“Business Decisions and Contracts in Illinois and Indiana Community Associations” – KSN attorney Kelly Elmore discusses business decisions and contracts in Illinois and Indiana condominium, homeowner (HOA), and townhome community associations. She addresses capital improvements, contract terms, liens, warranties, indemnification, and more. (56 mins.)
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Episode Transcription
Bernie: You are listening to the KSN Podcast, and on this episode, we’re discussing the impact of business decisions and contracts on community associations. Welcome to the KSN podcast, where you’ll hear from KSN attorneys as they share their experience and insights on legal issues surrounding community associations, collections, property tax appeals, and landlord tenant law. This episode is an edited replay of our March 22nd, 2023, webinar presented by KSN attorney Kelly Elmore. Kelly practices condominium, townhome and homeowner association law in both Illinois and Indiana and has extensive background as a litigator. During the presentation, Kelly discussed capital improvements, the community association manager’s role in business decisions, contracts, liens, warranties, indemnification, and more. KSN is an experienced legal resource ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we’ve earned the trust of thousands of clients since 1983. If you’d like to reach Kelly or any of KSN’s experienced attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form to send us a message.
Kelly: Well, thank you all for joining tonight. We are going to be discussing business decisions and contracts with a focus on both our Illinois and Indiana Associations. All right, so first up, business decisions affecting decisions related to capital improvements. So as many of you who are either board members or property managers, you might have had to deal with a large capital improvement or even small capital improvement project in your associations. What does this mean when we refer to capital improvement projects? Well, generally adding a substantial improvement to or renovating a section of the properties, there are a million different types of capital improvements. For example, a security system installed in a building or a property or flooring replacement, lighting installation and a lot of properties, hallway renovation projects and enhancing the property can be a big thing for associations over time. So anything falling into that category of substantial improvement to the property. So, the reasoning behind this it’s required by governing regulations, maintain, increase, protect the association’s property value. So why do we see associations engaged in these projects?
Well, as we’re all aware, as you enhance and increase the value of property it continues to allow association owners to protect their values. So, when they go to resell, I think there has been a huge focus in recent years, certainly in more urban areas of potential purchasers looking at things like amenities or what areas of the property do condominiums or other types of community associations offer to residents above and beyond just the living space. So maybe your association has a recreational area, a pool area, an amenity space, and an office suite for residents to use. So, a lot of projects that we’ve seen over the past decade I think have focused a lot on improvements that create additional space for residents to use but that’s still part of the association property.
Substantial versus insubstantial improvement. So, there are certainly projects that we have seen in associations that do not involve a substantial improvement to the property. Perhaps you’re just doing a refresh within the association, maybe you’re doing a paint or repair project but to add a little bit of value to the association and the key component when we talk about business decisions with capital improvements not only funding and large expense issues, which we’re going to get into, but we need to know what kind of approval is required and is this the type of project that falls within the board’s authority? Very first and foremost as an association if you’re on the board or if you’re a property manager trying to help advise a board as they start to talk about one of these projects, first and foremost, you might want to be reaching out to your association council to take a look at the governing documents to see is there anything in the governing documents that might trigger a certain approval within the association. There are some projects that can be approved by board members depending on where your association is located and what your governing document state and there are certainly projects that require approval by owners, perhaps either because it’s going to result in a special assessment or because of the amount of the project, and there’s a spending cap placed on the board. So, it is really important to know that as you embark on this process, that you are looking at your governing documents to know what authority is there.
Well, next we have business decisions, capital improvements, review of funding options. So, you’ve started maybe embarking on a project and start getting ideas. Maybe you formed a committee and you’re talking about the type of project in the association or multiple projects that you all want to do. You’ve talked with your manager, or you’ve talked with the association council to confirm that yes, here’s what authority is going to be required. So, we’re going to be prepared either to take a vote of the ownership or to take a vote of the board and now begins the fun task of trying to determine how we are going to fund the project. So, first up there are a number of different ways to fund projects. For example, many associations maintain a reserve account. So, in Illinois that is a requirement under our law that a board maintain reasonable reserves. The million-dollar question always is what is reasonable? There are a number of factors that go into that analysis. There’s no specific number or guideline as many associations would like, but the Illinois Condominium Property Act for condominium associations provides some very specific factors that a board must review in determining whether or not an association has sufficient amount of reserves in their accounts.
Again, it varies from association to association. Similarly in Indiana, we see varying reserve amounts maintained by different associations. A little bit different there in the state of Indiana as there is no formal law of recovery requiring a reserve fund. But certainly, as association councils and we represent many, many associations in Indiana, we certainly always recommend that an association try to maintain a reserve account for future or unanticipated projects. So, as you’re looking at your funding options, the first is is this something that might be able to be paid for out of our reserve account? Going back to Illinois, because there is a specific law in how you can handle and treat reserve funds, you might need to be consulting with your attorney as to whether or not the project that you’re looking to do is something that can be paid out of that account but really just know that if you have a reserve fund, you’re going to be looking at potentially using those funds. It may require some proactive board and advanced planning.
Another way of funding a capital improvement project is a special assessment. For those who might be unfamiliar, we all are familiar with the concept of a regular assessment, and many associations charge those on an annual basis. There are many associations who charge those on a monthly basis and some associations do it on a quarterly basis, so whatever your governing documents require but the regular assessments are really those amounts that are created and calculated based on the association’s annual budget. So, every year the board sits down, maybe with your management company you go through all the expenses. What did we spend last year? Are we anticipating increases for the next year? And you create an overall budget and the best estimate for what you think you’re going to need for the next year. You have a regular assessment based on that amount. Well, the idea with a special assessment is that it really is supposed to be a one-time, or sometimes associations have a couple of them, but it’s really intended to be a one-off, like a one-time large payment. That might be difficult for some or all owners to pay because they’re not always anticipated. Some associations are in a position where you’ve known for some time there are projects that you have to do, so you’re prepared. Everybody knows we’ve been gearing up for a few years, talking about this and we know it’s coming.
Other associations, maybe they don’t have a lot of funds on hand and there’s a casualty, or maybe there’s a sudden roof leak and the association needs to expend funds to do a repair or other type of project. And the idea is that the special assessment is used to cover one project or set of projects, but it is not intended to be an ongoing assessment over time. Another way to pay for capital improvement projects is also just an increase in the regular assessment, sort of the opposite of just doing a one-time special assessment. There are associations who have the ability to plan ahead. They collect regular assessments, set aside funds, and the association builds the account over time and set aside enough in savings to complete the project. A fourth option is outside financing and I know many associations that we work with have gone to third party lenders and banks many of whom will specialize in community associations and we certainly recommend that if you’re a community association, whether you’re a homeowner’s association or condominium association, that you do work with a bank or a company that’s familiar with lending specifically for community associations. But this type of financing, when you go and obtain a loan, generally allows for a bit faster completion of the project.
So, let’s suppose you are an association. You have a 1 million capital improvement project that you’re looking to start and obviously you need to generally make a payment to the contractor upfront, or you know that soon after the work begins, the invoices will be coming. Well, going and obtaining a loan with a lender allows you to get started on the process and move forward sooner rather than later, as opposed to building up the savings over time. So, there are a number of different factors that go into how you as an association decide to fund a project. You could also do sort of a hybrid or a combination of all of the above. I have an association I’m working with now; they have a large project going on. They had a large amount of funds set aside in a reserve account, but they also recognize that over time, this is intended to be a several year project. Things can change; price of material, and labor can increase, as we’ve certainly seen over the last couple of years. So, to ensure they don’t do a special assessment and then use up all of the funds, and now they have nothing left and now need to go back to the owners for a special assessment, they plan ahead. They set aside funds in their reserve by doing a special assessment, but then also obtained a loan.
So there’s, ways to do this, so maybe you just need access to a line of credit or things like that but depending on the project, depending on the background of your association, whether you have a lot of delinquencies and a number of other factors where banks will look at your financial help, we can work with associations to determine what is the best way to fund a project. I was at a seminar with a banking professional a couple of years ago, and I recall him saying, and I’ve always repeated this to associations whenever I hear a board or management company talking about a particular project, if you know you have a project that you either need to do as an association or you want to do because you want to enhance the property, or you can’t start planning early enough for that project. So, if you’re an association and you’re looking to do something in the next couple of months, hopefully you started the discussion a while ago. If it’s a large project and you’re going to be doing a special assessment, the more notice you can give to owners is better because you don’t want to abruptly send out notice of a special assessment and then trigger a huge delinquency in your association. So plan ahead, really spend time talking to your professionals, you know, the contractors who you’re obtaining bids from, things like that, so you really have a great idea of the scope of project and then work with, if you have a management professional, work with them and obviously your legal counsel to ensure you’re putting together an overall plan and package that makes sense for your association and we ensure you’re doing everything in compliance with your governing documents.
So, the manager’s role. So, for those of you managers fortunate enough to have been involved with a capital improvement project, we try to assist wherever we can with helping managers understand different types of improvements. Their exterior improvements, interior improvements, new construction, but just the different improvements that are specific to the community and we certainly recognize that in some associations the manager is often functioning as the construction manager, so your property manager or community manager might be dealing directly with your vendors might be working with the vendors to set up the schedule. I was involved in a massive project several years ago with a large property, and there was a lot involved. It was a balcony project, so a lot of scaffolding issues and access to units and it was almost a full-time job that the manager was just coordinating between all of the different vendors coming in to work on the property, but also communicating with the owners on here’s the timeline, here’s when we expect we’ll need access to your unit and just all of the issues that go into that.
So, as you’re working as a board and as management and everyone’s on the same page, always remember then, it’s also a huge undertaking to communicate with the owners, make sure they understand the scope of the project, what’s going to be needed of them. “Hey, everyone, in June, we’re going to need access to everyone’s units and if we don’t get that access during that month, it’s going to delay our project by X number of days.” So as much as you can communicate with the owners about the project and what will be needed is certainly a great advantage as you’re going through this project. Some bigger projects I’ve seen that I know can also create a lot of timing issues and sometimes we see delays when association, certainly high-rise condominium associations have garage projects going on, and you have to displace hundreds of owners at one time. You’re asking owners to move their vehicles. In some associations, I know in certain areas when there’s no other available parking, it can become complicated as far as having to bring in a service or some other alternative method for parking in the association. So being as detailed as you can, mapping out a timeline, getting an understanding of the scope of the project, being proactive with your contractors and vendors to understand expectations and the scope of work, and then, as we said, good communication with the board and the owners, and always just communicating on that schedule.
All right, so let’s talk about the contracts themselves for projects really in general and just business contracts that the board is entering into on behalf of the association whether it’s related to a capital improvement project or really any other type of contract. We have seen over the years many situations where associations enter into contracts that are no more than maybe a one- or two-page proposal. I just reviewed one last week. It was a snow plowing company and it barely had more than five terms in it. Nothing about termination, nothing about the scope, nothing about what happens if the vendor or the association defaults on the contract. So, I think a lot of companies and a lot of associations, you know, you can certainly get by on some of these contracts, proposal type things, but what I’m going to be talking tonight about is more best practices. We don’t want to over lawyer things, certainly if you’ve got a $1,500 snow plowing contract, you don’t want your attorney spending two hours creating a writer or redlining the contract to make it a little bit more obnoxious than it needs to be but there are some things that we as council for associations to ensure the board is protected and the manager is protected. There are a few things we like to always see in contracts.
Deficiencies in this contract. Usually, as I mentioned, they come to light only when there’s a problem. So, for example, the one I was reviewing last week, the problem is the vendor is not showing up. They now think one of the employees is doing drugs on the property, and we really only have a one-page sort of proposal that was signed between the two parties. So, not a whole lot of information in the contract. So, we then default to common law, but just a few things we like to see that I’m going to highlight so going forward, you can make sure, even if you’re not using your attorney, just to make sure you’ve got some basics. Really quickly on the capital improvement. One of the questions was, “What is the dollar amount for the reserves to obtain a loan or a mortgage?” It really depends on your association and also what state you’re in. Generally, we’re working with a banking professional to figure out those amounts. So, it’s really going to be dependent on what your banking professional says. Your associations are in great health, they might not be, you know, and you don’t have a major collection problem, the bank might say, look, we’re fine with moving forward. We know you guys are able to collect assessments, there’s good collateral for the loan. So, they might not have a huge threshold as far as amounts they want to see in your accounts. But for those associations who have high delinquencies, maybe a lot of foreclosures, they might want to see more money in your accounts.
“When Increasing regular assessments for future projects one to three years out, do you code it to the project as a line item, as an increase in the amount you’re putting away in reserves versus coded as capital expenditures? What’s the proper way to do that and this is for Illinois?” So first I would answer that by saying we would look at your governing documents. I had an association downtown where the particular governing documents, in addition to just standard operating account and reserve account, they had a really specific process as to a capital improvement reserve account. So, I think first and foremost, we would look to see if there’s anything in the governing documents specifically requiring that it be set aside and designated as a certain way. So beyond that, I think a lot of times associations will put an assessment into a reserve account and then might do some additional detail if you’re able to, as far as a capital expenditure versus repairs. So I think that might depend on what kind of system you’re using.
“If Money is taken out of reserves for a specific project, does it have to be paid back?” Depending on if you are Illinois or Indiana? So again, in Indiana, there is no requirement to maintain a reserve account. We definitely recommend best practices that you should have such an account for unanticipated projects. Again, the requirement in Illinois is that an association maintain reasonable reserves. So if you are an association, and I would answer it like this, if you have a major project and you have a hundred thousand dollars in your reserve account and you know the project is going to cost a hundred thousand dollars and it’s not something urgent that has to be done immediately because it’s a code compliance issue or anything like that, then we might recommend that you build up the reserves to be more than a hundred thousand dollars so that you don’t completely deplete your reserve. So if you’re an Illinois Association we try to steer clear of having you deplete your reserves, so we might recommend you do a special assessment, boost that reserve account. You’ve got plenty in there, especially since I swear no construction project ever seems to cost what anyone says it’s going to cost when we start them. So, I just think it’s a great idea that you try to anticipate what the amount might be and then just make sure you’re not pulling out the entire amount.
Okay, authority to do business. So first and foremost, depending on what state you’re in and what city or jurisdiction, confirm your contractor is duly licensed and authorized to do business. Now, certain trades don’t require licenses. If the particular individual that you’re using is required to have a license, we want to make sure that they do have such license. Also whether you’re in the state of Illinois or state of Indiana, I generally like to check to make sure it’s a corporation in good standing, meaning they’re filing their proper annual paperwork. It doesn’t necessarily mean anything with respect to whether or not they’re a good contractor or whether they have any pending judgements or complaints against them, but it’s just generally I think a good rule of thumb to confirm that they are in good standing with the state that you are in.
All right, so next, in the contract with the parties we always want to make sure there’s a very clear description of the parties. First and foremost, obviously any project that is being done for or on behalf of an association, the party really contracting for the services is the association. It’s not the management company, it’s not the individual board members. I think for the most part most vendors are clear about that issue, however, over the past decade, I have seen issues where either when litigation arose there was some confusion as to who had hired a contractor whether there was authority and you always want to make sure in any good contract that it’s very clear this is a contract between the association and the individual contractor. For you who are managers, you want to make sure you know it’s not being put in the name of your management company. Again, for liability reasons, for insurance reasons it should be the association and the contractor. If it’s a situation where whether you’re in Illinois or Indiana, if the board has delegated authority to the manager to enter into contracts, meaning yes, we’ve given our managing agent authority to, you know, we went out and got bids for, let’s say, a roof replacement company and the board has made a decision and we’ve authorized the manager to sign it on our behalf, that’s certainly fine. I think, again, best practices and makes sense too– after the board majority has voted and selected a particular contractor, I think it makes sense for a board member to sign it.
So, specifications in the contract. Now, depending on the type of contract that we’re talking about, again, kind of going back to there are certain contracts that might be just a one or two page proposal that everyone just signs and it doesn’t really have a lot of detail as far as some contractual provisions we might like to see. Specifications I think are really key, even if it’s a simple project like you’re hiring a contractor to replace a deck. I have seen contractual disputes between associations and a vendor just because of poor drafting. So one in particular, I’m thinking of several years ago, was kind of that one or two page contract where the description was just a couple of bullet points and it maybe said, vendor shall install new set of stairs, shall replace the landing, shall replace the deck, et cetera. Well, what became an issue was there were two sets of stairs and two landings, whereas the contractor thought they were giving a price for just one, the association said, no, there are two decks here. And so, because of the way it was worded and it was just, you know, we know people could have done things off the cuff. You meet with a vendor, you’re all at the property, somebody jots something down, there’s a handshake and unfortunately some things can lead to problems later on because under contract law, the court is going to look at, well, what does the actual contract say? And unfortunately you can’t say, yeah, but when we were there John Smith told me that he would do X, Y, and Z and he agreed to include this in his price.
So we like to see as attorneys as much specification and detail as needed. I would even say with something even as basic as I think somebody might have just asked something about cleaning services, even something where we’re not talking about a large dollar amount and maybe it’s a once a month cleaning or it’s a once a month service, I still think it really works to the association’s advantage to be as detailed and specific as possible because I think a lot of times expectations are not met when they aren’t shared or maybe the board or management might have had an expectation that certain things would just be automatically included and they’re not and now there’s some frustration as to the work being performed. So as much detail, even if things certainly seem obvious to you, you can’t overly specify in these contracts.
Description of where the work is to be performed. So again, kind of going back to just general drafting issues that have caused disputes, we have seen issues where it wasn’t clear in the contract as to where in the property the work was to be performed. This often again, becomes an issue where if a contractor or a vendor comes in and says, I will clean all of the deck areas, and they quoted a project and they thought there were two deck areas, but there were six deck areas, just going back to the specificity and description. Describe when the work begins. A lot of times I’ll be reviewing a contract and it might be signed in February for work that won’t begin until June 1st. Again, it’s very helpful when it’s really clear when the work is to begin. Otherwise, we generally assume a contract’s beginning when it’s executed between the parties. So, I think that’s also a good tip for vendors if you have a contract and you know I’m not getting to this property for a month or two, just be very clear. Add a line that states, this is when the work begins. Going back to that snowplow because it’s been cold and snowing, the contract I recently reviewed, it said work to begin on, I think it was November 1st and then it said until end of season.
Well, that wasn’t the particular issue with this property but when I saw that language, I thought, gosh, that could be an issue especially since we’re seeing snowfall after a 70 degree day and someone could argue, well, the season’s over because now we’ve kind of popped into spring. So again, we try to be really thoughtful as we review contracts on behalf of associations, and it really just works in everyone’s favor to be as specific and detailed as possible. And then similarly you want to be very clear about when the work begins, but also describing your completion deadline. Very, very clear from start to finish.
So, code compliance. So, depending on where your association is located, you might have certainly, state regulations, you might have city regulations, township regulations, village regulations. It can be a huge task to kind of keep them all straight and then once you learn them all, and this is very fun for us as attorneys, then they change and they update them and then our very favorite part is dealing with codes where it’s like, well, this code only applies up until 2012, and then anything after 2012, it applies differently. So just be aware again that there might be codes and other regulations that might affect your project. This is, again, generally why we hire professionals. When you’re hiring a general contractor or a particular vendor, certainly that is something we want to make sure is in the contract, is that they are representing to the association that they know what the applicable codes are, that they know when permits are required, things like that and that they’re going to perform the work in accordance with all of those codes and regulations because if we can take the burden off of the association to affirmatively know what they all are, and place that on the vendor that works in favor of the association in case there’s an issue later on.
All right, so lien waiver. So for certain types of projects, certainly larger projects, oftentimes a contractor will require a lien waiver. The association will require the lien waiver. The contractor needs to furnish their sworn statement as to the progress that’s been done on the project. Oftentimes they are providing waivers of a mechanics lien. So just so everyone is aware, in generally every state, there’s something called often a mechanics lien statute and what it generally states is that a contractor can maintain a lien on the association property while work is being performed for payments not made. And some larger projects that we see they’ll do a certain phase of the project, it’s inspected when the contractor sign off and say, yep, this has been completed, we’re signing off on this, they get their waiver and then the association gets a release as to that portion of the claim. So, very important on these really, really large projects that you’re properly getting those waivers. We’ve seen disputes over years, over the years where contractors have said we did complete this work. The association says, no, this wasn’t completed and that can become an issue. We always say waivers should be exchanged at the same time as payment. We don’t want waivers being provided in advance, so really want to make sure that we are following the timing on that or the protection of the association.
All right, so other things that we like to see in contracts; warranties. A warranty is sort of an additional insurance policy that a vendor or a contractor is providing to the association. So that’s another key point to make about why these contracts should be clearly defining the party to the contract is the association, because the warranty needs to extend to the association so that if there’s ever an issue with work that’s been performed under the contract, then the association can go back to that vendor and say, we have this warranty, here’s when the work was done, we’d like you to come out and review and fix this work. So generally, good warranty is going to describe the details of the warranty on workmanship should describe the details of the contractor or manufacturer warranty on materials. So, to maybe highlight or explain that a little bit more, you have the individuals who come out and perform the work on the association’s property, and then oftentimes you have the contractors using certain materials from a third party company. And so, you might have two different warranties for essentially the same type of work. So, for example, if you are putting down a new roof on top of a building, and you get a waterproof membrane put down beneath the roof, that waterproof membrane, the manufacturer is providing a warranty on the actual product and the contractors who are installing the product on top of the roof and then putting down the shingles, they have a separate warranty as to their workmanship.
That’s also why incidentally when we see litigation with construction projects, that’s why oftentimes a number of parties can be named. You know, for example, we’ve been involved in construction defect litigation where a board has had to bring suit because of defective work and it’s not clear at the time the case is filed whether or not the issue was the material that was used, if it was a defect by the manufacturer, or if it was actually a defect in the way it was installed and it’s a workmanship problem. So a lot of times you’ll see all parties getting named and citing to the warranties and things like that, but it’s very important in case there are ever issues that the warranties are clear what they’re guaranteeing, how long they last, is it a 10 year warranty, a 20 year warranty? When does it begin? And also be aware if you have done a project and you did obtain a warranty, you know, every so often an association might do a project and you could accidentally void your warranty. For example let’s suppose you replace the roof and you install the new membrane and you have your two warranties. Well, you decide to place a rooftop deck on the property because you want to create new amenities for your owners, and you move forward, and you hire the decking professionals and they come out and do that. You might unknowingly void the warranty for the roof that says, if you build anything on top of this, that voids the warranty. So we also just like to be aware of or remind associations to be aware of. Be careful about actions that ever could potentially void a warranty.
And then lastly, delivery of manufacturers’ warranties to the association. So that is a big issue many times with developer turnover. So it’s kind of like when you buy a house. If you’ve ever bought a new property and you go in and you open the drawers and you see the warranty for the new microwave oven that the developer put there, and then next to the refrigerator might be the warranty for the refrigerator. So, there’s all these appliance warranties laying around and things like that. Similarly, in an association when a property is turned over from a developer there are a number of construction warranties that are near to the benefit of the association and you want to make sure that asking for these warranties that you know, as a board and as a manager, everything, every warranty that the association has.
All right, contractor indemnification and other types of indemnification. So indemnification is a provision that essentially states that if I am sued as a result of this project, you the other party, you are going to pay for, usually, my defense and also pay if there’s a judgment entered against me. So a lot of times, a good example of this is we see indemnification provisions in management contracts. You hire an association management company, there’s a scope as to what the manager is to be doing for the association and if the management and managing agent are working within that scope then most often, most management contracts provide that if someone files a lawsuit and says, we hate the board, we think the board is mismanaging funds, and by the way, we’re also going to sue the managing agent too, because we think they’re in on it. A lot of times when we receive those complaints, the management company is tendering the case to the association’s insurance for defense and indemnification under the management agreement.
So similarly, in a lot of these contracts, we might see the contractor is indemnifying the association and management. So on a large project maybe a hole is accidentally drilled into an owner’s wall and they later sue the association and the management company. If the contractor had a clause in their contract that said, we will indemnify the association, then the association usually doesn’t need to worry about it. So it’s a very important clause to have and then also in many of these contracts, the association might indemnify the contractor just depending on the role the association’s playing in the contract. Key point to mention about any contract at all; from time to time your contracts that maybe are annual, they’re year to year or month to month but many contracts can go on for years. They could be a two year contract, a three year contract and then there are some contracts, you know, I’ll give you a good example; scavenger service for those in Illinois are a big one, clean laundry service, things like that. A lot of times those contracts can be five or 10 year contracts with auto-renewal clauses. And in every contract there should be a provision that says, if one party has to notify the other party about there’s an issue with this contract, or someone needs to terminate or something else like that we want to be very clear, the contract is clear how notice should be given.
Can it be sent by email delivery service? Does it need to be certified delivery? Where the notice is to be given must be described. So can you serve the registered agent of the company? Do you need to serve the president of the company? And I’ll tell you, that is a huge issue, especially for certain types of companies. Like for example, I did an issue several years ago with a Comcast contract. Unfortunately the association did not reach out to counsel and they sent notice of termination on an auto-renewing Comcast contract and everything about the notice was fine, but they didn’t deliver the notice by certified mail, which was required. And Comcast took the position you didn’t comply with the contract and that’s a $40,000 mistake. So, I can’t stress enough, we want to be clear in the contract that the notice provisions are clear and also that we follow them.
Recovery of attorney’s fees. So not every contract will have necessarily a provision about attorney’s fees. For larger contracts, we might recommend that if there’s a dispute between the parties that the prevailing party can recover their fees if they have to institute legal action. I think in a lot of contracts, the parties are fine just saying, if we have a dispute, we’ll pay our fees, you pay your fees. They’re appropriate in some contracts, they might not be appropriate in other contracts but that’s always something you should discuss and raise with your association counsel. Hey, is this something that we should be including an attorney’s fee shifting provision.
Termination provision. So this is one of those items where even if it’s a very basic contract I think it’s generally a good idea that it’s clear if one party feels the other party is not meeting its obligations under the contract, that it’s clear how do we end this relationship? Some contracts will say you can terminate with cause, but only after you’ve given notice and an opportunity to cure. So let’s suppose an association is having an issue with the vendor and we’ll use our snowplow vendor as an example. The vendor might want to include a provision that says, before you can terminate our contract we want to be given notice and we want a chance to fix this. That’s a type of clause with an opportunity to cure, or there could be termination without cause. So those are generally the easiest types of contracts to cancel, you know, upon x number of days’ notice we can terminate for any reason whatsoever or with no reason at all. So as an association, depending on what type of contract it is, you might just need to determine is that the type of provision we want or do we want to be able to give the vendor time to cure any issue.
Payment terms. So certainly this is important in any contract; is there going to be a down payment overtime? If this is maybe like a construction type contract? Will there be progress payments final payments? Is there a retainage? And things like that. So always want to be very clear as to when are the payments due, how do they need to be made, is there any prerequisite, you know, kind of going back to those lien waiver issues? Does the vendor need to show anything and those types of issues? So, building permits. So kind of going back to what we discussed earlier about making sure your vendors are taking responsibility for A, being licensed, but B also taking on the responsibility of being aware of any building code requirements, village requirements, townships, city, state, anything like that and then also generally you want to be clear who’s obtaining the building permits. Generally speaking, it’s going to be your general contractor who is obtaining permits, who pays for them should also be clear. So as an association, that’s kind of one of those details that can sometimes be overlooked if you receive a quote from a vendor for something that everyone generally is anticipating. This might be something we’re going to need to get a permit, whether it’s from a building department or planning commission for an HOA. You want to be clear, does this quote actually include that process? Will they be submitting it or is somebody going to be covering engineering or architectural fees and things like that? So, you just want to make sure it’s clear. So, there aren’t any surprises as far as who’s going to be paying for what.
Governing law. This is typically a provision we see in larger contracts. Governing law just generally is the provision in a contract that makes clear if there’s a dispute between the parties, this is the law that we’re going to file. But your contract is generally going to be, if it’s an Illinois contract, it’s probably going to be Illinois law. If it’s an Indiana contract, it’s going to be Indiana law. If you’re dealing though with a vendor from out of state or a national vendor for example, Comcast. Comcast litigate things all over the country. They might have decided long ago that Delaware is a great venue for them and they might be putting in their contracts laws of Delaware governing this contract. So that’s something you want to, especially in a larger contract, pay attention to because it might not seem important but if there’s ever litigation, you don’t want to get dragged out-of-state or to have your local attorneys dealing with out-of-state law.
Amendments to contracts. So sometimes they’re are amendments or change orders throughout a contract process. Generally our position on amendments is the requirement should be you can only change a contract by written amendment if it’s executed by both parties. It’s not great if a vendor can unilaterally change the terms on an association on their own, especially if there are associated costs. All right, and then lastly, one of the biggest is insurance. And depending again on your state requirements this is intended to sort of be best practice. We would always say with any insurance issue, you want to consult with your own association insurance agent or broker as to types and amounts of coverage for specific projects. So if you’re working with an agent and you’re not sure, I would certainly reach out and ask. You want to make sure you’re always working with an insurance agent who specializes in community association insurance. They’re going to be the most knowledgeable, they’re most up to date as far as the specific requirements of your particular state. You never want to be under insured or missing insurance that you should as an association, have and they can answer questions like how much insurance should we have for liability coverage? What kind of policy should we have for directors and officers liability policy?
So, with respect to larger type contracts and projects, just as a general basic rule of thumb, if a contractor is coming on to the property and is coming out to do any type of work at the association we always want the contractor to deliver certification that they do have insurance evidencing not only what insurance types they have, but that the amounts are satisfactory. You’re a massive high-rise condominium association and they only have a policy of up to a million dollars. That’s probably not going to be enough if you ever have some major project damage. So again, make sure you’re speaking with your agent on these issues. Documents should be providing that the association and the board and the agent are an additional insured while the project’s in place and that the contractor won’t cancel the insurance as well. I think there’s a question about primary and contributory insurance. So, you want your contractor’s insurance to be the primary, meaning that if there is a damage claim or if there’s a liability issue that the contractor and or subcontractor’s insurance is the primary, meaning they should be covering the majority of the insurance and the association’s insurance would really act as a supplement.
So I kind of analogize that in the same way as, for example, in Illinois with community associations under Illinois law, the association’s insurance is primary and that’s as a matter of law and then the unit owner’s insurance is secondary. So, if there is a, I just had this happen a few weeks ago, a water damage leak and it floods into 34 units, it doesn’t matter if an owner caused it and it originated from the owner’s unit, the association’s policy is primary, they tender to insurance and then separately the association the owner should tender and they’ll be contributory. Types of insurance, so one question we always like to ask is, does your contractor and or subcontractor have workers’ compensation? If you have a worker fall on the property or get hurt while they’re doing a project, you want to make sure they are never coming in after the association, that the contractor and the subcontractor have insurance to cover that and then also comprehensive general liability to pretty much cover anything and everything.
I know that was a lot of information and it looks like– “Where in the documentation does one insert the statement that the contractor’s insurance is the primary insurance?: So I would generally create a section in the contract itself maybe generally just referring to it as insurance. Again, if there’s any local or state ordinance that affects that determination as to whose insurance is primary, we would of course review that and factor that in. Let’s see, “What does additionally insured mean?” So it means that, you know, a lot of times a contractor will go out and obtain an insurance policy and it might be, you know, I’ll just use a big contractor, McCue Construction. When McCue Construction goes out and obtains insurance, it’s in the name of McCue. So if McCue comes on to ABC Condo Association and is doing a project and there’s an issue, McCue tenders it to their insurance company and that company might not necessarily cover the claim. However, if McCue names the association as an additional insured, meaning they are essentially a beneficiary under this policy not only can the insurance company have direct knowledge, yes, we’re covering this additional association under this policy. But also I think that gives the right to the association to also reach out directly as a direct insured and just gives some additional ability to have rights under the policy.
Let me answer my last question here. “At What point does a major capital improvement project have to be noted in the resale package for a condominium? When is the financing decided upon sooner?” Okay, so I assume that is an Illinois question because of the requirements under Section 22.1 of the condo Act in Illinois that requires the association to disclose any known or anticipated capital projects. I will tell you, there’s no great bright line test and it’s actually been something that’s been a little bit of an issue over the years because for years, I think some people took the position that if you weren’t doing a special assessment and there was no formal vote on the funding for an issue, it wasn’t really anticipated. In the last several years, especially after the condominium collapse in Surfside, Florida, you know, certainly lending institutions have taken a harder look at how associations are answering these questions and they really crack down and they want way more specifics than we’ve ever had to disclose before. So, now it’s a little bit tricky because if you have an association– I have one that’s talked about doing a window project for five years five years ago when it first came up, did they need to disclose it? I mean, it’s been five years and it still hasn’t happened.
So, I would answer it by saying this, I would consult with your association attorney because the requirements on disclosures have been changing a bit because of surfside and some of you might be aware that last year, Fanny and Freddie, in order to lend any federal backed lending, they decided to come up with their own form and it put everyone into a frenzy cause the questions were really complex. You had to produce a lot of information. So certainly, if you were moving forward with a special assessment or obtaining a loan, you were definitely, probably in the zone of disclosure. If it’s something that’s maybe on the horizon, but you really haven’t considered it and you’re not really talking details about how we’re going to map that out, you might be a little bit premature, but again, I would talk with your manager and your counsel as to the specific details and again, it might be when the financings decided upon, it might be sooner it just depends.
And then last question, “Did I hear you say HOA insurance is primary versus the homeowner’s insurance?” Yes, if you are an Illinois Association under Section 12 of the Condominium Act, the association’s insurance is primary. So I know where we ran a little bit out of time and I know that was a lot of information for one hour. As we mentioned earlier, we will be putting this up as a podcast on our website and if I didn’t get to your question if you had a more specific question, I would be happy to answer all of your questions. So thank you so much everyone for joining us tonight.
Bernie: That was KSN attorney Kelly Elmore. Kelly Practices condominium, townhome and homeowner Association law in both Illinois and Indiana. KSN is an experienced legal resource ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we’ve earned the trust of thousands of clients since 1983. If you’d like to reach Kelly or any of KSN’s experienced attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form and send us a message. Thanks for listening.
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Please note the material contained on the KSN Podcast is for informational purposes only and does not constitute legal advice. No attorney-client relationship is established by your review or receipt of the information contained on the KSN Podcast. You should not act on the information discussed on the KSN Podcast without first obtaining legal advice from an attorney duly licensed to practice law in your State. While KSN has made every effort to include up-to-date information on The KSN podcast, the law can change quickly. Accordingly, please understand that information discussed on the podcast may not yet reflect the most recent legal developments. Material is not guaranteed to be correct, complete, or up to date. KSN reserves the right to revise or update the information and statements of law discussed on the podcast at any time, without notice, and disclaims any liability for your use of information or statements of law discussed on the podcast, or the performance of the podcast generally. The KSN Podcast may be considered advertising in some jurisdictions under applicable law/s and/or ethical rules/regulations. © 2023 Kovitz Shifrin Nesbit, A Professional Corporation.