Beware of Automatic Renewals in Contracts Look at the Fine Print

 Fortunately for boards looking to cut costs while still providing needed  services to their buildings, many vendors are advertising bargain basement  prices to fortify their own business. Unfortunately, the risk of getting stuck  with unfavorable contract terms means that many boards will not be able to cash  in on the savings being offered.  

 There is nothing more frustrating than being “locked in” to a contract, and unable to take advantage of a better deal. It’s a common refrain that’s sometimes harder to implement than lecture about, but a careful read of any  contract before signing can save a co-op or condo big money down the road.  Board members are typically very astute when negotiating for prices and  services, but often overlook the fine print toward the end of contracts. And if  there is one tricky term that all boards and associations should watch out for  it is the frequently used, often concealed “evergreen clause.”  

 An evergreen clause is an item that allows a contract to self-renew at the  expiration of the current term unless either party notifies the other of an  intention NOT to renew. The language used is invariably a bit muddy as well.  Typically, the clause requires the board to provide such notice in writing no  less than 90 days and no more than 120 days before the current contract  expires.  

 In recent years, and New York especially, there has been a significant amount of  litigation surrounding automatic renewal and right of first refusal clauses. In  2005, the First Department invalidated such a clause in Inwood Park Apartments,  Inc. v. Coinmach Industries, Co. When a Manhattan co-op decided not to renew  their laundry contract, the laundry company refused to remove its machines from  the building, claiming that the right of first refusal entitled them to match  the bid of any laundry service that tried to take over. The court found in  favor of the co-op, stating that without a time restraint, the renewal clause  was an “unreasonable restraint” on the alienation of property. No building owner or administrator should allow  an automatic renewal or a right of first refusal clause into a contract.  

 So mark your calendar—because four years and nine months from signing, someone is going to have to  remember to cancel the contract. Unfortunately, in that time there will likely be many changes to the board, and  possibly even a new manager at the helm, which may mean that no one is going to  remember that a given contract is going to automatically renew in five years.  In fact, a copy of the contract may not even be around.  

 For this reason, even if a contract does not contain a self-renewal clause,  boards should avoid signing very long-term contracts. Five years is a long time  to contract for garbage disposal. This is especially true as garbage service  providers and companies offering similar services do not typically invest in  any special equipment at the property to provide their service. Laundry  providers do typically supply machines and related equipment to the property,  so there is more of a justification for those providers to use longer-term  contracts.  

 To avoid the “evergreen” dilemma the best defense is still a good offense–strike the clause. Insist that the contract not self-renew, and ensure that the contract has a  termination provision which affords the board or the association a way out if  service goes south. A clause that allows either party to terminate the contract with thirty to  ninety days notice, for any reason, offers boards the most flexibility. There  is no reason a board should be forced to take the risk of an unfavorable  contract automatically renewing by accident. There is simply too much at stake  and such clauses offer little if any benefit to associations. If the service  provider wants to extend the contract, that can be done with a simple request  to the board to sign an extension agreement. The burden of renewing the contract should be on the provider—not the board or association, which is ultimately the customer in the  transaction.  

 If you cannot remove the clause entirely, make the renewal contingent on the  provider giving written notice of the renewal date with ample time for the  board to opt out. Don’t get stuck in contract purgatory—review all contracts (even the fine print) before signing, strike any  self-renewing provision, and avoid excessively long terms whenever possible.

 Mark S. Einhorn is an associate with the Braintree, Massachusetts-based law firm  of Marcus, Errico, Emmer & Brooks, P.C. He is a member of the firm’s landlord/tenant and condominium association practice groups.  

 

Related Articles

Architects and Engineers

Keys to a Successful Relationship

Identifying, Storing and Disposing of Hazardous Materials

Keeping Your Residents and Staff Safe

A Look at Cogeneration

Is It for Your Building?