entering the agreement in the first place. In many of these cases, the agreement is either poorly drafted altogether, or contains one or more provisions which would have prevented us from recommending that the Association enter the agreement without further changes. 

Unfortunately, if proper legal review of a contract is not completed ahead of time, it often locks the Association into unfavorable provisions which hinder their options once a dispute arises. Whether an Association makes this decision due to the legal fees they may incur in the due diligence, or for any other reason, it can often result in major financial and legal consequences to the Association once a dispute arises with the vendor, which may have been avoided altogether if a proper legal review had been conducted. 

Two of the most common problematic areas we see when reviewing contractor agreements involve provisions related to the term and termination of the agreement, as well as the attorney fees provisions. 

Poorly-written or inflexible termination provisions are one of the most frequent culprits of frustration in any contract dispute. For instance, many contracts have automatic renewal provisions that automatically lock the Association into another term of years if not terminated properly. Other termination provisions may provide only a limited window of time prior to the end of the contact within which the Association must send notice of termination, or lose their chance entirely. 

As an example, one of our clients had a waste services agreement in place, which provided for an initial term of five years under the agreement. For the Association to terminate the agreement, it was required to provide notice anywhere from 90-180 days prior to the end of the contract termination date, and if notice was not sent during that timeframe, the agreement was to be automatically renewed for an additional five-year term. Because our client did not give notice during the proper timeframe, the agreement was automatically renewed and prevented them from terminating the agreement for another five years

As a general rule, for most contracts we recommend that termination is permitted at any time during the term of the contract, with or without cause, upon either thirty or sixty days’ written notice. However, in some certain instances more stringent requirements will be needed. In any case, we always recommend that our clients negotiate with the vendor to modify inflexible termination provisions, and often we will not recommend signing the agreement altogether unless the termination provision is replaced completely. 

In addition to poor termination provisions, another problematic area tends to be provisions regarding attorney fees. Attorney fee provisions can make or break the Association’s ability to effectively manage a contract dispute and/or litigation. In most cases, a proper attorney fees provision should include language in which the prevailing party is awarded all costs and attorney fees at judgment. However, many contracts do not provide any provisions at all related to attorney fees, which means that even if the Association does end up successfully pursuing damages against a contractor, they will also have to pay the attorney fees expended in recovering those damages. While there are certain attorney fees that may be awarded by operation of statute in some cases, we always recommend that the contract itself provide this. 

The termination and attorney fees provisions are just two examples of provisions which could drastically alter an Association’s ability to have recourse against a vendor, even when the Association has otherwise upheld its end of the contract and done everything correctly. 

We encourage our communities to budget the cost of legal review for any contract they may enter into in a given year. It is much more beneficial to all parties involved if disastrous results can be avoided later on by undertaking this minor due diligence at the outset of negotiations with a vendor.  

Adam Brown is a transactional attorney at HindmanSanchez P.C. and specializes in representation of Homeowners Associations and Community Association law.  Please visit www.hindmansanchez.com for more information.

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