Most condominium associations enter into a variety of agreements with different vendors and suppliers to provide essential services, such as laundry room facilities, snow-plowing, and landscape maintenance, to condominium residents.  Boards often sign these agreements without paying much attention to the legal terms governing the relationships, but imagine the following scenario:

Your association’s five-year contract with its laundry room vendor is ending (and not a moment too soon as far as most board members are concerned). Although the company hasn’t done anything terribly wrong, its level of service has slipped steadily over the past couple of years and you’ve found another vendor offering the association a much better deal along with the promise of better service. You send a letter to the laundry company explaining that the association does not intend to renew the parties’ existing agreement and asking the company to remove its laundry equipment from your property at the end of the contract term. 

Shortly thereafter, however, the laundry company’s in-house attorney responds with a letter indicating cheerfully that the contract, in fact, has already renewed for another five years.  The letter explains that the association’s contract included a “self-renewal” clause requiring the association to provide “notice of an intent not to renew no less than 90 days but no more than 120 days prior to the end of the current contract term.” 

Since the association failed to provide that required written notice within the contractual window, the contract automatically renewed itself.  As a result, not only can’t you take advantage of that better offer (which you better not have signed before getting out of the existing agreement), the association is going to be stuck for another five years with a vendor you don’t like who, having now locked you in for another five years, will have little incentive to try and make you like him better.  Adding the potential for future insult to that injury, unless someone is paying attention when this new contract ends, the association could find itself in the same position five years from now.  That’s why they call these self-renewal provisions “evergreen” – because they can last virtually forever.   

A Major Concern

Although such self-renewal provisions are common in contracts for services that are provided regularly ¾ laundry room management, garbage pick-up and elevator maintenance, for example ¾ they often go unnoticed when the contract is being negotiated, because boards tend to focus primarily on price, often to the exclusion of other concerns. 

If questioned about the contractual language, vendors will usually downplay its significance, insisting that: It is a “minor” provision; it protects both parties; and the board can avoid the automatic renewal by providing the required notice. In fact, the inclusion of an automatic renewal or evergreen clause in any agreement should be anything but a minor concern.

Such provisions protect the vendor’s interests while potentially prejudicing the interests of the association. And while it is true that proper notice will short-circuit the automatic renewal of the agreement, given the likelihood that association boards and management companies will change during any five-year period, it is highly unlikely that anyone will notice the automatic renewal provision and the required notification date in time to prevent the renewal.

Somewhat less common than self-renewal provisions, but equally undesirable for community associations, is the “right of first refusal” that many vendors insert in their contracts.  A right of first refusal entitles the existing vendor to match the material terms offered by a competing firm at the end of the current contract. Depending on how this clause is drafted, the existing vendor may have the right to exercise its right of first refusal well after the current agreement has expired or been terminated.  Like the self-renewal clause, a right of first refusal can act like fly paper, binding an association indefinitely to a relationship it may well want to end.   

Limited Options

If you have an agreement with a vendor that includes one or both of these traps – and they are in fact traps – your options are somewhat limited:

While suing a client is not a recommended business practice, this example illustrates the importance vendors attach to fly-paper provisions and the lengths to which they will go to enforce them.   Large companies – the ones most likely to have self-renewal or right-of-first-refusal provisions – are also likely to have in-house counsel, so litigation costs won’t be a serious concern for them, as they should be for community associations.  The vendors also have the law on their side.  Many of these provisions may be unpalatable but they are enforceable.  If you signed the contract, you accepted its terms, even if you didn’t anticipate how problematic they might become in the future.   

Just Say No

The best way to deal with undesirable contract provisions is to keep them out of the contract at the start, even if that means accepting a smaller cut of the revenue (on a laundry service contract) or selecting a vendor who charges more. The best way to avoid signing an agreement containing objectionable terms  ¾ those discussed in this article and a host of others not mentioned here - is to have your attorney review the agreement terms BEFORE signing.

If you elect to proceed without counsel, there are a number of things you can do to minimize the likelihood that you will be contacting your attorney later to ask how the association can get out of this objectionable contract:

 

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