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Subject: Canceling contracts when residents take control
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DavidG45
(Delaware)

Posts:144


08/10/2021 2:08 PM  
I am the lone resident board member of a community that is under developer control. We are nearing our 75% benchmark, at which time we will take control of the board. We have been told that at that point we will have the legal right to cancel multi-year vendor contracts that the developer had entered our HOA into; such as landscapers and property managers.

Short of hiring a lawyer on our own dime, does anyone know how I can research the relevant laws in Delaware?

We have some contract renewals due in the coming months, and I am going to suggest he not renew them. I'd like to know in advance what the options will be should he not take my advice.

AugustinD


Posts:1920


08/10/2021 4:30 PM  
Before bringing in an attorney, I recommend:

-- Read what the contracts say about terminating.

-- Study the Delaware Uniform Common Interest Ownership Act, Section 81-305:

"Termination of contracts and leases of declarant.
Except as provided in § 81-122 of this title, if entered into before the executive board elected by the unit owners pursuant to § 81-303(f) of this title takes office: (i) any management contract, employment contract, or lease of recreational or parking areas or facilities, (ii) any other contract or lease between the association and a declarant or an affiliate of a declarant, or (iii) any contract or lease that is not bona fide or was unconscionable to the unit owners at the time entered into under the circumstances then prevailing, may be terminated without penalty by the association at any time after the executive board elected by the unit owners pursuant to § 81-303(f) of this title takes office upon not less than 90 days’ notice to the other party. This section does not apply to: (i) any lease the termination of which would terminate the common interest community or reduce its size, unless the real estate subject to that lease was included in the common interest community for the purpose of avoiding the right of the association to terminate a lease under this section, or (ii) a proprietary lease.
"

-- Be aware that the Delaware statute's provision of a right to terminate on account of the contract not being bona fide or being unconscionable appears appears in other state's HOA and condo statutes. I suspect discussion of your question comes up a lot nationwide. I believe there is case law on what constitutes "not bona fide" and "unconscionable" for the purposes of a HOA prevailing in, if push comes to shove, litigation.

-- Be aware that the full Delaware UCIOA appears at https://delcode.delaware.gov/title25/c081/index.html


-- If you google on

HOA terminate contracts developer "bona fide" "unconscionable"

many sites come up that might help with your understanding of the HOA's rights after turnover.
BillH10
(Texas)

Posts:783


08/10/2021 6:14 PM  
As the lone board member who is an owner, I recommend you think long and hard about cancelling vendor contracts when the association takes control. What is is about the contracts or the contractor performance which is not acceptable to you--and presumably your new colleagues when developer turn-over takes place.

You may be the only owner with even a modicum of experience being a member of a board and managing an association. You and the members of the new board will be challenged for several months initially to understand the association and your governance roles and responsibilities. I would be especially careful about terminating the management company contract until the board is firmly grounded in managing the association.

I suggest you look at each contract as it comes up for renewal, beginning 4-6 months out and identify what is taking place that is driving the belief the contract should be terminated. Can the concerns be addressed? Are the perceived issues even a responsibility of the contractor? Would it be useful to hold a meeting with the owner or management, describe the issues, and determine if changes can be made or the contract amended. Would it make sense to offer a one year renewal?

You may have very valid reasons for termination of the contracts. Please ensure you are seeking to do so for the 'right' reasons before you find yourselves with new contractors and vendors, a new management company, and a significant learning curve for all concerned.
CathyA3
(Ohio)

Posts:2599


08/11/2021 5:30 AM  
I strongly agree with both Augustin's and Bill's comments. It can be easy to get out of contracts - many allow cancellation with proper notice - but it can be challenging to find better replacements, and without those you can end up in worse shape.

Developers usually work with contractors who have a proven track record, so the current crop probably aren't a bunch of nincompoops. If it's simply the terms of the contracts that are the issue, those can be re-negotiated.

I also suggest that if you're looking at changing property managers, do that first - we found our new one through word-of-mouth from happy homeowners in other communities. Many experienced management companies have a list of vendors whom they've worked with in their other client communities, so they'll know who the reliable ones are. This can save you much time and effort, as well as protecting you from making mistakes.
DavidG45
(Delaware)

Posts:144


08/11/2021 6:17 AM  
Posted By CathyA3 on 08/11/2021 5:30 AM
I strongly agree with both Augustin's and Bill's comments. It can be easy to get out of contracts - many allow cancellation with proper notice - but it can be challenging to find better replacements, and without those you can end up in worse shape.

Developers usually work with contractors who have a proven track record, so the current crop probably aren't a bunch of nincompoops. If it's simply the terms of the contracts that are the issue, those can be re-negotiated.

I also suggest that if you're looking at changing property managers, do that first - we found our new one through word-of-mouth from happy homeowners in other communities. Many experienced management companies have a list of vendors whom they've worked with in their other client communities, so they'll know who the reliable ones are. This can save you much time and effort, as well as protecting you from making mistakes.




I appreciate everyone's admonishments regarding the wisdom if cancellating contracts and the difficulting finding good contractors. But we've done our due dillegence on this. I approached every member of every one of our committees (the people who are really doing the work to make this a good community and who have working knowledge of the contractors we have been dealing with for three or four years.) We have held multiple meetings, interviewed multiple vendors, visited multiple references, etc. The problems we have dealt with have everything to do with performance, and nothing to do with the contracts. Our landscaper is simply not staffed to handle a community our size. Our property management company has failed us in every manner possible short of fraud.

In both cases the failures are significant, and we have well-regarded replacements ready to go. The advice I'm looking for is limited to our legal standing should the developer - who is likely to want to take the path of least resistance - renews these contracts against our advice. I have been up-front with our contractors and have told them I am actively working to have them removed. We are wondering if we might try to discourage them from re-bidding their contracts if we warn them that, should they do so, we will move to cancel them by spring.
DavidG45
(Delaware)

Posts:144


08/11/2021 6:17 AM  
Posted By AugustinD on 08/10/2021 4:30 PM
Before bringing in an attorney, I recommend:

-- Read what the contracts say about terminating.

-- Study the Delaware Uniform Common Interest Ownership Act, Section 81-305:

"Termination of contracts and leases of declarant.
Except as provided in § 81-122 of this title, if entered into before the executive board elected by the unit owners pursuant to § 81-303(f) of this title takes office: (i) any management contract, employment contract, or lease of recreational or parking areas or facilities, (ii) any other contract or lease between the association and a declarant or an affiliate of a declarant, or (iii) any contract or lease that is not bona fide or was unconscionable to the unit owners at the time entered into under the circumstances then prevailing, may be terminated without penalty by the association at any time after the executive board elected by the unit owners pursuant to § 81-303(f) of this title takes office upon not less than 90 days’ notice to the other party. This section does not apply to: (i) any lease the termination of which would terminate the common interest community or reduce its size, unless the real estate subject to that lease was included in the common interest community for the purpose of avoiding the right of the association to terminate a lease under this section, or (ii) a proprietary lease.
"

-- Be aware that the Delaware statute's provision of a right to terminate on account of the contract not being bona fide or being unconscionable appears appears in other state's HOA and condo statutes. I suspect discussion of your question comes up a lot nationwide. I believe there is case law on what constitutes "not bona fide" and "unconscionable" for the purposes of a HOA prevailing in, if push comes to shove, litigation.

-- Be aware that the full Delaware UCIOA appears at https://delcode.delaware.gov/title25/c081/index.html


-- If you google on

HOA terminate contracts developer "bona fide" "unconscionable"

many sites come up that might help with your understanding of the HOA's rights after turnover.




Thank you. That is very helpful.
BillH10
(Texas)

Posts:783


08/11/2021 7:23 AM  
David, sounds like you have done your due diligence. Best wishes as you move forward.
MaxB4
(California)

Posts:1601


08/11/2021 1:05 PM  
With very, very, very few exceptions, vendor contracts with HOA's should be on an annual basis, not multi-year. Matter of fact, a number of Bylaws will have that language written into them. Instead of cancelling the contracts, have them re-write them into annual contracts. I don't think you will get any pushback.
DavidG45
(Delaware)

Posts:144


08/11/2021 1:50 PM  
Posted By MaxB4 on 08/11/2021 1:05 PM
With very, very, very few exceptions, vendor contracts with HOA's should be on an annual basis, not multi-year. Matter of fact, a number of Bylaws will have that language written into them. Instead of cancelling the contracts, have them re-write them into annual contracts. I don't think you will get any pushback.




The contracts we are looking at are one-year contracts, but they automatically renew if we don't notify them by October 1 that we do not intend to renew. So it's a timing issue. We will probably gain control February or March. But by then the contract will already be in place to the end of 2022.
JohnC46
(South Carolina)

Posts:11665


08/11/2021 1:58 PM  
Our contracts ware for one year, automatically renewed if both parties agree and on a 90 day notice to cancel by either party going forward.
KellyM3
(North Carolina)

Posts:1806


08/12/2021 5:01 PM  
If you're not taking control until the end of Quarter 1 of 2022, the best advice - since you're on an HOA director website w/ veteran directors - is to allow your service contracts to expire on December 31, 2022.

Take control in March 2022

Use April, May & June 2022 to get your bearings on operations and define what you seek in new vendors.

Get your new vendors to bid beginning in July 2022 with a late August deadline for submitting bids

Select the winning vendors in September 2022 and establish contracts.

Give Notice of non-Renewal of contracts on Sept 15, 2022.

If you change property managers, notify your residents and engage the new company to begin transition around November 15, 2022.

Notify the residents of other service contractor changes on December 1, 2022.

Enjoy your new services and be transitioned on January 1, 2023 with residents having 45 days to get their own affairs in order to transition to a new management account.


The hassle of justifying the termination of contracts a mere six months before you'd give notice isn't worth it and will prove destabilizing. Plus, your board will take 60 days to hire new vendors, pushing the vendor changes to June or so. If you fire the property manager in mid-budget year, you rupture established dues payment pipelines and force your new company to scramble and confuse dues payers (who'll need a month or more to shift payments, etc). It would be worth the "fired" companies' time to sue you for contract performance and likely force you to buy them out dollar-for-dollar.

You would make two huge statements conducting these changes mid-year 2022. The first is that your HOA intends massive change. The second statement is your HOA is willing to sacrifice continuity and operations to make the first statement.

New boards relish making the first statement and don't think of the second.



KerryL1
(California)

Posts:8729


08/12/2021 5:23 PM  
Kelly's plan look really good to me. I have no experience in this area, but it just seem an extra 6 months, unless a vendor is gawdawful, gives both the new Board and owners some time to get used to the change and ease into them.
MaxB4
(California)

Posts:1601


08/12/2021 6:41 PM  
Kelly's thought process put out a good plan.

Couple of things to consider though.

1. Contracts don't expire at the stroke of midnight on December 31, 2021. The will have termination clauses in them. They generally will auto renew on the anniversary of the date contract of month signed, going through the end of that month. A contract signed on Sept 22nd, will run through the end of the month.

2. Contracts could have a different starting date, management started in May, landscaping started in Aug and so forth.

3. Most of these vendors work regularly with a developer, and a developer may not want to see these guys thrown to the wolves.

4. If you are considering changing management companies, be up front with them with your desires to possibly do a wholesale change of vendors. Make sure they can handle something like that, not all can.

5. Again, if changing management companies, make sure they can seamlessly handle a complete transition. You, as a board, should not have to worry about the actual details.
KellyM3
(North Carolina)

Posts:1806


08/13/2021 3:39 PM  
To follow Max's points.....

Follow those notice dates for termination. Avoid early termination that could prove small scale litigious (and you'll lose and pay up to close the contract).

For contracts that don't end on the calendar year and, since you're negotiating new deals, make them expire on Dec 31st so you know where everything stands from a service perspective. I've negotiated at 16 month contract for that very reason - synchronization with an easy-to-remember/milestone calendar date.

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