In general, Homeowners’ Associations (HOAs) in North Carolina are responsible for managing, maintaining, repairing, and replacing common areas, as well as upholding community standards consistent with the HOA's governing documents.
Accomplishing these goals requires contracting with service providers for everything from landscaping and pool maintenance to capital improvement projects. To avoid disputes, control costs, and ensure quality outcomes, it’s essential for HOAs to follow best practices when entering into and managing its third-party vendor contracts.
Review Governing Documents and Legal Authority
Before entering into any contracts, HOA boards should review their governing documents, including the Declaration of Covenants, Conditions, and Restrictions (CC&Rs), the bylaws, and the applicable provisions of the North Carolina Nonprofit Corporation Act, as well as the North Carolina Planned Community Act or Condominium Act. This review ensures the board has the authority to enter into the particular contract and identifies any approval requirements, such as expenditure thresholds that may require member consent.
Use Written Contracts, Not Verbal Contracts
Although it may be tempting to rely on a phone call, handshake, or purchase order, all contracts with vendors should be in writing. A well-drafted written contract ideally should define the scope of services, payment terms, duration, automatic renewals, and dispute resolution methods. Understanding the fundamental terms of a vendor agreement protects the HOA if the relationship does not go as planned. Without such an agreement, the HOA may struggle to enforce expectations or even to terminate the relationship.
Carefully Research Vendors and Verify Insurance
Selecting the right vendor is just as important as having a well-written contract. HOAs should start the process of selecting a vendor by asking for references, checking those references, confirming licenses, and verifying adequate insurance. It is critical that all written contracts include provisions for proper insurance coverages, and indemnification of the HOA to protect it from actions of the vendor in the event of property damage or personal injury. At a minimum, the HOA should require vendors to provide Certificates of Insurance and to give notice of any cancellation or change in coverage. As an added layer of protection, the HOA may also consider negotiating to be named as an additional insured under the vendor's insurance policy.
There Is No "One-Size-Fits-All" When It Comes to Contracts
Contracts should be tailored to the specific service being provided rather than relying on one-size-fits-all templates. For instance, a landscape maintenance contract should specify mowing frequency, pruning expectations, seasonal tasks, identify areas to be serviced, and pesticide usage. Without this level of detail, an HOA may be left paying for additional services it did not request – or be surprised by additional charges for services it assumed were already included as part of the negotiated contract price.
Establish Performance Standards and Accountability
Performance standards should be clearly outlined in the agreement, along with remedies for nonperformance. Penalties for delays or deficient work, as well as incentives for exemplary performance, help ensure accountability. The HOA may also benefit from retaining a portion of the amounted owed to the vendor until the HOA can verify that all services have been performed properly and consistent with the contract terms.
Define Termination Rights and Final Payment Terms
Termination rights are essential. A well-drafted provision allows the HOA to end the contract for cause (such as non-performance) or, when appropriate, for convenience with proper notice. This prevents the HOA from being trapped in an unworkable relationship and clarifies how refunds, final payments, or incomplete work will be handled.
Conclusion
Despite how straightforward hiring a vendor may seem, vendor contracts play a crucial role in the successful operation of HOAs. By using detailed written contracts, verifying insurance, defining clear scopes of work, and ensuring strong termination and accountability provisions, HOAs can mitigate risks, safeguard finances, and maintain the high standards their communities expect. HOAs that are uncertain about contract terms should consult legal counsel early to ensure the HOA has the authority to enter into the contract and help negotiate a written contract that includes all the necessary terms to best protect the Association.
