Chapter 11 - § 11.9 • THE MANAGEMENT CONTRACT

• Jurisdiction: Colorado

§ 11.9 • THE MANAGEMENT CONTRACT

§ 11.9.1—Contract Formation

The CCIOA empowers associations, without specific authorization in the declaration, but subject to it, to hire managing agents.¹⁴² A manager's contract is one of the matters that under the CCIOA can be discussed in an executive or closed session.¹⁴³ While discussion about the contract can take place behind closed doors, under the CCIOA, the association has to maintain a copy of all current written contracts to which it is a party and all contracts for work performed for the association within the immediately preceding two years,¹⁴⁴ and generally those contracts are available for examination and copying by members of the association.¹⁴⁵ Both parties should be aware that under the CCIOA every contract imposes an obligation of good faith in its performance or enforcement¹⁴⁶ and that the Act allows courts to refuse to enforce unconscionable contracts.¹⁴⁷

When a condominium association hires a professional management company, the parties will necessarily make some agreement about the services to be performed and the compensation to be paid. The parties could rely on an oral agreement,¹⁴⁸ but verbal contracts are inherently vague, making a written agreement an absolute necessity for both the association and the manager. Moreover, state law requires all contracts, agreements, authorizations, and disclosures between a manager and a common interest community to be in writing and contain the entire agreement of the parties.¹⁴⁹

The association attorney, no doubt, would prefer to prepare, or at least review, the proposed contract. In actual practice, associations routinely hire — and fire — management companies without ever consulting or even notifying the attorney. Ordinarily, the first time the attorney sees the management agreement is when a dispute arises between the manager and association over its terms. These disputes present an awkward situation for the attorney and the manager because they both work for the association and, in many cases, have maintained a collegial relationship. The attorney, of course, has an ethical obligation to represent the interests of his or her client, the association. If the management company requires legal advice concerning the contract, it must engage its own counsel.

Usually the management company supplies the contract between it and the association. The Federal Housing Administration adopted a Model of Management Agreement for Condominiums Form¹⁵⁰ that, while now over 40 years old, addresses many of the issues that a management contract still must cover. The FHA contract sets out the management company's agency status, requires it to maintain a bank for depositing association funds, establishes the company's compensation,¹⁵¹ and designates the term of the agreement and how it will terminate.¹⁵² The model contract sets out the services the management company will perform including personnel management; handling owner problems and complaints; collecting monthly assessments and any rents or fees (e.g., parking leases); maintaining the buildings and grounds; complying with federal, state, and local laws and ordinances; making contracts for the provision of utilities and other necessary services; obtaining insurance coverage for the association;¹⁵³ paying the association's operating and other expenses; providing accounting services and preparing an annual budget; maintaining office records, books, and accounts; and informing owners of rules and regulations.

By law, a management contract has to include the beginning and ending dates of the contract; details of all compensation, fees; and charges; the cancellation rights of the parties; a record retention and distribution policy; errors and omissions insurance coverage; crime/fidelity insurance coverage; a general description of the records to be kept and the accounting or bookkeeping system to be used; and the designated manager's license number.¹⁵⁴

The CCIOA effectively forces the parties to address certain issues in their contract, or be bound by the Act. For example, it requires that anyone employed by an association with 30 or more units as an independent contractor to manage the community must obtain and maintain fidelity insurance, unless the association names that person as an insured employee in a contract of fidelity insurance.¹⁵⁵ The coverage provided by either policy may not be less in aggregate than two months' current assessments plus reserves, as calculated from the association's current budget,¹⁵⁶ unless the association determines there should be a greater amount of coverage.¹⁵⁷ Thus, the parties will probably want the contract to spell out which of them will maintain fidelity insurance and in what amount.

Under another CCIOA statute, the association's contract with a managing agent is terminable for cause without penalty to the association and is subject to renegotiation.¹⁵⁸ The actual language of the statute is that a contract with a managing agent "shall be terminable for cause" and "shall be subject to renegotiation." The use of the word "shall" indicates the statute is mandatory and the parties may not contract to exclude its application to them. The effect of the statute is that should the association terminate the management contract "for cause" before the expiration of its term, the manager has no action against the association for breach of contract. The meaning of the requirement that a contract "be subject to renegotiation" is less clear. Ordinarily, when parties are in contract negotiations, if they fail to reach agreement, no contract is formed. If "subject to renegotiation" means that either the association or the manager can at any time force all or a part of the contract to be subject to negotiation once again, then the contract would seem to be illusory: never binding and subject to constant negotiation. While the manager apparently cannot exclude the statute's application, there does not appear to be any reason why the contract could not define "for cause" and "renegotiation." Whether those definitions would hold up to a challenge is another matter. Despite the statute, the contract may still contain a termination "with or without cause" clause that provides for and requires written notice of termination of a stated period, often 30 days. The manager and...