The Self-Managed Association Breaking Up Is Hard to Do

Breaking Up is Hard to Do

“All good things must come to an end.” “The honeymoon is over.” “Too much water under the bridge.” If there is an absolute certainty in HOA governance, it is that at some point, the board of directors will choose to terminate the current management agreement or manager relationship. The relationship between an association and its management company (operating as an agent of the association) or general manager (operating as an employee of the association) is often adversarial and not complementary. Tensions arising from confusing expectations or ambiguous contracts and service level expectations manifest as collective dissonance and unaligned expectations and objectives. Once board and/or member dissatisfaction with the manager or management company sets in, it’s almost impossible to maintain the relationship and be optimistic about moving forward. Inevitably, the board of directors will determine that it’s best to end the contract or employment agreement and go in a new direction. Managing a breakup successfully is critical for the continuity of the HOA in the areas of finance, compliance, and governance. For boards considering breaking up with their manager or management company, here is a checklist of activities to ensure a smooth breakup and easy transition to a new company.

TAKE STOCK AND OWN THE BREAKUP. With few exceptions, the board of directors will most likely be the party to initiate the termination of the management employment contract or agreement. By the time a board has gotten to the point of writing and delivering the notice of termination, chances are good that they have been dissatisfied with the management company for some time. It is a critical governance step for the board to schedule an executive session to openly, objectively, and honestly evaluate what has led to the disconnect and dissatisfaction. What is the basis of the termination? Did the manager or management company fail to meet its contractual obligations? Did it not meet service level expectations or key performance indicators? Was there some dysfunction in the board of directors’ dynamic that may have contributed? Were management company evaluations done regularly? When breakups occur, blame gets tossed around. HOA boards have the fiduciary duty to manage the affairs of the association, including the hiring of the managing agent and the delegation of management activities to the managing agent. Boards must also own and manage the termination of the manager or management company, but only after thoughtful review.

PLAN THE BREAKUP CAREFULLY. This is no time to let emotion get in the way. The manager or management company fulfills most, if not all, of the HOA’s compliance and annual operating activities. Before composing and delivering the notice of termination, the association’s compliance requirements and calendar should be reviewed. Are there critical deadlines and activities scheduled (e.g., elections, budgets, projects) that depend on the current manager or management company? Can they be rescheduled or postponed? Depending on the size and complexity of the association, it is wise for the board to plan for their two- to three-month search for a new management company to overlap or run concurrently with the notice of termination.

In all cases, separation from the manager or management company requires a formal notice of termination. For a management agreement that autorenews annually, a notice of nonrenewal may also be required. The notice must be in writing, must be dated, and must state the board’s expectations during the transition period. The notice can be emailed but should also be mailed via certified mail or hand delivered. The notice of termination starts the clock for the association’s transition to new management. Concurrent with the delivery of the notice of termination, the association’s members should be notified of the termination and transition to new management and assured that during the transition period the association will continue to function as expected and comply with its governing documents and relevant state laws.

REVIEW THE MANAGEMENT AGREEMENT AND SET

TRANSITION EXPECTATIONS. The board is responsible to act objectively and deliberately, in accordance with the sound business judgment rule. They should review the manager employment contract or agreement and identify termination clauses, requirements, potential costs, and risks. If the documents are unclear or confusing, the association’s attorney can be consulted. This review should include the development of a list of the board’s expectations for the current management company during the transition period. They should not assume that the manager or management company will carry on with their activities. It is necessary that they clearly identify in writing the board’s expectations for manager or management responsibilities during this period, especially for any projects underway or about to commence.

CONDUCT THE EXIT INTERVIEW. The exit interview is a critical governance activity. Many professional management companies advertise their low turnover and high client retention rates, but the data suggest that, on average, HOAs seriously consider changing their management companies within three to five years of executing a new agreement. A professionally conducted exit interview with the outgoing company representative can inform the board and provide important feedback about what worked and what didn’t and what were contributing factors in the professional relationship that led to board dissatisfaction. The point of the exit interview is not to blame or disparage or lay out a laundry list of management company failures, but for the board to demonstrate its ownership of the relationship and to understand how to better oversee its future management partnership.

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The Self-Managed HOA Continued from page 21

HOA boards are charged with governance and provide critical strategic leadership and oversight to their associations. Managers and management companies manage the dayto-day operational affairs of the association and implement board policies. This relationship is fundamental to the successful operation of community associations. The following are warning signs that may lead the board to consider breaking up with the manager or the management company: • Noncompliance with state regulations and filing deadlines • Not meeting agreed-upon operational expectations and/or key performance

indicators • Increasing micromanagement of the management company by board members • Changes in trends of member and board management satisfaction and dissatisfaction • Unusually high turnover of assigned management company personnel • Lack of follow-through or proactive communication from the management personnel about scheduled activities and unplanned or emergency conditions • Manager or management company fatigue

Board oversight includes being aware of these warning signs, which may indicate that the board and the management company are not in alignment. Warning signs should trigger an in-depth analysis by the board to determine the causes and potential consequences. The causes of dissatisfaction can often be determined through effective communication, and board and management expectations can be realigned. If not, a carefully thought-out and well-orchestrated breakup may be the best and only solution. Breaking up doesn’t have to be hard, but it does need to be deliberate and planned.

John Cligny, AMS, PCAM, CCAM-HR, is a veteran portfolio manager and community association management executive. As co-founder of Association Consulting Group, John is a trusted advisor primarily focused on educating and advising community association board members on effective governance to promote a positive public opinion of homeowner associations and community management. John is a frequent speaker and panelist on a wide range of community association topics and issues.

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