Thoreau famously advised writers to “simplify, simplify.”  But for community associations writing or negotiating management contracts, “Specify, specify” is far better advice.  When relationships between associations and their managers break down, as they do occasionally, the problems can often be traced to the failure on both sides to articulate their expectations at the outset of the relationship and state them clearly in the contract they sign.  A well-drafted contract can avoid many problems and provide a framework for resolving unavoidable problems.  This article discusses several, but by no means all, important provisions that should be addressed in a management contract.          
           
Explain Everything
 
If there is a cardinal rule of management contracts, it is this:  Spell out everything, assume nothing, don’t leave any expectation, however insignificant, unstated or unexplained.  The goal of the management contract is to state clearly and unambiguously the expectations on both sides, outlining in sufficient detail precisely what the management company is supposed to do and how it will be compensated for the services it provides.  You hope the contract will sit in a drawer gathering dust. But when something goes wrong, that’s when the contract means something.  And if that point comes, you want to be sure the contract says what the board members meant it to when they signed it. 
 
With that concern in mind, it is a good idea to attach the management company’s proposal as an exhibit to the contract, incorporating by reference all of the services the company described when presenting itself as a candidate for the job.  It would be difficult for a company to argue that it never intended to provide the services described in its proposal, and equally difficult for an association to insist that it expected services neither the proposal nor the contract specifies.
 
Draw Clear Lines
 
Management services will typically encompass a broad range of administrative, advisory, maintenance, financial, and communications functions. Most of the manager’s duties, although not all of them, would be part of the overall contract price, the equivalent of a “fixed price” dinner on a restaurant menu.  But some services should be classified appropriately as “a la carte” – extra services provided on demand but billed separately, in addition to the contract fee. 
 
In contract parlance, the fixed price duties would be classified either as “recurring routine services,” which are included in the base contract fee, or “periodic routine services,” also included in the base price.  However, costs associated with performing such services (such as mailing, document preparation, copies, etc.) are billed back to the association.   
 
“A la carte” services are typically listed under a category labeled “non-routine” services.  These non-routine services usually encompass items such as oversight of a major construction defect case and attendance at board or annual meetings over the number specified in the management contract. The management contract should draw clear lines between routine and non-routine services and should specify the rate at which “a la carte” work will be billed. 
 
How Much, How Often and When?
 
Clarity and detail are equally important in the description of “recurring routine services” covered by the base contract fee.  If the association expects the manager to produce a newsletter, the contract should specify how many newsletters the association expects and when and how the newsletter is to be delivered. 

By the same token, simply stating that the manager will conduct regular inspections also leaves too much potential for an expectation gap.  Such provision should clearly state when the inspections will be conducted and how often they will be conducted.  If you expect the manager to conduct monthly inspections and you want those inspections to cover all buildings including the exterior as well as interior common areas, the contract should make that clear. 
 
The contract should also describe the manager’s authority to make decisions and spend association money without specific board authorization, and, every bit as important, note the limitations on that authority.  Associations handle the financial authority question differently, depending on their size and leadership style.  Statutory requirements may also come into play.  Generally, checks written on behalf of the association should require two signatures, one of which at a minimum should be that of a board member.    
 
This notwithstanding, managers should be empowered to authorize certain work on behalf of the association without board approval  Such work should either constitute an “emergency” repair (however that is defined in the management agreement) or does not exceed a specified monetary limit.   Even though the manager may authorize the work, the board will still be presented with a check for signature, allowing the directors to stay informed about the use of association funds.
 
Hold Harmless
 
Management contracts typically have many features in common, but they aren’t standardized.  The terms, necessarily, will reflect the different needs and different negotiating positions of the associations and management companies involved.  State practices and statutory requirements also differ, making provisions that are common in some states virtually unknown in others.  One example is the “hold harmless” or indemnification provision, a standard feature of management contracts in Colorado, but quite rare in other states. This provision requires the association to defend the management company and pay any damages resulting from the company’s performance of its contractual duties.  Indemnification clauses may cover negligent performance of management duties, but exclude “gross negligence, willful wrongdoing, or criminal acts.” 
           
Associations should make sure the hold harmless language in the management contract mirrors their insurance coverage.  If the association’s commercial general liability policy should name the manager as an additional insured.  But the manager should also be named on the association’s Directors’ and Officers’ liability policy (“D&O”), which would cover areas the general liability policy excludes, such as allegations that the manager acted improperly.  The D&O policy in a sense almost builds in errors and omissions coverage for the manager.
           
Termination Clauses
 
Fortunately, management-association disputes do not often end in litigation, but these disputes do sometimes end the management relationship, a possibility contracts should anticipate by including a termination clause.  You should draft this clause with the idea that everyone loves everyone when the contract is signed, but provide for what happens when everyone doesn’t love everyone as much. 
 
In most states, the termination terms are negotiated entirely by the associations and their management companies.  But in some, state law dictates the framework for these provisions. For example, Colorado law provides that an association’s contract with a managing agent is terminable for cause without penalty to the association.What types of actions or inactions on the part of the manager would constitute ‘for cause’ can be a subject of argument. Therefore, to be safe, whatever other termination terms the association includes in its management contract, it should include a clause specifying that if the cause of termination is misappropriation of association funds, the contract can be severed immediately, with no advance notice and without any opportunity to cure.
 
In addition to the above, management contracts should contain a “with or without cause” termination provision available to both the association and management company upon written notice notice.  This will ensure the termination of the contract even the parties cannot agree on whether cause exists.  However, it is very important the contract spell out the requisite time of notice (i.e. 30 days, 60 days, etc.) 
 
Prior to signing a management agreement with the above termination clause, the board should review the association’s declaration.  Oftentimes, the declaration will contain language mandating a specific timeframe for termination clauses in contracts.  For example, the declaration may require any agreement entered into by the association to have a 30 day termination clause.  Therefore, the board should be very careful not to enter into a contract with a termination clause that does not comply with the declaration.
 
The major concern when an association and its management company part ways is how to ensure a smooth transition between the old company and the new one.  That is not a huge problem in most cases; management companies don’t like losing clients, but they also recognize that relationships don’t always work out and so take these break-ups, when they come, in stride.  Still, a particularly bitter split can sometimes make a departing manager less than cooperative. 
 
To avoid the disruptions that could result from a bumpy transfer of power, the termination clause should specify that the departing company is required to turn over association records to a new manager in a timely fashion.   The contract should require the manager to deliver pertinent records and provide a full accounting of money owed under the contract within a specified time (four weeks is usually reasonable) after receiving the termination notice.
 
Try to Hang On
 
While it is important for the contract to anticipate a possible termination and provide for it, it is equally important for associations to do everything possible to avoid that outcome.  You don’t want to prolong a relationship that isn’t working, but changing management companies can be difficult and expensive; it is almost always worth the effort to try and repair a relationship before ending it. 
 
If problems arise, as they will periodically in even the best relationships, boards should discuss their concerns directly with the manager, and if necessary, with the manager’s supervisor or the company president.  It may turn out that the problems are, indeed, irreconcilable, but if that is the case, you want to make sure you understand precisely what went wrong and why. Otherwise, the problems that led the association to end one management contract will almost certainly mar future management relationships, with the same unfortunate and undesirable results. 
 
To read an additional article on the issue of management company contracts click here.        

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January 11
The Discrimination Complaint
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January 11
The Discrimination Complaint
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Arvada Office
5610 Ward Road
Suite 300
(1 mile north of I-70)


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