Two Common Contract Clauses that Trap HOAs

Management of condominiums requires HOAs to enter into a variety of contracts with different vendors and suppliers to provide essential services (laundry room facilities, landscape maintenance, etc.) to condominium residents. Your HOA board may sign these agreements for the condominium without thoroughly reading the legal terms governing the relationships, which may have just led your homeowners association to renew contracts with approval, limit service options, etc. 

The Two Most Common Clauses

Self-Renewal Clause 

The self-renewal clause, sometimes called the evergreen clause, is a common element in HOA contracts that protect the vendor at the cost of the homeowners association. The self-renewal clause states that the contract will automatically renew at the end of its term unless the homeowners association provides the required notice to terminate the contract. This can sometimes be very specific, such as requiring a notice of an intent not to renew no less than 90 days but no more than 120 days prior to the end of the current contract term.

Since the association failed to provide that required written notice within the contractual window, the contract automatically renewed itself. As a result, the HOA cannot take advantage of that better offer (which it hopefully did not sign before getting out of the existing agreement) and is going to be stuck for another five years with an unsatisfactory vendor that will have little incentive to improve their service (since they have already signed on for another 5 years). Adding the potential for future insult to that injury, unless someone is paying attention when this new contract ends, the association could find itself in the same position five years from now. That’s why they call these self-renewal provisions “evergreen” – because they can last virtually forever.

Although such self-renewal provisions are common in contracts for services that are provided regularly— for example, laundry room management, garbage pick-up and elevator maintenance—they often go unnoticed when the contract is being negotiated, because boards tend to focus primarily on price, often to the exclusion of other concerns.

If questioned about the contractual language, vendors will usually downplay its significance, insisting that it is a “minor” provision that protects both parties; and the board can avoid the automatic renewal by providing the required notice. In fact, the inclusion of an automatic renewal or evergreen clause in any agreement should be anything but a minor concern.

Such provisions protect the vendor’s interests while potentially prejudicing the interests of the association. And while it is true that proper notice will short-circuit the automatic renewal of the agreement, given the likelihood that HOA boards and management companies will change during any five-year period, it is highly unlikely that anyone will notice the automatic renewal provision and the required notification date in time to prevent the renewal.

Right of First Refusal Clause

Somewhat less common than self-renewal provisions, but equally undesirable for community associations, is the “right of first refusal” that many vendors insert in their contracts. A right of first refusal entitles the existing vendor to match the material terms offered by a competing firm at the end of the current contract. For example, say Joe Schmoe’s Landscaping Company has inserted a right of first refusal clause in its contract with an HOA. At the end of the HOA’s one-year contract agreement, it must first offer Joe Schmoe to renew the contract before seeking services from another landscaping company. Joe Schmoe has the right to refuse the first offer made by the HOA, and only then is the association allowed to seek service elsewhere. Depending on how this clause is drafted, the existing vendor may have the right to exercise its right of first refusal well after the current agreement has expired or been terminated. Like the self-renewal clause, a right of first refusal can act like fly paper, binding an association indefinitely to a relationship it may well want to end.

Options for Dealing with Problem Contract Clauses

If your homeowners association has an agreement with a vendor that includes one or both of these clauses, its options are somewhat limited.

The HOA can…

Accept the new contract and hope the vendor commits a significant breach that gives it a basis for terminating it.

Negotiate with the vendor to waive the fly-paper provision. The prospects here aren’t great, however, because vendors won’t easily relinquish the option of locking a client into a new long-term contract, particularly in a difficult economy when vendors will do all they can to hang on to the clients they have. Most vendors either won’t waive their right under an existing contract or they will demand a buy-out price that associations are unable or unwilling to pay.

Ignore the objectionable provisions, sign a contract with the vendor it prefers and dare the existing vendor to sue. Most will do precisely that. One recent example: Anticipating that a laundry company the association wanted to replace would exercise its right-of-first refusal, the board obtained a proposal from a vendor offering to install new equipment under a one-year contract, foregoing the longer-term most laundry vendors require in order to recoup their up-front investment in the equipment they provide. The existing vendor has claimed the offer is a sham and is threatening to sue the association for negotiating in bad faith. 

While suing a client is not a recommended business practice, this example illustrates the importance vendors attach to fly-paper provisions and the lengths to which they will go to enforce them. Large companies—the ones most likely to have self-renewal or right-of-first-refusal provisions—are also likely to have in-house counsel, so litigation costs won’t be a serious concern for them, as they should be for community associations.

Learn about the different ways your HOA can fund a lawsuit

The vendors also have the law on their side. Many of these provisions may be unpalatable but they are enforceable. If an HOA signed the contract, it accepted its terms even if it didn’t anticipate how problematic they might become in the future.

Avoid Unfavorable Contract Clauses Altogether

The best way to deal with undesirable contract provisions is to keep them out of the contract at the start, even if that means accepting a smaller cut of the revenue (on a laundry service contract) or selecting a vendor who charges more. The best way to avoid signing an agreement containing objectionable terms— those discussed in this article and a host of others not mentioned here—is to have an attorney review the agreement terms before signing. Our Professional Directory can help you find a reliable attorney. 

If your HOA elects to proceed without counsel, there are a number of things it can do to minimize the likelihood of contacting an attorney later to ask how the association can get out of this objectionable contract:

• Put extended terms (more than two or three years) on the list of undesirable contract provisions. With the exception of laundry service companies, which have a legitimate need to recover their investment in the equipment they provide, most vendors have no justification for locking the association into a long-term agreement, other than that it is clearly in their interests to do so. An association has a much better chance of rejecting undesirable provisions during initial contract negotiations than of persuading a vendor not to enforce them after the contract has been signed.
• If a board of directors decides its preference for a particular vendor outweighs its concerns about the self-renewal clause, it should insist on language requiring the vendor to provide a reminder of the required termination notice at least 60 days before the deadline. The board should also make sure that someone is responsible for keeping track of the non-renewal notification dates for this contract and any others with similar provisions and make sure, as well, to comply with the notice requirements, e.g., sending the notice by certified mail or mailing it to a particular address.
• If a board is putting a contract out to bid, make it clear to competing vendors from the start that it considers self-renewal and right-of-first-refusal clauses to be non-starters or include a proposed agreement that the association will accept in the bid package.
• If your HOA is skipping the bid process and negotiating with a selected vendor, ask that vendor to provide a copy of its standard contract up front, before the negotiations begin. This is not a standard request, but there is no reason boards shouldn’t insist on it, in the interest of getting fly-paper provisions on the table (and preferably out of the contract) as quickly as possible.

John Shaffer is an attorney with the Boston law firm, Marcus, Errico, Emmer & Brooks, P.C. He focuses his current practice in the civil litigation practice group and construction defect litigation. The firm is active in the community association industry. Image courtesy of iosphere at FreeDigitalPhotos.net