Real Estate & Property Law

Contracts - What Do Owners in an HOA Need to Know?

Here's the scoop on this issue as presented to me by a reader with some questions:

"The prior HOA Pres. handled a remodeling project primarily by himself; the contract was nothing more than a Bid page signed by both parties.

Several modifications to the Bid were made using a 'gentleman's Agreement' per the out going Pres, with nothing annoted to the Bid document to that affect; to my knowledge, there were no letters or notifications presented to the HOA members informing them of the change in contract or agreement.

My question is this: is there a governing body or state rules governing the practice of contracts / agreements between HOA's and Contractors?"

There are lots of laws that might apply to any contract dispute. One provides that if a contract says either side gets attorney fees if it prevails in a dispute over the contract, the right is reciprocal, meaning the other side is entitled to the same right. (Civil Code Section 1717) There are laws relating to limitations on actions, stating appropriate remedies (meaning what one can recover in damages) and the like. There are laws governing conduct of fiduciaries in contracts and disclosures that must be made in contracts.

Here, the question really seems to be related more to whether this practice is legal or not, moral or not, smart or not.

It is not illegal, in fact many HOA and Condo boards end up in a situation like this, relying on the contractor to present the "contract", and accepting it's bid proposal as the final contract. There are many that would prefer to leave it up to someone else like the president or manager to administer the contract. Most board members would not have a clue how to manage a contract anyway, or what particular things are important to have in the contract to protect the association. Some might not even think to check out the contractor's licenses and insurance status with the state contractor's board.

So, even though it's not "illegal" to handle a contract this way, it reeks of irresponsibility. The most obvious errors that jump out here are:

(1) There is no indication the Pres. has any special expertise to manage the contract;
(2) Bid proposals are written to favor the contractors, not the owner or in this case the HOA;
(3) Nothing important seemed to have been documented in writing, to create a record of approval of the changes;
(4) None of the decisions relating to contract changes seems to have been approved by the Board.

"Gentlemen's Agreements" have no place in an HOA. Board members can do these things when arranging for a remodel job on their homes (assuming they have HOA approval), but they have to be more responsible when making decisions for the association, as they carry liability not only for their own "asset" but for the assets of the members. And these sorts of agreements often end up being argued in court.

Full post as published by California Condo & HOA Law on October 15, 2010 (boomark / email).