Board lacked authority to enter three-year management agreement

A recent Illinois appellate level case concerns the validity of a management agreement entered into by a condominium association. The outcome did not go well for the management company.

Decided Dec. 24, Alliance Property Management Ltd v. Forest Villa of Countryside Condominium Association concerns the impact of the provision in an association's condominium declaration that provides that no management agreement may run for a period beyond two years.

The association entered into a three-year management agreement. The agreement provided for liquidated damages in the amount of the management fee for the remaining portion of the agreement if the termination provisions were not followed. A dispute arose between the parties and the association terminated the management agreement.

The management company filed a breach of contract lawsuit against the association claiming the association terminated the agreement without following the specific cancellation procedures detailed in the agreement. As a result, the management company sought to recover the liquidated damages. The association responded by claiming, among other defenses, that the contract was void ab initio. That is, the association claimed that at no time did the agreement have any legal validity.

The issue presented by the case is whether a provision in the bylaws of the condominium association limiting the board to entering into contracts for no more than two years renders a contract with a third-party property management company for three years void.

The court held that the association did not have authority to enter into a three-year agreement, and that a contract executed by a party that does not have authority is void ab initio. When a contract is void ab initio, it is as if it never existed. Therefore, the management agreement was void and the management company could not recover any liquidated damages from the association under the terms of the management agreement.

Note, too, that the court wholly rejected the argument that the board had the authority to waive the language in its bylaws if the action is in the best interest of the association. Whether a board acted in the best interest of its association, the court stated, is a relevant consideration when the governing documents are ambiguous and the board makes a discretionary decision. It is not applicable when there is explicit language in the governing documents, as there was here, and the court reiterated that a board is obligated to strictly comply with the bylaws. Remember Palm?

Associations need to carefully review its governing documents to determine if there are any limitations on its authority to enter into contracts. A limitation on the length of a contract is a relatively common provision in association governing documents.

Similarly, many association governing documents specifically address agreements with management companies, and also require that management agreements can be terminated without cause and without payment of any penalty on some stated number of days written notice. An agreement that exceeds the authority of the board is void, as would be a provision in an otherwise valid agreement that exceeds the authority of the board.

While this case concerned management agreements, its principles would apply to any contract entered into by an association. As such, it is absolutely critical for a board to examine its governing documents before entering into any sort of multiyear agreement, in order to determine what limitations, if any, are imposed on the board's authority.

It also underscores the need to have contracts reviewed by counsel before being approved and executed, as there may be other legally significant issues raised by the association's governing documents easily missed by the untrained eye.

• David M. Bendoff is an attorney with Kovitz Shifrin Nesbit in the Chicago suburbs. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to condominium, townhouse, homeowner associations and housing cooperatives. This column is not a substitute for consultation with legal counsel.