Q&A: It’s not a waste of money to have an attorney review an HOA management contract

QUESTION: Our new board directors recently terminated the old management company. As treasurer, I cautioned other directors that this time we need to be more careful in hiring a replacement. We received 13 proposals and took our time, over a month, thoroughly interviewing each company and their on-site managers.

The board, which includes a number of successful business owners, voted for a local company and then signed its contract. We did not seek legal counsel because it’s a straightforward, east-to-read contract, so why waste money? But we soon experienced discrepancies between the promises made during interviews and the service and pricing provided.

I reminded the manager about what she and her boss said during the interview and that I intended to hold them to their promises. Her response was that “this is a fully integrated contract and you signed it.�

What did she mean by that? Do we have legal recourse here? Can we enforce those promises, or at least get out of the contract without being sued?

ANSWER: Apparently your directors checked their business acumen at the door along with their common sense. Contractual agreements, including management contracts, are a complicated area of law.

Listening to 13, or even 300, companies’ sales pitches is not due diligence, nor is deluding yourselves that you are competent to review a “simple to read� contract. An association’s management contract is by far its most critical contractual arrangement because it reaches into every aspect of HOA operations, short and long term. And never forget it was written by the management company’s attorney in a light most favorable to management.

It’s hard to understand why the board didn’t do any independent research, at least on the company it intended to choose. Directors could have visited properties the company manages, and talked to owners and board directors. It also is often revealing to check court records to see how frequently the company has been a party to a lawsuit, especially by other associations — and, more important, whether management has sued homeowners.

Even a simple Internet search would have yielded relevant information — both background about the company’s qualifications and financial stability, as well as potential alerts to problems experienced by owners and boards at associations it manages.

As for contracts, management or otherwise, it is fundamental to recognize that everyday English and contract English have significant differences, with serious legal implications. In particular, seemingly ordinary English phrases can have special legal meanings that may be adverse to your interests. Likewise, the lack of overt legalese such as “wheretofores,� “party of the first part� and long sentences does not mean a contract’s terms are “safe� to accept. Instead they likely mask pitfalls for the unwary board.

And if by “simple to read� you mean a short two to three pages, then likely many key contract provisions are missing. That assures that when disputes arise regarding hidden issues, their resolution is ambiguous. That invites arguments and additional legal expense.

Although you may have scrutinized provisions about management’s fees and specific costs, it’s not uncommon to skim the “boilerplate.� That’s a common term for those dreary clauses, clustered throughout but usually in the final pages of a contract that cover notice, indemnification, choice of venue for lawsuits, remedies and other things.

Even some lawyers gloss over it because it “looks like the usual stuff,� but disputes here are common and can be most problematic. Too often that pile of verbiage is where the most crucial legal language is buried. That’s especially true of phrases masquerading as English but having special legal significance. “Time is of the essence,� for example, traditionally means that a party’s delay in performance, even if small, constitutes a major breach — invoking damages otherwise out of proportion to the delay.

Serious contracts also usually say: “Paragraph and section headings shall have no meaning in the interpretation of this agreement.� Thus, anyone only skimming this contract could be in for a shock when he or she later discovers, for example, that the phrase “late payments will incur a 25% penalty� was buried in a paragraph headlined “Flowers and Trees.�

“Fully integrated� means that somewhere, probably in the boilerplate, you’ll find language that should be referenced as “Integration� or “Entire Agreement.� Typically this says that nothing counts unless it’s in this written agreement, which means that oral promises before or during signing have absolutely no legal significance. Nor do brochures, web pages and emails unless explicitly “incorporated� by the contract’s language.

In order to get out of the contract, check what it says about termination. Many provide for “automatic annual renewal,� which requires your board to give advance notice of termination. In that case, sticking it out for a year may be your best alternative to initiating litigation. Or, maybe management representatives haven’t yet invested extensive resources into your association account and they’ll agree to rewrite the contract to better reflect the parties’ intentions.

But first, you’d be foolish and derelict to fail to consult a lawyer right away to explore your options. If nothing else, the lawyer almost surely will be taken more seriously than a board director in negotiating legal issues and terms for changing or exiting the contract.

And in the future, keep in mind that having a lawyer review a contract — even if it passes muster without changes — is not a waste of money anymore than buying car insurance is if you never have an accident.

Michael Krieger, a Los Angeles lawyer practicing business contract, technology and intellectual property law, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian, JD, P.O. Box 10490, Marina del Rey, CA 90295 or [email protected].