WHAT EVERY ASSOCIATION AND MANAGER SHOULD KNOW ABOUT CONTRACTS AND MECHANICS’ LIENS by Beth Grimm, Esq. DRAFTING/NEGOTIATING CONTRACTS Most associations must deal with contracts and related issues on a daily basis. Contracts come into play in hiring management personnel, employees, landscapers, contractors and in purchasing or procuring various services. My experience as a legal representative tells me that a large majority of association directors do not necessarily understand the benefits of a written contract. Additionally, many association directors and managers simply may not have a basic understanding or appreciation for important provisions that should be included in those contracts. The information provided in this newsletter is designed to assist associations in "negotiating" contracts beneficial to them. NEGOTIATIONS ARE A KEY FACTOR Association boards of directors often feel at the mercy of contractors and service providers when they are handed a written contract or agreement and asked to sign on the dotted line. Association board members and managers do not always realize that they do have the right and power to "negotiate" more favorable terms. Many contracts are not "set in stone". But without a basic knowledge of contract terms and how they might affect the association’s rights, board members may well be at the mercy of the presenter of an already drafted, pre-printed contract. Once the basic knowledge is there, association representatives need only make their own demands in a negotiating process. FOUR ESSENTIAL CONTRACT TERMS There are four terms that "make" a contract: Parties Subject Matter Time Price (Consideration) Each of these terms or elements are essential and if they are not made a part of the contract itself, they may be inferred in some circumstances by the court. Parties Naturally, it makes sense to name all of the parties to a contract in the contract. In regard to homeowners associations, the association itself should be the party named in the contract to procure products or services for the associations. Associations should not name individuals such as board directors, officers, or managers as a party to any contracts for which the association is responsible. Associations are a viable business entity and most governing documents provide the directors with authority to make contracts on behalf of the association. Through management agreements or contracts, this authority is sometimes delegated to the manager or management company, but this delegation does not change the fact that the association should be identified as the contracting party. Subject Matter Without a specific subject matter, there really is no contract. The subject matter might include specific products, and improvement or construction project, specific services such as management, legal, financial/accounting, or laundry services. Whatever the subject matter, it should be spelled out clearly, in writing, and defined in such a way that the association knows exactly what is to be expected from the contract. Time Time for performance is another very important element in a contract. In contracts where time for performance is not specified, associations will find it hard to enforce any time limitations or demands. This leaves control in the hands of the contractor or the products provider as to when the products will be delivered or when the improvements might be constructed. If there is no time provided in a service contract, an association may find itself bound to staying with one contractor or provider much longer than it desires. If time for performance is absent from a contract, and a demand regarding time for performance is made, a court will have the say in determining what is reasonable. Naturally, what is reasonable in the eyes of the provided may differ drastically from what the association considers reasonable as time for performance. If time is an important factor, "time is of the essence" should always be specifically stated in the contract, even apart from specific timelines. This tells any party called upon to interpret the contract that time is an important factor and deviations should be denied. Price (Consideration) The specific price should also be embodied as part of the contract. Though it seems this is a matter of common sense, there are instances where the price or consideration (which may include something of value other than money) are inadvertently left out of the contract discussions and/or the contract itself. ADDITIONAL GENERAL PROVISIONS THAT SHOULD BE CONSIDERED Recitals The Recitals section of a contract basically embodies specific statements about the intent and purpose of the contract. There are times when the parties’ intent differs, and by stating specific Recitals, an association may avoid a later interpretation of the contract that is not parallel with its original intent. One might define or describe the entities involved in the contract in the Recitals section. The very purpose of the contract itself might be stated under Recitals. If the scope of a contract is to be defined, it might be found here. Arbitration If the association wishes to preclude the necessity of legal intervention in the event a problem should arise under the contract, it may wish to request or negotiate in a provision regarding arbitration. Some arbitration clauses are binding; some are not. It depends on how the provision is written. Some arbitration provisions allow for each side to choose an arbitrator, and those arbitrators to choose together a third arbitrator which will constitute a "body" to hear the matter. An arbitration provision may bind the arbitrators to specific rules such as those in effect of the American Arbitration Association or another entity. It is also important to understand that unless a provision so states, an arbitrator is not bound to follow California law in deciding a dispute. Some arbitration provisions specify that a decision of the arbitrators is judicially enforceable as a judgment. Limitation on Liability The parties to a contract do have the option to define limitations on liability of either party. However, these limitations are subject to court scrutiny if challenged and should not be unreasonable. The courts frown upon clauses limiting liability for intentional or negligent acts. Additionally, the courts tend to invalidate provisions regarding damages which appear to be penal in nature, rather than compensatory. Binding on Heirs or Successors When this provision is omitted from a contract, the contract ends when one of the parties dies, transfers its ownership, dissolves, becomes incompetent, or otherwise incapacitated. Unless the contract specifically states that it "binds and inures to the benefit of the parties and their heirs or successors", it will die with the "death" or "incapacity" of the party. Sometimes this is not a problem. For example, if an association hires a single contractor to build a fence, perhaps the association would not want the contractors heirs or successors to be responsible for finishing the project if something happens to that contractor. On the other hand, if an association has a contract to lease a golf course from the developer of the subdivision and that company goes broke or bankrupt, the association would want to attain its rights to lease that golf course with the succeeding entity. Attorney’s Fees Provisions Many contracts are written without attorney’s fees provisions. When provision is made, it is usually stated in terms that if either party is forced to bring a court action under the contract, the prevailing party will be entitled to attorney’s fees. Even if such a clause is drafted to protect only one of the parties, California Civil Code Section 1717 makes such a provision reciprocal if the other party prevails in a legal action. In smaller contracts, the benefit of omitting such a provision will inure generally to the defaulting or breaching party. The reason is that attorney’s fees are of a general concern in a decision whether to bring a lawsuit to enforce a contract. The absence of an attorney’s fees provision may discourage an association from taking action under the contract which might result in the necessity of defending a lawsuit even when it feels it is in the right. As long as an association acts reasonably and upon competent legal advice in regard to contracts, an attorney’s fees provision would be more likely to benefit than to harm an association. POINTERS FOR SPECIFIC SUBJECT CONTRACTS In order to assist associations in considering other factors about specific contracts, a list is provided below suggesting provisions for various types of contracts. MANAGEMENT AGREEMENTS AGENCY RELATIONSHIP FEE PROVISIONS (Ordinary and Extraordinary) MANAGER’S DUITES AND RESPONSIBILITIES collection of assessments, payment of expenses, computation and payment of taxes, preparation and distribution of budget, records and recordkeeping, management of records and books of association, annual reporting, contracting for services, maintenance inspections and/or walk-throughs, complaints of owners, meetings of board and/or membership, reporting and record keeping, insurance matters, representation in small claims matters. INDEMNIFICATION NOTICES SEVERABILITY TERMINATION LANDSCAPE OR MAINTENANCE AGREEMENTS definition of facilities definition of maintenance provision of equipment tools and/or supplies extra work payment schedule liability for injury/accidents assignment or prohibition of assignment CONSTRUCTION CONTRACTS Construction contracts should be given special consideration because claims so often arise in regard to construction projects. From my perspective as a legal advisor, I will approach construction contracts by presenting the most commonly asked questions. How does one prevent or protect against shoddy construction? Answer: The first step in protecting oneself from shoddy construction is to provide specifications to the contractor which are specifically referenced in the construction contract. If an association wants a fence constructed out of certain materials, the contract should say so. If the posts are to be set in concrete, such specifications should be provided. If the roofs are to be constructed from fireproof materials, then so provide. If cleanup is part of the bargain, then so state in the contract. If forethought is given to protect the association in such a manner, it will be much easier for the association to demand that the standards be met. If they are not met, it will be easier to terminate or rescind the contract. What does the association do when they are thoroughly disgusted with a contractor’s performance under the contract? Answer: Naturally, the best advice I can give is to consult an attorney before any action is taken. Generally, a demand for assurances of performance should be made to the contractor, and/or the contractor be given an opportunity to cure the known problems before any decision is made to try to break the contract. The association will want to know its rights and obligations if it determines to terminate its relationship with the contractor. An attorney will be in the best position to advise the association whether it is more practical to rescind the contract through a court action or terminate it outside court. If the association intends to take action that would be considered a breach, it is important to determine the defenses available to the association should the other party decide to bring a court action on the contract. How should the payment schedule be determined under a construction contract? Answer: The schedule of payments to the contractor should be tied in some way to increments in the project. Specifications should be made that if performance is not according to the terms of the contract, the association will have the right to terminate the contract at the various "increments". A certain percentage of the overall contract price (or price for each "increment") should be held for at least 35 days after the contract is completed. The reason for this is that if the general contractor with whom an association contracts engages the services of subcontractors, the association will want to be sure that all subcontractors are paid by the general contracting party. The way to be sure that the association is free from subcontractors’ claims (who are entitled to record mechanics’ liens against the association property) is to provide for this 35 day protection period and to request that the contractor provide the association with proof of payment to the subcontractor executed by the subcontractor itself. What does an association do if a mechanics’ lien is recorded against its property? Answer: Consult an attorney. There are provisions in California law which attempt to protect associations and other parties from claims of subcontractors who work on construction projects. HOW TO CHALLENGE MECHANICS’ LIENS OF SUBCONTRACTORS When a mechanics’ lien is recorded against the property of the association, the first step is to determine if there is a basis to challenge the lien. These are the possibilities: Failure of Subcontractor to File Valid Preliminary Notice Claimant must give proper preliminary notice of intent to record a mechanics’ lien within twenty days of completion of the project. (Civil Code Section 3097) Said preliminary notice must contain a description of the labor and services provided, the name and address of the provider, the name of the other party, a description of the jobsite, and the requisite words of notice to the property owner. (Id.) Service on owners in California must be by personal delivery, left at residence or place of business with a responsible person (adult) or by registered or certified mail (first class only). (Id.) If any of these provisions is not satisfied, then the preliminary notice may be subject to challenge, the lien recorded may be invalid, and the subcontractor should be so notified. Attempts to foreclose a lien that is patently enforceable could conceivably subject the claimant to liability for malicious prosecution. (Albertson v. Raboff (1956) 46 C 2d 375) It should be noted that the original contractor is exempt from providing this Preliminary Notice. The reason is that the owner would know if the contractor had not been paid—whereas he or she would not know if a subcontractor had been paid from the monies paid to the original contractor. Failure of Adherence to Requirements for Recordation of the Mechanics’ Lien The mechanics lien of a subcontractor must be recorded within 90 days after completion of the project, or 30 days after notice of completion is filed. (Civil Code Section 3115) The mechanics lien of an original contractor must be recorded within 90 days after completion, or 60 days after notice of completion or cessation of work where proper notices of either completion or cessation have been recorded by the owner. (Id.) Failure of Timelines for Foreclosure of the Mechanics’ Lien A mechanics’ lien is generally valid only for 90 days after recording unless specific credits are given that extend the time period. (Civil Code Section 3154) Petition to Release Lien Where no foreclosure action has been brought within the 90 day "life" of the mechanic’s lien, an association may petition the court for an order to release its property from the lien. (Civil Code Section 3154) In order to be successful, the Association must first have attempted to get the claimant to execute the release voluntarily. The Association must allege in the Petition that the claimant is either unwilling to release the lien, or cannot be found upon a reasonably diligent search. A hearing on the Petition is generally set within 30 days of filing. The prevailing party in such a court action is entitled to attorney’s fees not to exceed $500.00. What to do if a Mechanic’s Lien is valid and defense of foreclosure action is imminent. As the original contractor to post a release bond (under Civil Code Section 3143). If such a bond was provided, the Association would be entitled to release of the lien. Ask the original contractor to defend the Association from any action on the lien. The general contractor is bound to defend any action against an association brought on a subcontractor’s mechanic’s lien. (Civil Code Section 3153) If the contractor refuses to defend, the owner is in a good position to charge the contractor the full expense of the defense under Civil Code Section 2778. Please be advised that the information given here in regard to mechanic’s liens is in very general terms. Almost all provisions have been extensively interpreted by cases in California, and your legal representative should be consulted if you are faced with the possibility of defending a mechanic’s lien. ORAL vs. WRITTEN CONTRACTS Although hindsight often indicates that an association would have been more sufficiently protected by reducing a contract to writing, oral contracts are enforceable as well. The simple fact of the matter is that oral contracts are generally harder to prove than written contracts. In order to prove the terms of an oral contract, testimonial evidence of people involved is often required. This may serve as a deterrent to attempting enforcement of such a contract if parties are difficult to deal with or locate. In regard to entering into any contract, it is naturally always better to have the contract reviewed by the association’s legal representative. As many managers and board members have found, it is far less costly to check the sufficiency of a contract before the fact, rather than attempt to deal with the contractual problems that often arise later on in the process. Printed with the permission of Beth Grimm, Esq. Beth Grimm is a practicing attorney in the field of Community Association Law. She has authored considerable material on the subject of Community Associations. Beth A. Grimm, A Professional Law Corporation, 3478 Buskirk Ave., Ste. 1000, Pleasant Hill, CA 94523 Beth Grimm's "Legal Digest" is written and edited by an attorney familiar with California law and that is it's focus. The practical points may apply to your state, but be mindful that the laws relating to condominiums and townhouses in the various states is different and please do not try to apply California law to any situation in another state based on this newsletter information without consulting an attorney familiar with the laws in that state. << Back to Avalon Samples and Articles Page Portions of this page Copyright 2004 Avalon Management Group Inc. All Rights Reserved, other content may be copyrighted by the respective author(s.)