HOA Homefront™
By Kelly G. Richardson

HOA Homefront - Legislative News - Governor Vetoes AB 1328; Dealing With Long Contracts

This week Governor Schwarzenegger vetoed AB 1328, authored by Assembly Member Salas. The bill would have allowed a common interest development board, regardless of any ban on long-term contracts in the association’s Bylaws or CC&R's, to enter into a contract of up to five years for contracts for water or energy which were "reasonably anticipated" to result in savings. Associations already have the ability to enter into longer contracts, so long as the membership votes to approve. Otherwise, a board would be able to tie the hands of future boards through long-term contracts. Concerns were raised by opponents, including the Community Associations Institute, as to whether removing this important limitation on board power would be healthy for associations.

The Governor's complete veto message:
“To the Members of the California State Assembly: I am returning Assembly Bill 1328 without my signature. This bill would allow a homeowners association (HOA) of a common interest development (CID) to enter into a contract of up to five years for water or energy efficiency programs under specified conditions. This bill is unnecessary. Existing law limits a HOA’s capacity to enter into multi-year contracts for various types of services, instead requiring a vote of the membership to enter into contracts of more than one year. This bill would override this important veto requirement, weakening the system of self governance that is central to the operations of CIDs and could result in contracts that do not reflect the approval of a majority of the members of the HOA. Further, if this bill is enacted, it could potentially expose CID members to long-term negative consequences brought about by board mistakes. For these reasons I am unable to sign this bill. Sincerely, Arnold Schwarzenegger”

If a contract truly must be of a long-term nature to save money, have it approved by the membership. The double envelope 30 day process required of most other votes does not apply to this kind of vote, so it should be easier to accomplish. The need for a long-term contracts is not widespread, and long-term contracts should be scrutinized quite carefully. Are the savings from such a contract so substantial that the association is justified in sacrificing its flexibility and foreclosing any other options for five years? Another way vendors sometimes tie in associations to longer term commitments is through the automatically renewing annual contract. These are often traps for the unwary board, because the window to reject the renewal (and at least seek alternative proposals) is often missed, binding the association to another year. Associations should request that annually renewing contracts provide the association the opportunity to terminate the contract prior to the end of the term, normally upon thirty days’ notice. For the vendor contract in which the start-up cost is significant (such as a management contract) the association may want to consider offering a buyout in exchange for the right to terminate during the first year of the term. Be fair to your vendors, because with some contracts the vendors lose money until they reach “cruising altitude” after the set-up period. It is not unreasonable for them to want assurances that they will have the relationship long enough to realize a profit. But after the first year ends, the best approach is to have the contract cancellable upon one month’s advance notice. In the rare instance where a long-term contract is in the association’s best interests, the board should plan on presenting to the membership not only the proposed contract, but a disclosure of the various alternatives which were explored and the reasons why the longer contract is the recommended option. Then it is up to the membership to participate and support their association by reviewing the information and voting.

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Kelly G. Richardson is Senior Partner of Richardson & Harman PC, a California law firm known for real estate and community association advice. Direct questions to KRichardson@RH4Law.com. For past columns, visit www.HOAHomefront.com. All rights reserved®.