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Management Contracts 101 Negotiating Your Community’s Most Important Contract

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There are elements of board service that can vex even the most committed, most intrepid volunteer—and negotiating a building’s management contract is probably at the top of that list. Vexing or not, however, the extent and quality of services available to your building community hinge on what’s in that contract; managers and management companies are obligated to provide what’s agreed upon in it—nothing more, nothing less. That’s why securing the appropriate terms for the appropriate price is an essential component of maintaining a sound, properly functioning building.

The Nuts & Bolts

“At its core, a management contract establishes [two things]: the fee the association will pay to the management company, and what services the management company is obligated to provide for that fee,” says Kristofer Kasten, senior legal counsel for Altus Legal, a community association law firm based in Chicago. “However, management contracts will address many other details along with those two fundamentals. Most management companies have their own standard form contract that they use, but they often do negotiate with a prospective association client on certain terms that the association may want changed, deleted, or added.”

“Management agreements are the basis from which managing agents assist and help operate properties on a day-to-day basis,” says Mark Hakim, an attorney with New York City-based law firm Schwartz Sladkus Reich Greenberg Atlas. “A management agreement is intended to be ‘soup to nuts,’ providing a roadmap of the agent’s duties and responsibilities, including administrative and financial matters. The agent is intended to be the arm of the board, generally handling all matters during the term of the agreement, while the board continues to make the actual material decisions. Some ministerial decisions, like purchasing of supplies and so forth, are delegated to the managing agent so the board can focus on the bigger-picture items.”

 And while “management agreements for co-ops and condominiums contain many boilerplate provisions, the devil is in the details,” points out Dennis Greenstein, an attorney with the New York office of global law firm Seyfarth Shaw. “There may be unique physical, financial, and staffing considerations that should be considered and provided in the agreement to cover them.”  

 Ellen Shapiro, an attorney with Marcus, Errico, Emmer & Brooks in Braintree, Massachusetts, adds that once finalized, “management contracts are often sacrosanct—very little can be changed.” She explains this to her clients when they seek her expert advice before entering into a management agreement. “Like any contract, though, the standard management contract should contain start and end dates and financial considerations, as well as the role and duties of the manager.” The expectations of the client—in this case a co-op corporation or a condominium association—should be clearly delineated.

What’s Typically Included

 According to Kasten, “Services and duties of the management company typically covered in a management contract include, but are not limited to, things like collecting assessments from owners, maintaining the association’s books and records, payment of association obligations (e.g., utilities, landscaping, contractors, and vendors providing goods or services to the association), preparing an annual budget for the board’s review and adoption, common element/area maintenance, hiring and supervising association employees, and obtaining and maintaining insurance.

“Those duties and services are generally performed at the direction of the board and at the association’s expense,” he continues. “For example, the management company may work with an insurance agent to procure general liability and property insurance covering the association, which policies are approved by the board and are in the name of the association as the insured with related premiums being paid by the association.”

 From a more purely legal perspective, Kasten advises his clients that their management contract should include, among other things, clearly delineated termination rights, party indemnification, notices, fee shifting, and applicable law.  “The contract should clearly state how and under what circumstances either party may terminate the contract,” he says. “For example, the contract should provide whether it can be terminated prior to the end of the applicable term for any reason, or only for cause. The contract should limit the association’s indemnification of the management company to situations in which it is reasonable for the association to be responsible for a claim, loss, or damages. The association should not indemnify the management company for the management company’s own wrongful acts. The contract should clearly state how notices required under the contract should be delivered (e.g., certified mail, personal delivery, email, private courier, etc.) to the other party, and clearly state the time in which the notice must be given. The contract should provide that the prevailing party in a dispute involving the contract is entitled to recover attorneys’ fees and costs from the non-prevailing party, which is a fair fee-shifting provision. It is not recommended that only the management company be given the right to recover attorneys’ fees and costs. The contract should provide that it will be interpreted and enforced under the laws of Illinois [when] that is where the association is located. This may seem common sense, but with more national management companies, it is important to look at whether the contract refers to another jurisdiction.”

 “Management agreements are used to exclusively appoint the agent to run and operate the building,” says Hakim, “from payroll, to transfers and sales, to repair matters, to the supervision of employees. For example, many boards will allow agents to enter into contracts—for repairs and supplies costing up to $2,500, say—without the board’s involvement, though that figure may vary depending on the size of the building. Not having to stop and revert back to the board for small decisions facilitates more efficient and effective operations.”   

Greenstein recommends that a contract “designates the individual to be assigned to the building by the management company,” along with “a provision giving the board the right to demand a change if it is not happy with that person after [they’ve had] a reasonable time and chance to correct any deficient behavior.” He adds that “another essential provision is requiring the managing agent to notify the board of violations placed on the property, and of any condition in the building or property which is known to be unsafe, or would be a violation if noted by any governmental agency.” 

Parting Ways

Breaking a management agreement is never an easy decision, but it’s a contingency that should be included in every contract nonetheless. “The management contract should provide that the association has the right to terminate the contract if the management company breaches the contract,” says Kasten. “However, an association may consider negotiating a broader right of termination. Generally, terminating a contract prior to the end of the current term for the convenience of the terminating party will subject the terminating party to damages, unless the contract provides that the contract can be terminated without cause. Those damages could include the fee that would have been paid during the remainder of the current term or possibly liquidated damages, if provided for in the contract.

 “Some contracts may expressly provide for a termination fee,” continues Kasten.  “Also, some contracts may include provisions allowing the management company to deduct from association funds unspecified amounts after termination, which amounts can be significant and the purposes of which may be unclear.”  

But before breaking a management agreement, says Hakim, “we always suggest having a frank conversation with the upper management of the company, and perhaps even having the property manager reassigned. However, when it becomes necessary, the exit agreement must be reviewed to ensure that a timely termination is sent. Generally, a building will have a right to terminate upon 30- or 60-days’ notice without cause. The building is generally only liable for the costs to the date of termination. It’s quite rare in a management agreement for a co-op or condominium to see any penalties, but again, the agreement must be reviewed.”

Greenstein points out that “breach of the terms of the agreement, such as the agent acting outside the scope of their authority under the contract, mismanagement (or worse) of funds, or willful default of the agreement,” can lead the board of a co-op or condominium to dissolve a management agreement before its end. As to what legal or financial penalties might be incurred, “someone can always assert a claim against another person or entity,” Greenstein says. “The board would have to prove there was a breach or default and then damages. And if successful, then they would have to seek to enforce a judgment if obtained.”

Proceed With Caution

Kasten cautions boards to be vigilant about what exactly their contracts contain, and what responsibilities—and liabilities—may fall to board members themselves. “Most if not all management contracts provide that the managing agent will take direction from a single designated board member—or, in the absence of such designation, the board president,” he says. “This type of provision makes sense, because it ensures efficient communication and avoids a situation where multiple board members could give the managing agent conflicting directions. However, an association may want to review the language of such a provision carefully, and make appropriate changes to ensure that a less than honest board president doesn’t use the exclusivity of his or her communication with the managing agent to hide impropriety from other board members. I have seen that type of provision become the focus of a dispute between an association and management company where a board president used association funds for personal purposes.”

When changing managing agents or firms, say the pros, keep in mind that you’re seeking a seamless—or near seamless—transition. Hakim relates one not-so-seamless example that demonstrates why it’s important to keep things cordial:

“One of our condominiums terminated its managing agent,” he says. “The old company refused to assist in the turnover/transfer process, and didn’t deliver the books and records of the condominium to the new agent. So for an extended period, the association was unable to access its bank accounts. Imagine a condominium unable to pay its bills? Or not having access to its own books and records? We worked with the board and new management, and the bank, and we were ultimately able to assist in facilitating the transfer of the accounts, and the books and records—but obviously, it took the threat of legal action to do so.” To minimize the chance of such headaches, Hakim says, “Especially in this day and age of digitized records, we recommend that a board have real-time access to its files, and also that a current board member always be a signatory to any account.” 

Management contracts are a critical cog in the co-op/condo machine. Even if your board includes members with contract negotiation experience, it’s always wise to seek the advice of legal counsel—and to always read the small print. Most importantly, identify your wants and expectations and make sure they all get into the document in clear, concise language to avoid troubles later.

A J Sidransky is a staff writer/reporter for CooperatorNews, and a published novelist. He can be reached at alan@yrinc.com.

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