Community Associations and Sel-renewing Contracts: Just Say NO

Published on: August 14, 2001

n an ideal world, all Community Associations would undertake an annual review of their governing documents, their contracts, their residents’ manual, their standard operating procedures, their employment handbook and all other matters relating to the operation of the Community Association. If this task were undertaken, Community Associations could continuously update their operations and procedures in light of new cases, new law, input from owners and advances in technology. However, the world is not ideal and based upon costs, time and other constraints, most Community Associations will not undertake this process. That being the case, cherrypicking different items to update and evaluate each year may be a much easier and more practical process for many Community Associations. Therefore, in this column as well as in future columns from time to time, I will attempt to pick a task with the hopes that some Community Associations will, at a minimum, consider performing the task sometime during the year. The particular task I would suggest in this column is simply obtaining, reviewing and systematically filing all contracts of the Community Association. This task, by necessity, should include getting updated certificates of insurance from all contractors or, better yet, having the Association named as an additional insured on the insurance of the contractors. In addition to property damage, liability and other insurances, all Community Associations should insure that all contractors have worker’s compensation insurance in at least the amounts required by statute.

Although most Associations will immediately think of the management contract when compiling the list and most Community Associations will have a copy of the management contract on file, it is the less obvious contracts which are of concern. A particular concern are the so-called self-renewing contracts, which automatically extend for periods of time unless terminated pursuant to the terms of the contract. In this category, a particular concern are common area laundry leases or contracts which typically have a term of five (5) to ten (10) years and extend for said periods unless otherwise terminated. Unfortunately, because of the unique setup of Community Associations, in the period of five (5) to ten (10) years Managers and Board Members may come and go without anyone tracking the termination date and the method of termination during the term of the agreement, thereby allowing the contracts to self-renew without notice.

In order to avoid any further unkind words from Bob Biederman or others, that I might sometimes be just a little bit too wishy washy, I hereby strongly suggest that the Community Association industry declare war on all laundry companies which insist upon self-renewing long-term contracts and which insist upon said contracts being leases versus simply contracts or licenses. If you do nothing else, get on the phone today and contact your laundry contractor demanding a copy of the contract and telling the company that you are “mad as hell and you are not going to take it anymore”. In my humble view, too many laundry companies have used unconscionable contracts, which clearly benefit the laundry company versus the Community Association and which contain no method to termination of the contract during the entire term of the contract. In addition, some of these companies have used complaints by Community Associations about old, outdated and defective laundry equipment as a method to renew their leases for even a longer period of time simply by promising decent, operating and new machines and equipment.

It should also be noted that typically laundry companies give to the Community Association a certain percentage of receipts. Also, in many cases, the laundry companies will “buy” the laundry room by paying an upfront commission to the Association. As to the first issue, it should be noted that the Association should find out as precisely as possible what it costs the Association to provide the water and other utilities to run the equipment in order to determine what the Association is actually making on the arrangement. Based upon somewhat outdated information, I would venture to guess that if an Association is receiving 50 percent of the receipts that they are paying approximately the same amount in utilities and water. In effect, if this is the case, the Association is at best breaking even. As to the issue of getting an upfront commission on/or having the laundry rooms renovated, certainly the Association should request that this be given and should not be shy about rerequesting the payment of the commission upon renewal of the contract. Obviously, the suggestion in terms of negotiating the contract is that the contract terminates on a certain date and is not subject to automatic renewal. Various other changes should also be made with the assistance of counsel for the Association in order to make the contract acceptable. These should include, but not be limited to, attaching and incorporating the proposal given by the laundry company to the Association as well as provisions for earlier termination, insurance, double locks in order to ensure the accuracy of the coin count, as well as specific provisions relating to when repairs will be made to an operable equipment and other changes which may be desired.

It should be noted that laundry companies are certainly entitled to make a reasonable profit based upon a reasonable contract, and certainly a longer term contract may be justified based upon the initial cost of the equipment and initial payment of the upfront commission. However, the contracts currently provided, in most instances, are not acceptable and it is up to the laundry companies to work with the Community Association industry to establish an acceptable, reasonable and fair agreement. As always, I welcome the opportunity to speak or meet with representatives of the laundry company industry to try to develop a contract which would be acceptable to Associations as well as to laundry companies.

Finally, Community Associations should not forget to look at other possible self-renewing contracts which may include elevator contracts, trash removal contracts and pest control services.