Negotiating the Contract Good Relations Develop When Terms are Clear

Negotiating the Contract

The management contract defines the relationship between the condominium and management company, but the document's provisions frequently receive only cursory review or discussion by the condominium board.

If troubles crop up down the road, they often can be traced to a failure to include expectations, rates of compensation, and specific legal duties and roles when the contract was written.

To avoid conflict cropping up between associations and their management teams, and to promote harmonious relations between a manager and his or her board, more time should be invested in reviewing the contract while it is being drawn up, rather than after a dispute arises.

Money: Base Rate v. Non-routine Services

One of the persistent hot spots in contract negotiations is how much compensation will be paid to the management company for its services. Because of the nature of condominium management, the rate of compensation generally falls into two categories: a base rate and a rate for non-routine services, also known as special projects.

David J. Levy, PCAM, of Sterling Services in Holliston, Massachusetts, compares the base rate to a "fixed price buffet" and non-routine services—which include management services relating to emergencies, administering insurance losses, or tending to planned construction projects—are like the "drinks."

"It's easy to predict how much the average person is going to eat, but someone could really drink you out of business," says this industry veteran. "Say the buffet costs $5.99 and the drinks are extra. The drinks [in a condominium] are the capital projects."

The key to figuring out the appropriate base rate, Levy says, is "determining how hungry the people are." So what would make a condominium "hungry," or in need of more services?

Conditions in a property that would make it a glutton for a manager's time include deferred maintenance, a large amenity package, or an active adult community that's quite active and has many subcommittees, says Levy. "In a townhouse property in the suburbs, you can bid $20 a unit and make a profit on the arrangement. But you can have another property where you charge $42 a unit and lose your shirt because the façade is falling apart and they don't have enough money in their reserves, and they're politically unstable, and there's a coup d'état every couple of years," says Levy.

The more problems at a given property, says Levy, the higher the price the manager will have to charge to cover his or her investment of time in the property.

Truth in Advertising

Contract negotiations are a delicate balancing act. On the one hand, the community is trying to portray itself favorably, while, on the other, a manager contemplating signing on to manage the community is attempting to uncover the number and depth of any problems he or she will be charged with solving. The process is really like a first date, says Levy.

Managers "are trying to find out as much information before we bid, and [the community is] acting like they're having a first dance," says Levy.

In Contracts, Specificity Is Wise

During the negotiations that determine a base rate that is acceptable to both sides, it is very important to also specify exactly which services will be provided and the frequency with which they will be performed, says attorney Stephen Marcus, a principal with Marcus, Errico, Emmer & Brooks, in Braintree, Massachusetts. Some of the details specified in the contract might include the number of board meetings the manager will be obliged to attend, the number of unit owner meetings the manager will attend, and perhaps even copying costs for documents. If the contract is clear about specifics, no misunderstandings should arise about what is expected and what is being provided, he says.

One example of an association heading off trouble by detailing their expectations in writing is offered by the contract negotiations of Holden Farm Condominium in Nashua, New Hampshire.

Holden Farm Board President Peter Ladd says his association believes that it is important to specify the manager's availability—in their case, 24/7 for emergencies—and the expected response time in case of an emergency, such as a callback within 30 minutes. Ladd's association has a creek running through it and during a recent flood, a call to a manager was met with a quick and robust response, he says. "They got here immediately, and we used all kinds of resources—sandbags, the fire department—and they [the management company] stayed and worked the issue," says Ladd.

For non-emergencies, Ladd says he expects the manager to be available to both board members and residents during reasonable hours. "If the owners get answering machines and services with no return calls, that certainly raises some eyebrows," Ladd says.

Non-routine Services Are More Troublesome

Primary contract negotiations center on compensation, the number of predictable events a manager must attend, including a certain number of meetings, and performing standard services. But being specific in the non-routine or special project section of the contract can be more difficult, because the services that may be called for are more difficult to forecast.

For this reason, it is common for a manager's compensation for performing non-routine services to be determined by a percentage of the total costs of the project, says Levy. For instance, on a $1 million roofing project, he says, the manager might be compensated 10 percent of the first $100,000 in project costs, 6 percent of costs from $100,000 up to $500,000, and 5 percent over $500,000. The percentages decrease as the project increases because a manager will typically give a quantity discount, he explains.

Construction v. Project Management

Another consideration when figuring percentages on capital projects is the distinction between construction management and project management, says Levy, who is a Massachusetts-licensed construction supervisor. Construction management involves supervising the workers while they install a roof, but project management is more about lining up the construction loans, doing the extra collections, and sending out the mailings, says Levy. "If Mrs. Smith calls up on a Friday at 6 a.m. and there's a Dumpster blocking her driveway, they're not going to call [the construction supervisor], they're going to call you, the management company. If a unit owner's car gets a nail through a tire, the unit owner is not going to call [the construction supervisor], he or she is going to call me. If the board wants to have three extra meetings to talk about the special assessment, that's not a construction issue, that's a management issue," says Levy. "It's a lot of extra work."

Typically a condominium will pay a construction management fee to an outside engineering firm and a project management fee to the management company, says Levy.

If the condominium has an on-site superintendent who can handle some aspects of the special project, Levy says that should be reflected in the special project section of the contract. "Let's say we go in and the property has an on-site super. The amount is 'X' if they employ the superintendent 40 hours a week. If they cut him to 30 hours a week, then our special project fee would double.

"The other way to say it is that our special project fee is this, and there's a 50 percent discount, contingent upon you [the association] continuing with your on-site staff. If you have to do a roof replacement and Bob is the maintenance guy and there's a problem, then Bob can help you. If you have to run to the property manager every time there's a problem because there's no Bob at the property, then the management company has to charge more."

Some condominiums may not want to pay a special project management fee, says Levy, because their community or board may include owners who have relevant professional experience. Faced with a large construction project, the board might elect to place the management of the project into the hands of that individual. A manager's inquiries in this situation are often met with a breezy, "We've got a retired engineer on the property who's going to handle all that." The problem comes when the retired engineer goes to Florida, quits, or refuses to deal with problem tenant—leaving the manager to clean up the resulting mess, says Levy.

Template v. Custom Contracts

Once the details, both routine and non-routine, of the contract have been worked out, the mechanics of draw-ing up the document are typically straightforward, says Levy. Most management companies have a standard contract, which allows for a small amount of customization, he says. His firm, along with others, uses a standard management contract that Community Associations Institute drew up about 10 years ago, he says. Most of that contract is "boilerplate" but the document includes spaces for different pricing and for defining the number of meetings the manager is required to attend, says Levy.

Because reworking an in-house contract is such an enormous task, Levy says most management companies will not entertain condominium requests to restructure the document.

Such an appeal would typically be met with, "That's the contract. If you don't like it, please look for another management company," says Levy.

Legal Details Are Critical

In addition to defining the compensation and expectations for routine and non-routine work, a number of additional legal issues should be addressed in the contract, says attorney Marcus.

One important area is the "hold harmless" provision, also known as an "indemnification provision," which makes the association responsible for insuring and defending the management company against claims of negligence while the company performs its duties, says Marcus.

In many cases, says Marcus, the management company is added as a covered person under the association's Directors and Officers insurance coverage, which would protect the company against discrimination claims, among other things.

It makes sense for the association to adopt a "hold harmless" provision to ensure that the association and management company are on the same legal side in the event that actions of the management company are legally questioned. "If it's covered by the association's insurance policy, the association and the manager are not going to be fighting over who's responsible," says Marcus.

When arranging for the coverage, Marcus says it's important that the hold harmless language in the management contract is essentially the same as the language that is used in the association's insurance policy.

Specific guidelines on the manager's ability to spend the association's money should also be included in the contract language, says Marcus. Typically these guidelines allow managers to write checks for normal operational costs up to a certain limit, says Marcus. Anything over the limit, advises Marcus, should require a signature from a board member. But Marcus cautions that an exception to the guidelines should be included for emergencies, so the manager can quickly spend funds on his or her signature if a board member cannot be located.

Termination: Always a Sticky Issue

Another contract area that needs to be carefully defined is the termination clause, which outlines what happens when the contract is cancelled. Under Massachusetts law, says Marcus, a contract can be terminated by the association with 90 days notice without the need to offer any cause. Also in Massachusetts, the contract can be terminated in as little as 10 days if a cause is offered. If a 10-day notice is given, however, the management company has a chance to rectify the problem within the 10 days, says Marcus. Termination provisions similar to those set in Massachusetts state law should be included in contracts in those New England states that lack state laws on termination clauses, says Marcus.

Also typically included in a contract is a clause that allows for immediate termination in cases of misappropriation of funds, he says.

Stewardship of the financial and other records that the management company maintains for the association—and what happens to those records when a contract is terminated—is yet another issue that should be addressed in the contract. The records, says Marcus, are the property of the association under Massachusetts law, but a provision in the contract for the turnover of records and a full accounting of financials should be included the management contract.

The inclusion in the contract of specific termination procedures fits in with a pattern in which management contracts have become much more precise over the past 20 years. "They're definitely getting more specific, and it does protect both sides," says Marcus. "Whenever there are surprises and nobody knows what the manager's obligations are, that's not good for either party."

When the specific contract parts are finally nailed down, Marcus recommends that the finished document be reviewed by both sides and by legal counsel. His firm doesn't review contracts issued by its own associations, says Marcus, to avoid any hint of conflict of interest that might arise because the firm also works with management companies.

Paramount for all parties, says Marcus, is to carefully consider the management contract before it is signed, because "it's a contract that is for a pretty significant amount of dollars, and it's building up a relationship that can last for many years."

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