Management contracts too often ignore realistic scenarios

As controversies in associations go, none are more emotional than when there is a perception by board members and/or owners that the property manager is the source of some problem. It comes down to criticism of a work product, lack of follow-up, failure to perform some task and often results in a personal attack on the manager himself.

Obviously, sometimes there is basis for the manager's performance to come under scrutiny, but many times the manager or the management company is on the firing line because of a problem that had its roots elsewhere. Instead of working together as a team to solve the problem, unfortunately it is human nature to look for a scapegoat, place blame and wallow in misery.

Whether it is an underfunded reserve, poor contractor performance on a big maintenance project or an increase or special assessment, it has to be someone's fault. The fact that prior boards neglected to do a reserve study and plan for the future or that the board chose to hire the lowest bidder, becomes secondary.

One of the biggest problems in the manager's perception of themselves is they are virtually "bulletproof;" they don't need errors and omissions insurance because they have all these indemnifications written into their management agreement. The reality is that these agreements are not made of Kevlar.

Aside from the manager's actual performance, there is a tendency to place too much emphasis on the management contract in relation to the manager's performance.

This reliance is misplaced since all the good intentions and well-drafted paragraphs, will not make a poor manager perform, or an overworked, overextended manager perform more efficiently.

If you review the typical management agreement in use in the industry today, you will see laundry lists of tasks and responsibilities, language to protect and defend a lot of backsides, regardless of fault, and pointed language expressing all the good intentions on the world. However, the most important parts are often overlooked and neglected, and that is; dealing with litigation in a realistic fashion (all the indemnification provisions in the world still will not address reality when a suit is filed), insurable interests and most importantly, if the relationship should end, how does it end professionally, without animosity and without having to call the lawyer?

Let us start with the most important premise; a written contract, is only as good as the intentions of the parties. (When I was in law school we learned that a verbal contract was not worth the paper it is printed on!) People can perform under an agreement with a handshake, so why all the flowery verbiage? Because in the event of a dispute, either as to who does what, or ending the relationship, the details must be spelled out.

However, if either party fails to follow these precepts, then the dispute has to go to the courthouse to be resolved. It has to be self-enforcing. The parties have to do what they say they are going to do, e.g. submit the claim to insurance, turn over the records within 30 days, etc. If either party fails or refuses to do so, you have a stalemate.

First, let us examine the litigation scenario, which unfortunately happens all too often. Aside from mortgage foreclosures, there is a very high likelihood that if the association gets sued for any reason, the manager will also be named as a party (and often the directors will be named individually, as well). The manger typically says to the board, "look at the contract, we are indemnified from this." The association's general liability and/or directors and officers insurance should cover this.

But, what happens when it doesn't? The insurance company balks, subject to further investigation looking for some fault on the part of the manager to avoid coverage, or the board receives a reservation of rights letter, questioning exposure for liability but offering legal defense for the association but not the manager.

What happens? Either the association must go out of pocket to pay for the manager's legal defense, or the manger can submit the claim to his or the company's own carrier.

Therefore, in order to avoid the former, an association must make sure that the manger carries insurance as a backstop as the cost of legal defense will usually outweigh the amount of the claim. Secondly, if the manger has been involved in reviewing or securing insurance for the association, they have an obligation to make sure that the policy has state of the art coverage both for their client's protection as well as their own. Lastly, if the manager is sophisticated enough to have purchased their own liability policy, they must make sure that they too have errors and omissions coverage.

The other problem, as referenced above, is the obligations of the parties when the relationship ends. This is a pure test of human nature, character and integrity.

Whatever the agreement says about transition, it still requires the parties to honor their word. If the termination/transition is emotional (managers taking their firing personally) or bitter (board members feeling taken advantage of), the association attorney will get dragged into the dispute. Aside from being potentially costly, it is a conflicted situation because, although the attorney takes his direction from the board, he has still been working with the manager as the main contact over the last years or months and now has to choose a side.

These situations are of course ripe for mediation, but the underlying agreement itself could be drafted in a self-enforcing fashion. Typically, it says that the manager can keep money to pay bills that come in, financial records don't have to be turned over until completed, records in boxes are turned over - whenever, and so on. Contract after contract deals with these issues in an ambiguous fashion, and unless the parties do the right thing a dispute will drag on endlessly. So, the solution is found in changing the conventional wisdom. First and foremost, the records belong to the association. Period.

The management company is merely the custodian. Regardless of all the good work they have done on keeping them up to date, the bottom line is that the records are the property of the members of the association, the manager has them for safekeeping, and when the relationship is ending, they must be given back.

Too often we see managers, who have taken their firing personally, even though it may have been purely political, holding the records for ransom. In my opinion, this is unethical, regardless of what the contract says.

Conversely, I see board members refusing to pay the manager their monthly fee or charges spelled out in the contract, because the manger allegedly did a bad job. That is why you fired them! Except in the instances of fraud or impropriety, there is no legal or ethical reason for a board to withhold payment.

Sometimes these disputes drag on because the parties who have been business partners for years refuse to communicate and work out their differences.

If the agreement is written in self-enforcing language (failure to turn over the records within the time specified will create liability of all out-of-pocket expenses to recreate them plus legal fees, or failure to make payments when due will result in accrued interest at 18 percent per annum compounded daily) might be a forceful deterrent, but, why not make sure all records are scanned and electronically filed and all monies are guaranteed by an arrangement with lending institution in order to prevent arbitrary behavior?

When it is time to sit down and either sign or renegotiate a management contract, instead of the parties just signing a form (the contract which defines by its very nature one of the most important relationships an association has) that is an alphabetical listing of general tasks, why not take a realistic approach to both how the relationship should function with realistic scenarios and also how it will end, which unfortunately, is a fact of life in their industry.

Otherwise, it is just a bunch of words on paper with no real meaning.

• Jordan Shifrin is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at jshifrin@ksnlaw.com. This column is not a substitute for consultation with legal counsel. Past columns can be read at www.ksnlaw.net.