Communicate Before You Terminate

The success of a community association depends on the cooperation and communication between the association's Board of Directors and Management Company. When the Board and Management have good communications, small problems are resolved before they become big problems. However, this level of communications is missing in many associations and the consequences are rapid management turn over, unhappy Board members, dissatisfied owners and lower property values. In this article, we are describing a process Boards of Directors should follow to solve a serious problem with their management company. In this case, the serious problem may result in the termination of the management agreement.

What the Board Should Do?

When some boards of directors feel their Management is not fulfilling their responsibilities, they make a quick and emotional decision to terminate the management agreement. They direct their attorney to send the termination notice and begin the process to find a new management company. Unknowingly, the Board has placed a time limit on themselves to complete a process they have never experienced. Often, the results of this quick and often emotional decision place the Board and the Association in a disadvantageous position.

Before the Board reaches the final decision to terminate any management agreement, several actions should occur.

First, the Board should attempt to work out their problem with the current management company.

1. The Board should provide a written list of concerns (with examples) to the principal of the management company. The list should be unemotional and factual.
2. The Board and principal of the management company should meet to discuss the Board's concerns.
3. The Board should be prepared to hear concerns that the management company has of the Board. These concerns should also be factual and unemotional.
4. A plan should be developed that is mutually agreed upon with specific steps to resolve both the concerns of the Board and Management. This plan should be put in writing, with a reasonable timeline to address the problems of both parties.
5. The plan should incorporate some means to determine success or failure.
6. The plan should include progress meetings and a commitment from both parties to attend those meetings.

Second, if the Management is not able to resolve all of Board's issues with Management, the Board needs to weigh the monetary and non-monetary cost of replacing the current Management against the effects of the unresolved problems.

The Board should recognize that no management company is perfect. And, just as in any relationship, there are ups and downs. Each partner in the relationship will make a decision whether it is wiser to work out the problems, or if construed to be too great, end the relationship and start from scratch.

A change in the management company is typically costly to the association. It usually involves significant time commitments from the Board during the search, interview, and selection process. Other non-monetary costs include delay of projects, and the learning curve of the new management team, often 6 to 12 months where the Board's involvement in the day-to-day operations will be significantly increased. The monetary costs include new coupons, sometimes there is a set up fee by the new management company, an interim audit may be required, repeated notifications to owners of the change in management, legal review of the new management agreement, and short term increase in owner delinquencies.

If the Board concludes it is in the association's best interest to change management, the Board should budget 5-6 months to complete the selection process. A hasty termination notice to the existing management company may cause an insufficient timeframe for the Board to make an informed business decision on new management. A telephone call to the attorney, if not already done, should verify the termination specifics within the existing management agreement. When determining the termination date, the Board should consider the association's fiscal year end, budget preparation and approval time requirements, and planned capital improvement projects.

The Community Associations Institute (CAI), has a publication, Choosing A Management Company, (GAP #8) that gives guidance to the Board on this process. This publication includes a sample request for proposal (RFP), a list of management services that an association may desire: an evaluation matrix to compare the bidder's proposals and references as well as sample questions to ask the bidders' references. The publication also elaborates on the documents should accompany the RFP such as by-laws. The Board should also get referrals for new management candidates from their legal counsel, audit firm, and insurance agent.

Timing is everything. The Board needs to be in control of this procedure. It is recommended that the termination notice to the existing management company is not given until a new management company has been selected. This may delay the change in management, but if the Board considers this when they are developing their timeline, it will facilitate the change in management to the Association's benefit.