Few things can raise one's blood pressure like signing a big contract. That can be especially true for board members or managers signing sometimes mammoth contracts on behalf of a co-op or condo association, obligating their neighbors, friends and themselves to page after page of fine print. Thankfully, there are more than a few ways to stop the pen from shaking when the dotted line get signed, and it all starts with ensuring a very thorough vetting of the contract in question.
Contracts are often thought to be intimidating, and that's probably a good thing in many ways. Contracts shouldn't be taken lightly, as they represent a legal agreement of responsibilities. Whatever may be said between an association and an association, if it's not in the contract, there's no proof it was part of the agreement.
Generally speaking, contracts are written on behalf of the party who's writing them. “So they're one sided—or lopsided,” says Sima L. Kirsch, a Chicago-based attorney at the Law Office of Sima L. Kirsh PC. “Most people don't realize that at first, contracts are not contracts; they're proposals. They're not complete contracts. A proposal is an offer, consideration and meeting of the minds. That meeting of the minds is what sets all the other terms in motion,” says Kirsch.
An important tool for boards is to simply compare and contrast different offers. If the initial contract you're given is more realistically a proposal, it helps to have different versions from different vendors to sort out who's really a serious contender for your business. “I think you always have to revert back to the Business Judgment Rule, which in Illinois is the divining rod for whether or not a board is acting consistent with its fiduciary duty. And while nobody sets out a plan, you oftentimes hear you should review at least three different vendors,” says David Hartwell, founding partner at Penland & Hartwell LLC in Chicago.
These days, contracts that automatically renew are everywhere, from your Chicago Tribunesubscription to your NPR contribution. Some of these are convenient, and make life easier by eliminating the need to stay on top of regularly recurring charges. But your Pandora membership is one thing; your condo's laundry contract is another. “Each side should have the option of determining at certain points of times whether or not they want that relationship to continue or not,” says Hartwell.
Automatically renewing contracts are a popular money-making device for consumer-based services, like cable TV and cell phones. “Any sort of ongoing service contracts is where you see the renewal provisions, and we always advise against it,” says Hartwell. “It shouldn't be a problem for the contractor because if they are doing a good job and the relationship is stable, then typically the association will renew. If they are not doing a good job, this gives the parties the opportunity to get together to try to resolve things.”
The device of automatic renewal might be a win-win for vendors, but part of the onus is on board members and managers to make sure they're giving vendors a fair shake. “One of the things we see is that parties don't work to resolve matters anymore,” says Hartwell. More and more, associations are more willing than ever to dump a relationship with a current vendor rather than work out a particular problem or issue. A persistent issue with service or maintenance is one thing, but smaller things can almost always be worked out with proper communication, and can save the headache of starting a whole new partnership with a different company.
Ensuring clarity and protecting the co-op or condo’s rights to terminate a contract for poor service also must be considered when signing an agreement. “The problem usually relates to the quality of work being done by the contractor,” says Mark Rosenbaum, a principal with the law firm of Fischel & Kahn in Chicago. “Anybody who signs a contract with you is a contractor. Sometimes the contractor doesn’t do things he’s supposed to, or doesn't do things in a timely fashion.” To protect your community from shoddy work or constant equipment problems, the pros agree that your contracts must explicitly define the vendor's responsibility or obligation with respect to maintaining and replacing defective and non-operating equipment, or response time to fix the equipment.
Spelling this stuff out in black and white not only protects an association legally, but helps keep peace within its walls, should things go awry. “Elevators not working, broken laundry equipment, boilers not functioning in cold weather or the absence of hot water will create immediate anger in any building,” says one attorney. “Clear language in the agreement stating the response time—with remedies for the board if the vendor breaches such agreement—is critical to the board's ability to demand service, and to terminate the agreement if not honored.”
When it comes to contracts, inexperience on the part of a board or manager is usually to blame for mistakes and not-so-great terms and conditions. “A contract will say that, 'We're going to finish the work on X date,' but it may not say what happens if they don't finish on X date,” says Kirsch. “They may say that they're going to perform this work, but they don't tell you to what standards they're going to perform it. So if they don't perform to your standards, how can you hold them on anything if you haven't put it in the contract? So every time you set something out in a contract, you have to ask, 'What's its purpose—and what happens if it doesn't happen?'”
Securing the advice of legal counsel can save big money down the road, but still, some boards or managers try to save dollars up front by simply going it alone. Many boards and agents feel that it is not necessary to pay legal fees for the review of smaller contracts—which is understandable, perhaps, especially for a building or HOA that's feeling financially pinched—but the pros agree that approach can lead to trouble later.
“The best way to deal with contract issues is to have good legal representation before you sign the contract,” says Rosenbaum. “Many of the contracts that associations sign with vendors are form documents drawn up by the vendor, and those documents are in some cases egregious in favor of the vendor. If you have a contract going in that spells out each party's duties and rights, it makes the whole process so much easier in dealing with how to terminate the situation. Associations can be penny-wise and pound-foolish. They may not want to spend $250 for an attorney to review a contract, but then what if that contract blows up and then they have to spend thousands of dollars on an attorney—it’s not good for anybody.”
Crossing T’s and Dotting I’s
Getting a good contract involves not just avoiding mistakes but proactively ensuring that the proper elements are included in the document. One of those elements is the right to terminate the contract if the vendor is in breach.
Delineating responsibilities is also important, including questions of maintenance. The vendor should be responsible for any damages or fines that result from their failure to maintain the equipment and/or comply with the legal obligations required by applicable laws and governmental bodies, for example. The legal pros consulted for this article stressed repeatedly the importance of being clear about what's being covered in terms of repairs and defective equipment and the cost of labor, particularly emergency service on weekends and holidays. As one attorney put it, “There should be warranties on new equipment, specific obligations to replace parts, and what is excluded in the coverage. “
Property managers can be a vital resource for finding vendors and fostering relationships when projects are underway. But, boards have to have a keen eye for the motivations of managers as well. “What you're seeing more and more are sort of 'preferred vendor' lists that are proposed by property management companies,” says Hartwell. “Again, property management companies are in a good position to sort of know who the players are in the various different vendor sectors. But I think the board needs to ascertain what the relationship is between the vendor and the property management company. Are they paying anything back to the property management company? Because that could create a conflict.”
For self-managed buildings, there may be a sense of being alone out in the contract wilderness. Without a professional management firm overseeing their affairs, it's even more important for a self-managed board to enlist experts they can trust.
There are certain aspects of contracts that may apply to more than one type of vendor or service contract. For example, an agreement with a contractor may have a section on insurance, as will an agreement with a landscaper. It is important to review those sections with an experienced eye. “There should also be adequate insurance coverage of the contractor and vendor naming the property owner and others as additional insureds on the policy,” says one pro. “Also, we require an indemnification from the vendors and contractors.”
Eyes Open, Looking Ahead
One of the best ways for condo and HOA managers and boards to protect themselves when signing a contract is to look for red flags ahead of time. More often than not, the signal that the contract is no good is what's not there, rather than what is there. For instance, a contract should address issues like worker’s compensation. “I would say contracts that have a significantly larger human element to them are more apt to disputes,” says Hartwell. “For example in a cable contract, once the cable is installed in the building and hooked up, there’s not much of a human element—no repair people on-site all the time. Alternatively, elevator maintenance has a significant human element to it. People are there every month, or every couple of weeks. Those are more prone to breach, because now you have somebody that can say 'This person didn’t do a good job,' and their side will say ‘We did do a good job, and we did exactly what we said we were going to do.' Sometimes there are mismatched expectations.”
Other than checking references, there are other resources at the board's disposal that can help check out a potential vendor's bona fides. One means is to conduct a litigation search to see if there are a number of lawsuits involving the contractor, and the claims made and the outcome of the matters. Also see if the property manager used the vendor in other buildings, and what the experiences were. Require several references from other buildings to see if the contractor met the time and work requirements and if he honored the remedying of any problems which arose and for which he was responsible to address.”
Ascertaining the way the vendor operates is equally important. Before signing any contract, it helps to know whether the contractor or vendor will clean the work areas each day; Were the workmen respectful of the both residents in the building?” Character matters, especially in a long-term arrangement that may affect dozens, if not hundreds, of residents in a building or community.
Certainly signing a contract can be a nerve-wracking experience. With the right advice and experience, however, and a willingness to ask questions, that experience can be a positive one, making way for new services and improvements that will benefit residents and families for years to come.
Liz Lent is a freelance writer and frequent contributor to The Chicagoland Cooperator. Editorial assistant Tom Lisi contributed to this article.