Condominium and homeowners’ associations enter into a variety of contracts with different vendors and suppliers to provide services to its residents. Before an association enters into a service contract, there should be a thorough review of its terms and conditions. Below are some clauses that are typically found in condominium and homeowners’ association service contracts and should be paid particular attention to before the association signs the contract.
Many service contracts include indemnification clauses. Indemnification clauses obligate one party to pay or compensate for the losses or damages or liabilities incurred by another party to the contract or by some third party. Indemnification clauses are a means of shifting risk between parties to an agreement and usually serve as a key negotiation point in most contracts. For example, certain language in an indemnification clause may expose associations to liability not covered by its insurance policies. If not covered by insurance, an association could be “on the hook” to indemnify another party without any attributing insurance proceeds, which may result in the association levying special assessments against the owners to cover the cost. Also, an association should be wary of indemnification provisions that provide the association to indemnify the other party or third person in all cases (without regard to negligence, gross negligence, or wrongful conduct). Again, indemnification provisions are often overlooked but are critical in protecting the interests of a condo or HOA.
Self-renewal clauses, or “evergreen” clauses, are common in service contracts. Self-renewal clauses provide that the contract will automatically renew at the end of its term unless the association provides the required notice to terminate the contract. These clauses usually protect the interests of the vendor or supplier while potentially prejudicing the interests of the association. Given that association’s personnel (board, officers, management, etc.) frequently change, associations run the risk of forgetting renewal dates and/or notice requirements. As a result, associations may be stuck with an unsatisfactory vender or supplier for another term and unable to take advantage of better offers. It is critical to properly account for and be prepared for automatic renewal provisions in contracts entered into by condominium and homeowner associations.
Right of First Refusal Clauses
Vendors or suppliers may insert a right of first refusal clause in their contracts. A right of first refusal entitles the existing vendor or supplier to match the material terms offered by a competing business at the end of the current contract. Depending on how this clause is drafted, the existing vendor or supplier may have the right to exercise its right of first refusal well after the current agreement has expired or been terminated.
The above examples are only a few key provisions that may be overlooked when negotiating and entering into a service contract by a condominium or homeowner association. In light of the foregoing, condominium and homeowners associations, along with their managers, should consult with legal counsel to ensure that a contract is properly reviewed so that the association is adequately protected.