Management Contracts Negotiating for Success

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Along with competent, engaged leadership, good management is fundamental to the successful operation of any shared interest community—and the basis of good management is in large part spelled out in the contract between the community and its manager. A thorough and complete contract outlining the expectations and responsibilities of the management firm makes everybody’s job easier. Board members, both existing and new, should know and understand what’s in their management contract and be prepared to make changes when community needs change or are not being met adequately.

The Basics

Contracts are the basic building blocks of both our commercial and legal systems.  They lay out the basic terms agreed upon by two or more parties that must be abided by and met to execute agreed-upon tasks. Whether we are talking about an agreement between a “widget” producer to supply parts to a “widget” user, or a management company to provide expertise, direction, and experience to a co-op or condo board, contracts lay out the details and provide the legal framework within which tasks are executed to the satisfaction of all parties.

“Generally,” says Kris Kasten, a partner at Chicago-based law firm Bartzen Rosenlund Kasten, “a contract between a community association manager or community association management firm and a community association should clearly state the services the community association manager or firm will provide as part of the management fee. The agreement should also clearly state what services will not be provided as part of the management fee, but upon request for an additional fee, and what that additional fee would be. Such a contract should also address risk through indemnity and insurance provisions, and clearly delineate termination rights.”

Additionally, according to Jeremy Kay, a partner at Marcus, Errico, Emmer & Brooks, a law firm located in Braintree, Massachusetts, “any written contract is merely the memorialization of an agreement between the parties to it—in this context, between an association and a property manager. Therefore, any terms the two sides agree upon should be included in the writing. If the manager and the association disagree on some issue, they should either negotiate a compromise, or not contract to work together. If and when a contract is formed, the writing should clearly detail each side’s expectations, what each side expects to get out of the arrangement, and what they must do to get it.”

“Management contracts should be very detailed and very specific as to what the responsibilities and duties are, and in setting forth standards and compensation,” says Scott Piekarsky, a principal at Offit Kurman, a law firm located in Hackensack. “The terms and responsibilities laid out in the contract must be very comprehensive and robust. The top five items to be included are who are the parties, what will they do, what will it cost, what do we do if a problem arises, and the definition of their relationship.”

In the case of condos vs. co-ops, there are some differences in contracts depending on the type of ownership structure. “The board generally enters into the contract,” explains David Fitzhenry, a partner at Moritt Hock & Hamroff, a law firm located in Manhattan, “and there are certain differing requirements for co-ops and for condos. Some facets of the contract are easier for a condo, as condo management is not as heavily involved in the transfer of units. In that case there will be a standard application package to the board, but most condo boards have only the right of first refusal—and it’s uncommon for boards to actually exercise that right to prevent the transfer of a unit. In a co-op, the management is much more involved in overseeing the transfer of units because they are responsible for the transfer of stock certificates and proprietary leases, essentially acting as the transfer agent. It’s a large and important responsibility. That process needs to be in the management contract.”

Contract Length & Termination

Of course, sometimes things go sour; any relationship can go from honeymoon to divorce. Perhaps for that reason alone, a contract between a management agent or firm and a shared interest community should have a definite beginning and end.  Open ended arrangements are not a good idea.

“Contract length can vary,” says Kasten. “Typically, the initial term is one to three years with automatic renewal for subsequent terms, unless either party elects not to renew. Renewal terms are usually one year, but sometimes can be for like terms as the initial term. For example, the initial term may be two years, and auto-renews for additional two-year terms. One factor that can limit the term of a management agreement is the community association’s governing documents. For example, if a declaration or bylaws provides that the board cannot enter a contract with a term of more than two years without owner approval, then the management agreement will comply with that term limitation because the parties will not want to expend the time, energy, and resources to obtain owner approval for something that is generally not the most important part of the agreement.” 

Kasten notes that “termination rights can vary among management agreements. However, they usually include non-renewal, termination for cause, or termination for convenience upon payment of a termination fee. Most management agreements provide that either party may elect not to renew the agreement upon written notice given to the other party within a specified period prior to the expiration of the then-current term. Usually that specified period is 60 or 90 days. Also, many management agreements provide that either party may terminate the agreement when the other party breaches the agreement. This would be a situation in which termination is for cause. Often, for-cause provisions require the terminating party to give the defaulting party time to cure the default. If that default is not cured, then the agreement is terminated.”

“Regardless of the initial term of a management contract,” says Kay, “the hope at engagement is to establish a mutually beneficial long-term relationship that lasts beyond the terms of the existing board. For that reason, I like terms contemplated to survive the test of time. For example, if notice is to be provided to an association according to some clause in the contract, I like for it to be provided to an established law firm that has been representing the association for years, rather than a board member whose term might expire during the life of the relationship.” Clearly, continuity is important in these circumstances.

“Companies want as long as they can get,” cautions Piekarsky, “and will give a price break and a break on increases for a longer contract. Boards may be leery to go more than a year with a new contract because they don’t want a problem getting out. Usually, the smart companies put in a notice provision and an opportunity to cure. There’s also the question of whether you can break the contract with or without cause. Managers want with cause, owners usually want without.  Management firms want the ability to cure the problem. They invest themselves in the deal, so they want a fair opportunity to serve. But on behalf of the board, there should be a reasonable opportunity to end it if the manager isn’t delivering.”

Fitzhenry adds that “it’s important that management can be terminated by the board upon appropriate notice without cause on 30- to 60-day notice. Management usually agrees to this. It’s become so common it’s almost a deal-killer not to agree. That being said, terminating for cause might not have a notice period, but might have a cure period.”

What Shouldn’t Be in There

According to Kasten, “When reviewing a management agreement, I typically focus on indemnity and insurance provisions, because those provisions address who bears certain risks. Indemnity provisions should be fair, meaning that each party indemnifies the other party for their own wrongdoing. A community association should not indemnify management for their own wrongdoing. Insurance provisions should require coverage that is reasonable and commercially feasible, as well as compliance with applicable law. For example, the [Illinois] Condominium Property Act and the Community Association Manager Licensing and Disciplinary Act include provisions addressing types of coverages that should be in place. In addition to those items, I also look out for provisions that are confusing or lack specificity.”

Contracts should also spell out certain extents and limitations of management versus board power. For example, “the board needs to have control over staffing,” says Fitzhenry. “Never agree that the super, even as an employee of the managing agent, can be terminated without reasonable consent from the board. Very often unit owners grow close with their super and staff, and may be very angry when a manager terminates someone. The board must be involved and give reasonable consent.”

Consistency in Contracts 

Our laws, like our governmental structure, are spread over three levels: federal, state, and local. While contract law varies somewhat from state to state, the pros interviewed for this article agree that management contracts are amazingly consistent from state to state and locality to locality, with the specifics of local requirements distinguishing them when required by state or local ordinance. That uniformity aside, boards should always consult their own attorney to confirm that whatever they are seeking in a contract with a management company is in line with local laws and other requirements.

As the backbone of your relationship with your managing agent, the contract you sign must be easy to both understand and execute. Consult with your legal counsel, and make sure each board member thoroughly understands the terms and conditions agreed upon. As a fiduciary for the community, full knowledge and understanding are the keys to unlocking the most productive agreement the community can have for efficient and effective day-to-day operation.

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