There is a common misconception that legal costs are fixed and that lawyers should be treated differently than other vendors who are subject to the rules and requirements of a competitive bid process. Not so, says James A. Judge, Esq., an attorney with the Irvine, Calif.-based law firm of Van Gemert and Judge. Judge recently discussed the topic of escalating legal fees and how associations can control their costs at a Community Associations Institute (CAI) seminar during its national conference.

"Where other vendors are subject to a competitive bid process for virtually every piece of work, the lawyers usually escape having to give a firm price for their work, and generally are given every assignment, together with a blank check," says Judge.

Legal services are like anything else a competitive business, says Judge, and a good experienced lawyer should be able to give a reasonable estimate how much settling a legal dispute will cost. "While legal costs are often difficult to predict, make no mistake—most good lawyers know what a dispute or transactional matter is going to cost, if they have sufficient experience."

Not a Blank Check

It's not uncommon for community associations and boards to rack up thousands of dollars in legal bills over what may seem like a simple matter, Judge says. Be wary of some of the following ways in which legal costs can escalate:

Failure to Budget Properly Legal costs generally are cyclical with the economy. In good times when homeowners are current with their assessment payments, associations have more money to spend and tend to spend more on general counsel work and less on collections. In bad times, money is tight, making general counsel decisions more difficult and more work and money is diverted to collect delinquencies. There are in the economy, and in the history of every association's budget predictable economic trends that offer invaluable information as to not only the total amount of money that must be allocated to legal services, but how it is to be spent.

Lack of Proper Response to an Evolving Situation Legal matters are no different than items of maintenance. They frequently present themselves at an early stage, when they could be handled cheaply. But when they are frequently ignored, they therefore become bigger later on. Take the board, for example, that wants to review its own contracts. One loophole in the contract and the most critical element—cost—goes through the roof. Now the association is faced with a much bigger problem that conceivably could have been avoided earlier. Likewise, lawsuits between homeowners and homeowner associations present themselves as "mini-disputes" long before they wind up in court. Boards frequently err by adopting a "wait-and-see" attitude that proves costly later on.

Selection of the Right Attorney for Each Assignment Associations may have their own in-house counsel or hire one or two lawyers for specific matters. But, does every legal assignment by a homeowners association involve just homeowner association law? Not necessarily. Matters could involve insurance, contracts, business, construction, and a whole host of other things. By not shopping the market, an association may be buying into a big learning curve and not get the results it desires. Along the same lines, the style of a particular lawyer has a big impact on the "bottom line"—the final cost. While there is something to be said for an aggressive litigant, his or her services may cost more.

Lack of Planning & Cost Analysis at Each Stage of the Dispute This boils down to not giving the lawyer or the firm a "blank check." Also, require input on a regular basis to determine where things stand and what they are going to cost, as well as planning for the most effective strategy, and also the least expensive options.

Failure to Examine or Explore Alternatives The alternative dispute industry is booming, and associations have the option of considering an alternative method to settling their disputes. This option is also provided for by law in New Jersey.

Failure to Negotiate Never assume a "fight to the finish" strategy and know how or be prepared to negotiate.

Examine Insurance Issues Who is paying for the dispute? Will the association's money or insurance money be used? Does a special assessment have to be levied on the homeowners to pay for a settlement? An insurance specialist could be a valuable part of estimating your legal costs.

Examine Governing Documents If restrictive covenants can be a guide in pet disputes or problems in maintaining common areas, for example, why can't they also offer advice to help associations resolve their legal problems?

All About Budgeting

Most associations typically look at their prior year's budget for legal costs and adjust it slightly to account for inflation and the current economic cycle. That, however, might not be enough review, says Judge. Gaining a truer picture of the association's costs can only be achieved if one looks at a five- to 10-year history, he says. Such an examination is vital, especially if an association was under-budget the previous year, he explains. The natural tendency of the board of directors might be to reduce the legal budget if costs were falling, but that could leave an association "high and dry" in the event of an unexpected dispute, says Judge.

Once a five- to 10-year average is determined, the association can go in and make any necessary adjustments, such as accounting for one-time, one-of-a-kind lawsuits or large transactional projects, such as rewriting your bylaws or your governing documents, for example. The association can also adjust its budget upward if members are aware of disputes on the horizon that could lead to major litigation, according to Judge.

"It's vital in the process that boards do a 'reality check.' Legal costs cannot be eliminated—legal is a cost of an association doing business. Many associations are big corporations, and the legal budget allocation should adequately represent the level of protection they are going to need, whether they've ever seen a dispute or not."

It's important, says Judge, for boards to gather input from legal counsel and other professionals every step of the way or problems could arise. Only an experienced lawyer can tell which disputes are about to escalate and which ones will just go away over time, he says.

Proactive Rather Than Reactive

A common belief is that legal expenses come out of nowhere and automatically skyrocket, but that hardly ever happens. There is usually forewarning in that events present themselves well in advance so that boards have time to prepare and anticipate a certain outcome, says Judge.

"Associations can either be proactive or reactive. Reactive is almost always more expensive in the long run. Proactive may look like it costs more sometimes, but it's always cheaper than the alternative."

Associations are usually faced with two types of legal tasks: actual litigation and transactional work, which includes things like rewriting contracts or governing documents and also coordinating elections and distributing materials, ballots and proxies. "A proactive association will recognize and respond early to a dispute. If professional help is needed to resolve the dispute early on, proactive associations will see the wisdom of paying for it, or at least sharing the costs.

"A proactive response to events and circumstances determines whether you can control the ultimate costs of the event or circumstances, and save the budgeted money for other more important things."

Shop Around

Associations should not be afraid to shop around and bargain for legal services, Judge says. Associations are a business and they deserve to have a predictable cost for a predictable commodity, no matter what service is provided. In the case of actual litigation, which is often unpredictable, a good lawyer should be able to offer a reasonable parameter to help guide the association as to its future costs, says Judge.

Also don't assume that all lawyers get paid "by the hour." That may or may not be the case, he says. Some lawyers today are flexible enough to charge a "flat fee" for a particular project and stick to that amount. And don't be afraid, he says, to get a second opinion on important legal decisions from a qualified lawyer that may be outside your jurisdiction.

A Win-Win Strategy

One of the most important strategies that associations can take advantage of in legal matters is knowing how to negotiate and when to negotiate, Judge says. The power in negotiation comes from knowing all the angles and understanding all the alternatives. The more information you have, the more powerful your negotiating position becomes, says Judge. To maximize your negotiation, you must identify the bottom line and what you seek as a favorable outcome. You must also consider the opposing party's bottom line and what outcomes they seek, he says.

Marketplace negotiation is a series of jumps back and forth and counter-offers that often lead to an agreement. If a deadlock occurs, a good lawyer will rethink their strategy and look for differences that can be traded off or compromised. If both sides remain entrenched in their positions, a professional mediator expert in the art of alternative dispute resolution (ADR) may be called for, Judge says. If all else fails and litigation is the result, an association should still continue some form of mediation so as to limit the costs and the internal damage that a lawsuit usually brings.

Debra A. Estock is Managing Editor of The Cooperator.