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The Basics of HOA Contracts

Written by on Tuesday, 29 March 2005 6:00 pm

Homeowner associations deal with contracts on a regular basis for hiring personnel, maintenance contractors, arranging for general and service contractors, and for purchasing products. Contracts come in many forms: An invoice, a proposal or a discussion can constitute an enforceable contract. Many associations do not fully understand the importance of clearly written contracts and contract clauses until after getting burned. The following will help in negotiating and executing contracts that accomplish the intended purpose and afford basic legal protections.

Have you ever accepted a proposal from a contractor without requiring more? When presented with a written contract, the board has a fiduciary duty to review it carefully and "negotiate" more favorable terms. Don't be intimidated by contracts. All contracts can include addendums and counter offers just like in real estate deals.

There are four components that make a legally binding contract: Parties, Subject Matter, Time, and Price (Consideration). With them, this is a legally enforceable contract unless one of the parties is under the influence, a minor, or otherwise lacks the "legal competence" to contract.

Parties: All parties should use their official legal names. Some homeowner associations in everyday practice may use a variation of the official name. Check your documents [CC&Rs] for the "official" association name. Look at the Articles of Incorporation for incorporated associations. If it becomes necessary to sue and there is an incorrectly named party, you may jeopardize your ability to collect. Directors or managers should not contract individually for association needs. Make sure the NAMED PARTY is the association. Most CC&Rs provide authority for the board president or some other officer to make contracts on behalf of the association. Authority to sign is sometimes granted to the management company, but this delegation does not change the premise that the association should be identified as the contracting party.

Subject Matter: This might include a description of products, a specific construction project, specific services such as management, legal, financial, or laundry facility services. It is very important that it be spelled out clearly in such a way that the association knows exactly what is to be expected. For example, if you fail to specify that both sides of the fence are to be painted, the contractor may paint only the "front" and then leave. If the contract doesn't say what kind of paint or stain is to be used -- the contractor may choose an inferior product than you would choose. Further, when soliciting bids, unclear subject matter in the job specifications will result in 'apples to oranges' bids. How can the board choose wisely?

Time: Time for performance is another very important element in a contract. Without it, associations will find it hard to enforce and be at the mercy of the contractor. What is "reasonable" to the contractor may differ drastically from what the association considers reasonable. "Time is of the essence" should always be specifically stated in the contract, even apart from specific timelines. This tells all parties that time is an important factor and deviations should be avoided.

There should be some deadline which triggers a penalty, unless there is an agreed on extension for circumstances beyond the control of the parties. Fencing, painting, and roofing contracts are good examples. A penalty clause will protect against a contractor that takes on too many jobs and moves from job to job with empty promises of finishing "soon." Penalties should be big enough to get the contractor's attention and grow daily to prompt action.

Another provision to consider is an automatic renewal clause. It generally requires special action from the association to terminate the contract. For example, some long term contracts like management, laundry facilities, and landscaping often have clauses that the contract automatically renews if no notice is given by the association 60-90 days before the anniversary date. If all long term contracts expire at a specific time, then both parties are required to reaffirm the contract, not just the association.

Price (Consideration): There are times where a set price is left out of the contract because of unforeseen circumstances. For example, a roofer that agrees to re-roof a building finds that special platforms for the air conditioning units need to be constructed to comply with current code ordinances. The roofer would typically want a "cost plus time and materials" contract to cover those unforeseen repairs. The same is common in structural dryrot repairs, since much of the damage is hidden. It is still important that all that is seen, or known, be quantified by a set price. Extras should only be authorized by a written "change order" that details the work to be done and the price.

Common Clauses

Recitals: Recitals appear at the beginning of a contract, and discuss the intent and purpose of the contract. There are times when the parties' intents differ, and specific recitals will clarify the original intent. The scope of the contract itself could be stated here.

Extraordinary Circumstances -- Acts of God: Sometimes there are special provisions for renegotiating the contract because of extraordinary circumstances that prevent timely completion. A construction contract often contains protection for the contractor if there is an Act of God or disaster that interferes with the project like a windstorm, flood, or earthquake.

Termination: Both sides generally want the protection of a binding contract so that expectations are fulfilled. However, all contracts should have some means to terminate the contract if it does not work well for the parties. For example, in a construction or painting contract, an association may want the right to terminate if the project is not completed by a certain date, but the contractor may require that all costs expended (such as for building supplies or paint) be reimbursed before termination can be effected.

ADR -- Alternative Dispute Resolution: To encourage settlement of disputes outside the court, a good provision to include is for ADR like mediation or arbitration. Mediation is often a desired first step toward resolution. Mediation is defined as "intercession of one power between other powers on their invitation to arrange amicably differences between them." Arbitration is defined as "the hearing and determination of a controversy by a person either chosen by the parties involved, or appointed whose decision is called an award." An arbitration provision may bind the arbitrators to specific rules such as those in effect of the American Arbitration Association.

Limitation on Liability: These provisions are often called indemnification or hold harmless clauses. These limitations should not be unreasonable. The question is usually "how far do they extend." A property manager generally seeks indemnification from the association if the manager fails in some duty. This means the association may be required to defend the manager if he or she is sued for some failure to act, and pay the damages, if the manager is found guilty. Some indemnification clauses protect for simple negligence, others protect for gross negligence. Few protect for intentional, willful or malicious acts. Covenants, Conditions & Restrictions [CC&Rs] often indemnify board members for negligent acts that occur when they are serving the association.

Binding on Heirs and Successors: Without this provision, the contract ends when one of the parties dies, transfers its ownership, dissolves, becomes incompetent, or otherwise incapacitated. Sometimes this is not a problem. For example, if an association hires a contractor to build a fence, perhaps the association would not want the contractors heirs or successors to be responsible for finishing the project if something happened to the contractor. On the other hand, if an association had a contract to lease a property from the developer and that company went broke, the association would want to retain its rights to lease the property with the succeeding entity.

Attorney's Fees Provisions: This provision usually says that if either party is forced to bring a court action under the contract, the prevailing party will be entitled to attorney's fees. This provision serves as a deterrent to default. As long as the association does not breach the contract, an attorney's fees provision would be beneficial.

Construction Contracts Provisions: These kind of contracts are hotbeds for dispute and litigation, so extra care should be taken at the negotiation and drafting stages.

How does one protect against poor construction? Most importantly, provide both detailed bid specifications and standards to the contractor which are referenced in the construction contract. If cleanup is part of the bargain, then state it in the contract. Require performance bonds in substantial construction projects, keeping in mind that the cost of the bond will be figured into the bid. Provide for withholding payment for substandard work. Provide for termination if substandard work is detected at any time. If there are standards stated, it will be much easier for the association to demand that the standards be met. If they are not met, it will be easier to terminate the contract.

How should the payment schedule be determined under a construction contract? The schedule of payments to the contractor should be tied to work completed. DO NOT advance money for materials or prepay. This is a red flag of problems to come. Any contractor you hire should be solvent enough to cover reasonable up-front costs. For larger projects, a certain percentage of the contract price could be held back to ensure that all subcontractors or suppliers are paid. Require that the contractor provide lien waivers from all these parties before releasing the "hold back" money.

What does an association do if a mechanics' lien is recorded against its property? Consult an attorney well versed in contracts and homeowner association law.

In conclusion, it is the board's fiduciary duty to read and understand and properly prepared contracts that affect the community association. A wise attorney advises to pay as much attention to the "getting out" provisions as the "getting in" provisions. Remember, the well being of the entire association is hanging in the balance.

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  About the author, Richard Thompson

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.