2012 HOA To Do List: Exercise Due Diligence Before Executing Contracts

On a yearly basis, the boards of homeowners’ associations (“HOAs”) are faced with making important and sometimes costly decisions on behalf of the communities they govern. When retaining the services of professionals and vendors to provide services for your association – it’s essential to exercise due diligence to ensure your association is properly protected. Here are some important reminders:

Always review a contract before entering into it. Unfortunately, from time-to-time, association boards will enter into a contract without carefully reviewing the terms of the agreement. Sometimes this will occur when a board has built a relationship of trust with a particular professional or vendor. However, it’s important to understand that this relationship does not dispense with the obligation of directors to take the necessary action to make informed decisions on behalf of the communities they serve. 

Obtain legal review before entering into significant contracts. Not having legal counsel review contracts where significant money will be spent by the association and significant work will be performed by the contractor – is penny wise and pound foolish. This is particularly true with construction contracts and significant vendor contracts. Your legal counsel should be equipped to review and negotiate terms regarding things like: scope of work, payment terms, insurance requirements, warranty requirements, indemnification, lien waivers, default and termination of the agreement.   

 

Don’t assume terms of contracts are not subject to negotiation. Sometimes vendors will tell boards that the terms of their contract are not negotiable. While there may be particular provisions a vendor is not willing to budge on – don’t assume this is the case. If there are provisions a vendor will not negotiate, boards need to consider whether this is a deal breaker for their association. In making this decision, it may be wise to seek advice from legal counsel or other related experts. 

 

When conducting the business of your association, it’s important to remember that directors have a duty of care they must fulfill. This means that directors must give the business of their association the same degree of care and diligence that prudent persons would exercise in their own affairs under similar circumstances. The duty of care requires directors to invest time and attention to association business, make reasonable inquiry into association matters to enable informed decision-making and to take reasonable (not arbitrary and capricious) action.  

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