Important Things to Know About Entering Into Contracts on Behalf of a Homeowners Association

In the course of operating a homeowners association there are many types of contracts that are entered into in the name of the association. Examples are management agreements, agreements with professionals such as lawyers and accountants or reserve study providers, and agreements with contractors who perform work on association property. Frequently, the association becomes bound to the terms of a contract by the acts of one or two officers or a property manager acting without proper authority or authorization. This is because the vendor, acting in reliance on the signature(s), provides products or services called for under the terms of the contract. In some instances, the association can be bound to a contract that was not even signed if there was partial performance by the vendor and the association accepted the benefits of the contract. This can result in the association becoming liable for performance under a contract that contains provisions which are not in the best interests of the association.

Contrary to what frequently transpires in the everyday operations of a homeowners association where property managers or rogue officers or directors acting on their own enter into contracts on behalf of the association, contracts in the name of the association should not be entered into until they have been reviewed, and approved, by the association’s board of directors, and in some instances by legal counsel for the association. This is important because proposed contracts typically contain provisions that favor the party who provides the written document and/or exclude important provisions that would be for the benefit or protection of the other party. In the homeowners’ association context, the contracts entered into by an association are almost always provided by the vendor and are drafted in a manner that is in the best interest of the vendor and not the association. Because the typical volunteer board member or property manager lacks the expertise of a lawyer, many of the undesirable provisions that are in a contract document that is provided by the vendor go unnoticed or are not challenged because they are not fully understood by the person who may be signing the document. Additionally, it is common for an association’s governing documents to contain provisions which mandate that all contracts be approved by the association’s board of directors and which limit the time period of a contract. Thus, it is important for the association’s directors to be familiar with the provisions contained in the association’s governing documents that pertain to contracts when proposed contracts are considered for approval.

Typically, the procedure followed in the entering into of a contract on behalf of a homeowners association involves a property manager, officer or director first being authorized by the board of directors to obtain bids and a proposed contract from one or more vendors (it is always a good idea to obtain multiple bids). If necessary, input from legal counsel is then obtained and then the facts regarding the bids or proposals are presented to the board of directors for review, discussion and approval. The discussion and approval is generally handled by the directors while conducting business in executive session. Once the document has been reviewed and approved by the directors, one or more officers should be authorized to sign the contract on behalf of the association. The approval and authorization by the association’s board of directors should then be documented in minutes of the meeting.

With the exception of decisions that are made regarding emergency repairs or nominal maintenance issues, if a manager, officer or director of the association approves a contract without first having obtained proper authorization from the board of directors, the association may still be bound by the terms of the unauthorized contract because of reliance on the part of the vendor, but would have alternative forms of recourse against the manager, officer or director for his or her unauthorized actions. This would not be the case where the decisions involved a need for emergency repairs (hiring a plumber or restoration company to deal with a water leak) and there was not time to go through the normal contract bidding and approval process. The same would be true in the case of routine nominal repairs where a manager, officer or director of the association may have blanket authorization to contract for expenditures up to a maximum amount (i.e. $500 or $1,000) without the necessity of full board approval.

To minimize the risk of exposure to claims that actions in connection with binding the association to a contract were not authorized, the person signing the contract should always be certain that the contract is prepared in the name of the association and not any individuals (the manager, officer or director), and the signature block at the end of the contract should always have the name of the association followed by the name and title of the person(s) authorized to sign on behalf of the association. It is also a good practice, and some state statutes require, that contracts in the name of the association be signed by two officers (one officer being either the president or vice-president, and the other being either the secretary of treasurer).

When there have been unauthorized contracts entered into by a property manager, officer or director of the association, which did not involve either an emergency situation or a nominal expenditure, the typical optional actions that may be taken against the person(s) include such recourse as: (i) terminating or removing the person from his or her position as the property manager or an officer of the association (because the officers serve at the pleasure of the board); (ii) imposing some form of censure on the person if he or she is a director; (iii) taking action to organize a membership vote to recall the director (assuming the person who signed the contract was a director at the time); and (iv) instituting a legal court action against the person for damages. When confronted with this situation, the board of directors should seek input from the association’s legal counsel concerning the appropriate course of action to take.

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