Association board wants to terminate law firm, management company

Question: The new board is trying to cut down unnecessary expenditures, but our homeowners association has a law firm on retainer and a management company on contract. Periodic audits unearthed what looks like duplicate and excessive billings for telephone conversations and communications between the attorney and management company owners and employees, also billings for attorney and management attendance at association activities.

We have not asked either the law firm or management company to partake in these communications or activities. They do it anyway, telling us that conversations and appearances are “necessary.” We’ve been unsuccessful in getting this situation to stop, and we’re considering terminating both the law firm and management company. The board was warned that if we terminate either of them, they will sue us for breach of contract. How do we handle this?

Answer: Such appearances are “necessary” only when the board votes in an open meeting to state they are necessary and provides the date and time such appearances will take place. The cost of each appearance should also be stated in the meeting minutes so the homeowners know where their money is being spent and for what reason.

In any relationship between an attorney and client, it is the client that makes the decisions, including whether the attorney attends meetings and when to end the arrangement and/or the agreement. Most attorney “contracts” or “retainer” agreements provide for termination at any time without cause. If it does not, that very action by the law firm may be a violation of its professional responsibilities, subjecting the firm to discipline.

Management company contracts often tend to be ones of adhesion, meaning they are unfair to the other party. Provisions are typically written to benefit the management company, not the association. Many management contracts contain automatic renewal provisions.

Finding the termination or renewal clauses in management contracts may not be easy. Typically, the association must notify the management company that the association will not be continuing its contract, within the stated time limits or before, and in the manner specified in that clause or clauses. There may be a number of other “relationships” noted in the contract that must simultaneously be terminated.

Boards should scrutinize every word in management contracts and understand the legal implications before signing. The association should seek to exclude any unfavorable terms.

The association does not need to have attorneys on contract or retainer. Hire an attorney on an “as needed” basis or on a “transactional” basis. Depending on the size and needs of your association, a management company may be unnecessary. The functions it performs may be able to be handled by other vendors already employed by the association or independent contractors whose specialty may be required.

Depending on the size of the association, and whether there are mixed uses, the association’s treasurer should be capable of handling assessments and invoicing. If needed, a licensed certified public accountant could be hired to assist in accounts payable and receivable, and to prepare and review the association’s annual financial statement.

As a fiduciary, the treasurer plays a pivotal role as a board director. This is not a slacker’s position because its duties can’t be delegated. Avoiding contracts the association can’t afford makes the treasurer’s position a hands-on directorship. The treasurer is charged with the ongoing role of reviewing accounts payable, contracts, retainer agreements, invoices, audits, bank accounts and investments the association may have, as well as reconciling these accounts with potential contracts the board wishes to enter into. Keeping the association’s spending within its operating budget is the treasurer’s job. The treasurer’s duties are unchanged even if the association has a manager or management company.

Boards are reminded that not only is the law of contracts constantly changing, but also that certain phrases in documents often have a specific legal meaning that few non-lawyers recognize.

It may be necessary to hire an attorney to review documents. Be careful about hiring attorneys with association clients because many may have a conflict of interest with other associations and management companies. Although attorneys should disclose conflicts of interest, they may not always do so.

Don’t be frightened if either the law firm or the management company sues the board and association, because the defense should be provided by the association’s insurance policy’s indemnification clause, provided that the board’s actions are reasonable and performed in good faith. If the law firm fails to terminate its agreement with you on request, you can file a complaint with the State Bar (www.calbar.ca.gov).

The late Stephen Glassman, an attorney specializing in corporate and business law, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to P.O. Box 10490, Marina del Rey, CA 90295, or noexit@mindspring.com.