Automatic renewal can perpetuate a management problem

Question: I’m on the board of our homeowners association and was shocked when our management company’s contract was supposed to terminate, but they stayed on! We wanted to get rid of them but learned too late that the company had what is called an “automatic renewal” clause. How do we get out of this contract?

Answer: Because boards often accept management company contracts with little or no negotiation, the majority of these agreements are laden with terms and conditions favoring management and its employees while limiting oversight and remedies available to the association.

“Automatic renewal” in a contract means that upon expiration, the contract automatically begins again. Such automatic renewals have the same terms as the previous contract, unless they specifically recite changes upon renewal, for example, a 10% annual increase pertaining to certain fees or costs in the expiring contract. A simple clause might look like this:

“TERM: This agreement shall be for two years and will renew automatically at the end of the then-current term unless one Party gives the other at least 60 days notice of non-renewal.”

Yet, that TERM is anything but simple. If no one on your board bothered to read — let alone understand — the contract, then the right to terminate was wasted. If your management contract ends, say, Feb. 28, a termination notice to the company on Dec. 31 is ineffective because it’s only 59 days in advance of Feb. 28. Moreover, that failed notice probably further hurts relations with the company and invites even poorer performance.

What does “giving notice” really mean? Most contracts have a boilerplate “Notice” section that describes to whom you must send notices (whether for termination or other matters), how notice is to be given (courier service, U.S. Postal Service mail requirements, etc.), and when it is effective. “Effective” means, when it counts as “being given” to the other party. This critical definition determines what day is No. 1 in counting days of advance notice. For example, a notice of termination delivered personally by messenger usually starts the termination clock that day. But a contract may say that notice by fax is only effective the first business day after the fax is sent (to prevent unfairness like a Friday night fax, which will probably remain unseen until Monday).

Thus, terminating a contract, whether just in the nick of time or well ahead of the required minimum notice, necessitates careful reading of how to accomplish it and who is to get it. But wait, there’s more.

The clauses of our 60-day example above might be separated and found in disparate parts of the contract so that “This contract renews automatically” occurs inconspicuously in an otherwise unrelated clause. How can this be? Ethically, it should be in a section with a title like “Term and Termination.” But if you look carefully, you might find language — typically toward the end of the contract — explicitly stating something to the effect of: “The headings in this agreement shall not be used in its interpretation and shall have no legal effect.” You can’t rely on the headings: a provision on any topic may appear anywhere. Of course, most contracts will group related language under appropriate headings, but the potential freedom allows parties inclined to be exploitive to bury things in clauses where they are likely to be overlooked.

Note also that the “two-year” term in our example ordinarily means each “renewal” will be for another two-year term, a doubly long time to endure a company you already don’t like. Boards should limit the term to a year or even less.

Other provisions associated with automatic renewal of the agreement might bind the association to items such as increased management fees and cost-of-living increases in its employee benefits. Boards are well-advised to read and weigh each word carefully.

Note that the majority of management contracts provide no standards or mechanism for periodic examination or audit of company performance, or for determining whether an association’s needs are being met. Inadequate performance is thus perpetuated in contracts with automatic renewal provisions.

All of this underscores the need to read contracts carefully and thoughtfully, especially your management agreement, which has far greater complexity and broader implications than, say, an agreement with a gardener or waste disposal service. As part of their duty to the titleholders, new board directors should review the management contract to understand the company’s obligations and to recognize whether its performance is as required.

This column was co-written by Michael Krieger, a Los Angeles attorney practicing technology business and intellectual property law. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian JD, Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.