By: David A. Closson, Esq.
All too often an association’s board of directors wants to end a relationship with a vendor only to find it overly burdensome or expensive termination provisions in the vendor’s contract. The board may have relied on a history with the vendor or oral representations made by the vendor’s representative without fully reviewing the termination language in the contract. Unfortunately, that is the root of many problems.
Reviewing and negotiating the primary terms of any contract before signing it is critical to protect the board, association, and its homeowners. As you can imagine it is significantly more time consuming and expensive to try to terminate a contract with one-sided termination provisions that could have been negotiated and revised before the contract was signed. One of the most important terms in any contract is the termination provision.
Making sure your contracts have clear and reasonable termination provisions will help the association avoid unpleasant surprises by allowing the association to terminate contracts with vendors who are not performing without paying termination fees, not requiring the association to continue working with unwanted vendors after the relationship has deteriorated, and not requiring the association to initiate or defend a lawsuit to determine if there was a breach and/or proper termination of the agreement. When reviewing a termination clause in a contract make sure that, at a minimum, the relevant provision answers the following five questions to the association’s satisfaction:
When may the contract be terminated?
Pay careful attention to when the contract may and must be cancelled. Some contracts contain “evergreen” provisions that state the contract will automatically roll over and renew into subsequent contract term periods unless one of the parties has given the other party notice of termination of the contract. Some of these provisions require notice to be given significantly prior to the end of the current term of the contract, such as no less than 90 days prior to the expiration of the current contract period. If such notice is not given timely, the contract automatically renews for another term. If the term of the contract is multiple years, this means the association may be stuck with the vendor for several more years and will have to wait until the upcoming expiration of the next term to give proper notice of termination.
Must there be a reason for termination?
Some contracts indicate they may only be terminated before some predetermined period of time “for cause”. The permissible causes are outlined in the agreement and typically include items such as the insolvency of one of the parties or a breach of the agreement by one party. These provisions commonly require the party wishing to terminate the agreement to give notice of any alleged causes for termination and provide the other party with an opportunity to “cure” or fix the issue before the contract can be terminated. As you can imagine, the parties often disagree as to whether or not there has been a breach of the agreement and a permissible cause for termination, such disagreement can lead to costly and time consuming litigation. However other termination provisions allow for termination of the agreement “for convenience”. Such provision allows either party to terminate at any time simply by giving notice to the other party of the termination. In such an event, there does not need to be a reason, explanation, or justification given for the termination.
How, when, and to whom must notice be given?
The contract should contain provisions stating how, when, and where notices are to be given under the contract. Some contracts set forth an address where notices are to be sent, the method of notice (such as regular or certified mail) and the time frame (notice is deemed given 2 days after mailing and must be given 30 days before the termination is effective). Make sure to comply with these notice provisions in the agreement. If the contract can only be terminated “for cause”, include and outline the reason for termination.
Can both sides terminate?
Review the termination provisions to see if they are mutual. Mutual provisions allow the same termination rights for each party. If not, the parties may have different rights and requirements to terminate. In the event the termination provision is mutual and allows for termination for convenience, be aware that the vendor also has the right to terminate simply by giving advanced written notice, in which case the Association will be forced to find another vendor. Be sure to act fast if you receive a notice of termination to start evaluating potential replacement contractors so services to the community are not disrupted.
What payment is due in the event of termination?
Review the agreement for provisions regarding payments due upon termination. Pay special attention to liquidated damages clauses. Such provisions may require the terminating party to pay the other party some specified monetary amount if the contract is terminated prior to the end of its term. Other similar provisions may require the payment of demobilization fees or lost profits stemming from the termination. Ideally, the amounts due upon the termination of the agreement only include those amounts for goods and services provided up to the termination date.
If you have questions or would like to further discuss your association’s contracts or contract issues please contact a Altitude Community Law attorney at 303.432.9999.