By Robert M. Meisner, Esq.
It has always been the position of this law firm that a community or condominium association should get all of the help it possibly can in running its affairs. The directors and officers are generally volunteers who are not compensated for their efforts, are incurring potential liability, and are often involved in a thankless job, receiving little appreciation from their members. A property management company or professional manager should be seriously considered by every community association. However, there are certain criteria which should be required and red flags that must be avoided.
The professional manager’s role can include assessment collection only and/or accounting, site management only, or full management services. Any community or condominium association that is continuing to be managed by the developer designee should recognize that under the Michigan Condominium Act, a management contract is voidable at the transitional control date or within 90 days thereafter, or upon 30 days’ notice with cause. We generally recommend to our developer clients that they retain an independent property management company from that of their own company and/or affiliated company to manage the affairs of the association, in order to avoid any sense of conflict of interest. However, many times, the Association will be faced with a manager who is directly affiliated with the developer, either in terms of being owned or controlled by the developer or who has an unholy alliance with the developer, who uses the manager in every project. That kind of manager may not be concerned about the long term interests of the association and may only pursue the best interests of the developer for economic gain.
In considering the duties of the managing agent and the ability of the association to retain one, examination should first be directed to the bylaws of the community to ensure that there is no prohibition on the retention of a property management company. There may also be limitations on the maximum contractual term of the property management company contained in the bylaws. The Association should be concerned about automatic renewing provisions in the management contract, which may lead to unapproved renewal of a property management company’s contract over a period of years. There should also be a termination clause in any property management contract, which should be reviewed by an attorney who is not in any way affiliated with the management company. But suffice it to say that to the extent that the property management company has recommended hundreds of community associations to one lawyer, it creates an economic disincentive for that lawyer to be objective in representing the interests of the association as opposed to the managing agent.
In a discussion I had with attendees at a UCOM seminar, I asked the simple question, “How many of you were told by your management company to use “their attorney on behalf of the association?” A number of the attendees raised their hands, which caused me to explain that what was really going on was that the management company was pushing the association Board to use an attorney whom they favor because of a cozy relationship, who in effect is purportedly representing the association and not the management company. This type of deceptive characterization of the relationship between the attorney and the management company is all too frequently the source of how the attorney gets the project. Frequently, there is not even a written fee agreement between the association and the attorney, thereby rendering even more suspect the real relationship between the attorney and the management company. The attorney for the association has a fiduciary and ethical duty to be beholden only to the client, namely the association, and should appreciate the fact that there must a balanced arrangement whereby the management company assists the Board and oversees the activities of the attorney, the attorney oversees and assists the Board and oversees the activities of the management company, and the Board makes decisions with the understanding that they must review the acts or omissions of the management company and/or the attorney. With that system properly operating, the better the chance for a smooth and efficient operation of the association without deception and conflicts entering into the process.
It is also important that the duties of the management company, vis-à-vis the attorney, are clearly set forth. Simply stated, management companies should not be practicing law, e.g. preparing liens and other types of collection activities or advising as to the pros and cons of litigation, and attorneys should not be playing manager in the context of preparing budgets, etc. It is important that the attorney do the lawyering and the manager do the managing without stepping on the toes of the other so that they operate in harmony.
Management companies incur potential liability and some try, on occasion, to pass that liability on to the association by way of indemnification provisions in the agreement. This is often an issue of controversy in negotiating the terms of the management agreement, but if the attorney for the association is not willing to take the management company on because his or her financial dependence rests in the hands of the management company, the association is getting shortchanged. Some attorneys will advise the association that if there is a dispute between the association and the management company, they as attorney for the association will not get involved. They may use a panoply of excuses, including conflict of interest, etc., but the truth of the matter is that they don’t want to bite the hand that feeds them, and if you are involved in a situation where the attorneys are not willing to zealously represent your interests as an association, get a new attorney. Our experience over many years is that awareness of these conflicts can help the prudent association select the right management and the right lawyer for success.
