HOAs Must Understand Use and Power of Contracts

The board of directors in a homeowners association (HOA) is responsible for the functionality and governance of the community. One of the powers and duties delegated to the board of directors is the power to negotiate and enter into contracts, which is highly significant to the operation and bylaws of an HOA. In fact, one of the exceptions to the open meetings requirement Under CCIOA is for negotiation of contracts. This is significant because boards can meet in executive sessions to negotiate contracts and then re-convene in an open board meeting to vote on approving a contract.

What is a contract?

In its simplest form, a contract is an agreement between two or more parties where there has been a “meeting of the minds.” To have a contract, there must be an offer, acceptance of the offer, and consideration. Consideration means that there must be value given by each party to the contract. While some oral contracts can be enforced, an association should only enter into contracts that are in writing. Not only does this make enforcing a contract more difficult, but it also leaves the details of the performance of the contract in the eye of the beholder.

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There are a multitude of contracts that associations use. The most common include:

• Maintenance contracts
• Landscape contracts
• Cable bulk service agreements
• Building envelope/construction evaluations
• Construction contracts
• Employment contracts
• Attorney representation agreements
• Management company contracts
• Association lending contracts.

With the different variations of contracts, it is important each is negotiated in ways that suit the HOA community and are reviewed and discussed thoroughly by the board.

When is legal support needed?

If a contract is for ongoing services, or for more than a few thousand dollars, it is highly recommended and encouraged that the HOA brings in an attorney to assess and review the material. There is specific terminology in every contract that can be used if a disagreement arises, which is why an attorney must be brought in to help the board understand the nuances that may be difficult to understand and interpret. Timing of the performance of the contract, conditions precedent to performance and association obligations within the contract should be scrutinized.

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Before entering into a contract, the board must fully understand the scope of what it addresses and demands, this includes the goods or services that are going to be offered, what the expectations are for performance under the contract, how to terminate a contract, what it will cost the association to terminate the contract, whether arbitration is required, or any other limitation on enforcing the contract, and if attorney fees are to be awarded to the prevailing party in a lawsuit. Without having a grasp on these aspects, the board is at a vulnerable disadvantage which could cause negative legal ramifications if an issue was to present itself.

What type of contracts are commonly used?

There are numerous different types of contracts, all with their caveats. Understanding the differences and knowing what to expect before engaging with a contract is beneficial because it streamlines the revision, negotiation, and entering into phases. In general, contractors use standard form contracts, these can have provisions that may not be favorable, or even applicable, to the association. These form contracts are very lengthy and can be very specific about payment, insurance, performance, and limitation of liability. Under no circumstances should the board use a bid as the construction contract. When the board selects a bid, they should request a copy of the contract to evaluate terms.

There are also clauses within the contracts that boards should be cognizant of. Evergreen clauses are a common pitfall, and it is critical associations understand these terms. An Evergreen Clause is an automatic renewal clause. It’s a contractual provision that operates at the end of a contract’s terms to automatically extend the term for a specified period unless one party provides notice of its intent not to renew. These time periods for notice can vary widely and be as long as 90 days, depending on the length of the original contract. Colorado passed a new law in 2022 which requires upfront and specific disclosure of these types of clauses; however, boards should still be wary.

Finally, as a fiduciary of its members, the board of directors has an obligation to enter into a contract with the best interest of the association at the forefront. Certain negative terms within a contract may outweigh the lower bid price for services and be more advantageous to the association’s needs. The association should always solicit bids from multiple sources for any contractual need and compare price and terms.

When entering into contracts, the board needs to fully understand the contracts it enters into on behalf of the association. Questions and concerns about contracts should be discussed with legal counsel.