Most community associations in Florida operate with the assistance of outside vendors. As such, many community associations do not have in-house staff to pressure wash sidewalks or maintain the elevators. Communities often have a compilation of contracts with multiple vendors ranging from one-page estimates with no contractual provisions other than price, to lengthy contracts with exhibits and many pages of small print.
Arguably, every provision in each contract is important, but there are three specific provisions that are most relevant today. With increasing insurance costs, contractor unavailability and market fluctuations, many contracts either ignore these important terms, or include creative and vendor-friendly drafting that puts the Association at a significant disadvantage.
Clause 1: Termination
It is a common myth that all contracts in Florida can be terminated for convenience with 30 days written notice; however, in Florida, the general rule is that unless the contract specifically provides otherwise, a contract can only be terminated when one party breaches a material term of the contract. Limited termination rights can be desirable if the association has favorable pricing or exclusivity with a specific vendor, but limited termination rights provide no flexibility.
Most community associations prefer the flexibility of being able to terminate an agreement with or without cause. If an association wants this flexibility, the contract must expressly state that that the association may terminate with or without cause.
Additionally, even if an association has the right to terminate without cause, it should also be aware of any termination penalties in the agreement and should read the entire agreement. There are several contracts providing that the association may terminate without cause, but another part of the contract provides that there is fee to terminate for convenience. Termination fees vary, but anything above zero should be included in the Board’s consideration.
Clause 2: Limitations on Liability and Exculpation Clauses
An exculpation clause seeks to limit the contractor’s liability for his or her negligence, or for any claim whatsoever arising out of the agreement. These provisions effectively state that the contractor’s maximum exposure for any claim is the price of the contract, or sometimes three months of the monthly fee, or in other cases a nominal sum like $1,000. For example, if a contractor is paid $10,000 for a project and causes $250,000 of damage and injury, the contractor and its insurance carrier will argue that the total exposure is $10,000. If enforced, the community association will be in a very poor position.
Recently, some contractors have become more aggressive in including these liability limits in their agreements. When challenged, the contractors routinely respond that the provision is required by their insurance carrier, but the carrier wants this provision because it benefits from capping its exposure to $10,000 while providing $1,000,000 of coverage.
In Florida, exculpation clauses are generally looked on with disfavor, but they can be enforceable. If it is determined that the community association and the contractor had equal bargaining power, and if the language in the contract is clear and unequivocal, a contractor can potentially avoid significant liability for its own negligence. This means an association may be without recourse when there is significant damage or liability.
Thus, it is critical to clearly review proposed agreements to determine if they include exculpatory language. As noted above, the contractor may carry a lot of good insurance, but that insurance may be irrelevant if the contractor has clearly limited its exposure to an amount that may be even less than the contractor’s deductible.
Clause 3: Price Escalations
Lingering supply chain issues from the pandemic, inflation and demand fluctuations arising from recent hurricanes all create uncertainty and price risk. A painter, for example, may not know if their overhead, material and labor costs will be remotely similar in six months. Conversely, community associations have fixed budgets and limited sources of revenues. The community association wants assurances that the negotiated contract price will be the same on the day of signing and the day the work begins.
As a result, some contractors include crafty language allowing them to pass through all price increases resulting from ambiguous causes, such as “anything beyond the contractor’s control.” Under this standard, every price increase for any reason could be unilaterally passed through to an association and without its approval.
If a community association wants a fixed price agreement that hedges its risk against market conditions and unilateral increases, it is imperative that it includes a fixed price and also reviews the agreement for any provisions that would allow the contractor to unilaterally pass through increases without consent, as this risk should be included in the fixed price at signing.
In summary, both simple and complex agreements can have significant implications for community associations. These contractual issues exist in many agreements and are negotiable. If an association wants flexible termination rights, fixed costs and favorable recovery options, it should have these agreements reviewed by legal counsel during negotiations – not after. One recommendation is to include a proposed agreement as part of bidding package so that contract negotiations start with neutral or favorable language on these key terms. Additionally, community associations should employ a standard addendum for short estimates or simple contracts that include minimal and favorable terms such as insurance, timely performance and termination rights.
If you have questions concerning your community association’s contract clauses, please contact a Varnum real estate attorney.