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American Bar Association - Defending Liberty, Pursuing Justice

SPRING 2011

Vol. 7, No. 3

 

REAL ESTATE

 

Homeowner Association Management Contracts

By James C. Middlebrooks

A large percentage of all housing in the United States is located within a common interest community—a development in which a “[homeowner], by virtue of the [homeowner’s] ownership of a [home], is obligated to pay for a share of real estate taxes, insurance premiums, maintenance, or improvement of, or services or other other expenses related to, common elements, other [homes] or other real estate” (Uniform Common Ownership Act §1-103(9).). These common interest communities will generally have a homeowners association (HOA), of which all homeowners (Owners) are members, and the responsibilities of which are generally handled by a board of directors (Board) elected by the Owners. The Board will often hire a professional association manager (Manager) to perform various manangement functions. The following material relates to the management contract between the HOA and Manager.

The Key Questions

  • What Does the HOA Want? ”5-Star Full-Service” to “Limited Bookkeeping and Accounting.
  • What Can the HOA Afford?
  • Almost all HOA Boards and owners would like to offload all management responsibilities to someone else, but at what per unit per month cost?
  • Managing a 10- to 20-unit project may require almost as much time as a 100- to 200-unit project. So, most professional managers have a minimum base monthly charge for full service management.
  • In Washington, typical of many states, approximately 70 percent of all condominiums have fewer than 30 units, and 70 percent of subdivisions have fewer than 50 homes. Thus, most HOAs do not have the benefit of “economy of scale” to spread the cost of professional management.
  • Finally, these high-density projects are the prime source of affordable housing, which means the owners may be in the bottom one-third of income and are unable to afford a $30+/month/unit management fee.
  • What Are the Priority Management Functions?
  • Financial and property condition is most important—annual budget and reserve analysis; quarterly income/expense statement and balance sheet; monthly bank account reconciliation; monthly assessment deposits and assessment ledgers; annual common area condition inspections. These are the management functions for which owner self-management often does not work well.
  • But the less the manager does, the more the HOA Board and owners have to do themselves—from enforcing the dog-leash rules to supervising the HOA vendors and service providers. So as you fine-tune the management contract to provide for what the manager will do, you have to make clear in writing to the HOA Board what the Board will have to do.
  • Who Is a Good Manager?
  • In most states, there is no licensing, testing, bonding, or governmental supervision of “professional managers”—anyone that can print a business card can be a manager. With an incompetent or dishonest manager, the contract is almost irrelevant.
  • Is the manager a member of Community Association Institute (CAI)? [Note: Encourage the HOA Board to join CAI and gain access to seminars, publications, and similar resources.]
  • Does the manager have the various professional designations that first require education and testing?
  • Are the manager’s existing HOA Boards happy with the service?
  • Does the manager have multiyear relationships with HOAs (rather than a series of one- to two-year relationships)
  • How to Terminate?
  • The most important management contract provisions is the “30 or 60 day, no fee, no penalty, no cause termination”—both by the manager and the HOA.
  • Residential HOA management is a highly subjective and intensely personal relationship—if it is not working, you do not want to spend time with legalistic contract analysis—by all means have a frank discussion of concerns, but if mutual trust and satisfaction is lacking, then just end the relationship.

The Key Provisions

There is no one standard HOA management contract template, nor is a one-size-fits-all approach possible. Each management contract may have to be modified to work with a particular project, the provisions of the project governing documents, and the desires of the HOA Board and Owners. However, the following are some of the more key provisions:

  • Governing Documents. The management contract and the performance of the Manager’s duties must comply with the project governing documents, including the Declaration of Covenants, Conditions and Restrictions (Declaration), and HOA bylaws.
  • Law. The management contract and the performance of the Manager’s duties must comply with federal, state and local law (including, for example, a state condominium statute).
  • HOA Board Policies. The management contract and the performance of the Manager’s duties must comply with the HOA Board policies and resolutions.
  • Common Elements (Not Units).
  • The Manager’s duties will primarily be confined to the common elements (that is, the portions of the project other than what each Owner owns exclusively).
  • The Manager’s authority and duties will generally not include the supervision, management, or interior maintenance of individual homes except as may be required by the governing documents.
  • Independent Contractor Status. The Manager will generally be an independent contractor—not an employee of the HOA.
  • Manager’s Employees. The Manager must comply with all local, state, and federal laws in employing employees and subcontractors and agree to hold harmless and defend the HOA from any and all claims arising by reason of employment of any of Manager’s employees or subcontractors.
  • Limitation on Manager’s Obligations. The Manager should not be obligated to implement any decision which:
  • Is contrary to applicable law or the governing documents of the HOA,
  • Would involve transactions or services about which the Manager has no expertise, knowledge, or requisite license, or
  • Would involve transactions or services which are not expressed in the contract.
  • Notice of Violations of Law. The Manager should notify HOA if the Manager knows of a violation of law.
  • Compliance with Law. Subject to the contract, the Manager should assist the HOA in complying with law.
  • Hiring HOA Employees. The Board should have the sole authority to hire and fire HOA employees.
  • HOA Books and Records.
  • HOA books and records should be maintained by the Manager in accordance with generally accepted standards, including applicable state law.
  • All HOA books and records belong to the HOA and must be turned over to the HOA Board upon request.
  • HOA Professional Contracts. Except as may be otherwise provided in a written resolution of the Board, all contracts on the behalf of the HOA (including without limitation contracts for professional services such as attorneys, accountants, inspectors, reserve specialists, architects, engineers and other professional or personal service providers) should be in writing, be approved in advance by the Board and be executed by the Board.
  • HOA Insurance.
  • HOA insurance should require Board approval.
  • All HOA insurance should be reviewed annually by a qualified insurance professional.
  • HOA Insurance Claims. Settlement of insurance claims should require Board approval.
  • Enforcement.
  • HOA is responsible for enforcement of HOA governing documents.
  • The Manager only assists HOA.
  • Term and Termination of Management Contract. A one-year term is customary, but the contract should subject to a 30-day no penalty/no fee/no cause termination by either Manager or HOA.
  • Manager Liability.
  • Managers will generally limit their liability to the HOA to intentional misconduct and gross negligence.
  • The important thing for the HOA is the insurance coverage provided by insurance maintained by the Manager and by the HOA.

Subject Matter for HOA Management Contract

The following is the table of contents of a well-drafted and comprehensive HOA management contract. It illustrates the appropriate subject matter:

1. Appointment and Function of Manager

1.1. Appointment
1.2. Duties and Services
1.3. Independent Contractor Status

2. Employees of Manager

3. Duties of Manager

3.1. General Management
3.1.1. Counseling
3.1.2. Development of Policy
3.1.3. Implementation of Policy
3.1.4. Compliance with Government Order
3.1.5. Administration of Personnel
3.1.6. Enforcement
3.1.7. Administrative Records
3.1.8. Solicitation of Proposal for Service
3.1.9. Contracting
3.1.10. Insurance Placement and Claims
3.1.11            Attendance at Meetings
3.1.12. Meeting Administration
3.1.13. Financial Records
3.1.14. Bank Accounts
3.1.15. Investments
3.1.16. Collections
3.1.17. Delinquency Enforcement
3.1.18. Disbursements
3.1.19. Financial Statements
3.1.20. Management Report
3.1.21. Budget Preparation
3.1.22. Independent Audit
3.1.23. Tax Filing
3.1.24. Record Maintenance and Storage
3.1.25. Inspection
3.2. Property Management
3.2.1. Supervision
3.2.2. Preventive Maintenance
3.2.3. Inspection
3.2.4. Work Request Administration

4. Duties of Association

4.1. Provision and Accuracy of Records
4.2. Provision of Funds
4.3. Provision of Plans
4.4. Designation of Association Principal Place of Business
4.5. Designation of Corporate Contact
4.6. Enforcement

5. Compensation

5.1. Base Management Service
5.2. Additional Management Service
5.3. Resale Certificates, Broker and Lender Requests, Transfer Fees
5.4. Administrative Expenses
5.5. Management Services
5.6. Maintenance Services
5.7. Professional Services

6. Term of Agreement and Termination

6.1. Term
6.2. Termination
6.3. Notice
6.4. Termination Procedure
6.4.1. Turn-over of Records
6.4.2. Termination Accounting
6.5. Expenses Incurred After Termination

7. Liability and Indemnification

7.1. Manager’s Liability
7.2. Manager’s Insurance
7.3. Association's Insurance
7.4. Placement of Association's Insurance
7.5. Indemnification

8. General Provisions
8.1. Conflict of Interest
8.2. Affiliated Interest
8.3. Modification of Agreement
8.4. Use of Counterparts
8.5. Arbitration
8.6. Jurisdiction
8.7. Void or Unenforceable Terms
8.8. Precedence and Scope of Agreement
8.9. Assignment

James C. “Pete” Middlebrooks, is an attorney in Everett, Washington, and works extensively with community associations. He can be reached at 425-252-2693; his email address is mailto:pete@jcmiddlebrooks.com.

© Copyright 2011, American Bar Association.