Terminating Developer Contracts

Has your association recently been turned over from developer control?  If so, have you noticed any long-term, one-sided contracts with companies that sound eerily similar to the developer?  If this sounds familiar, then we may be able to help!

Ok, so enough of the infomercial.  However, if the facts above apply to your association, there may be a way out of that contract entered into by the developer that seems so unfair to the association.  

The Arizona Condominium Act, at A.R.S.§ 33-1245 and the Restatement of Property (Servitudes), Section 6.19, allow condominium associations and planned communities to terminate certain contracts and leases that were entered into before the board of directors elected by the homeowners took office.  Condominium associations and planned communities have the ability to terminate, without penalty, the following contracts/leases entered into by the declarant-controlled board of directors:

1. any management contract or employment contract;
2. any contract or lease between the association and a declarant or an affiliate of a declarant; or
3. any contract or lease that is not bona fide or was unconscionable to the owners at the time entered into under the circumstances then prevailing.

The first two categories are fairly easy to spot.  For example, if the Declarant has retained a management company or a full-time employee manager on a long-term contract, the association can cancel these contracts when the homeowners take over the Board.  Additionally, if the Declarant has a long-term landscaping contract with a fully owned subsidiary of the Declarant, the association can terminate this contract without penalty.  

The third category is more difficult to navigate through.  The third category applies to contracts that are not "bona fide" and contracts that are "unconscionable" when entered into.  The term "bona fide" generally means that the agreement was made in good faith. Courts typically find that contracts are "unconscionable" when they are so one-sided that no party would enter into the contract if they knew the terms of the contract.  So, in order to fit into this third category, the contract must typically "shock the senses" or not be entered in good faith by the parties.  This analysis is extremely fact specific and there is often no clear answer regarding whether the contract can be terminated under this third category unless a lawsuit is filed and the facts supporting the claim are proven.

We often see contracts that fit into this third category in the form of cable contracts. These are known as "bulk billing" agreements that bind an association on behalf of all of its homeowners.  These types of agreements are not necessarily unconscionable and may not be terminable by the association.  The specific facts must be taken into consideration to determine if the cable contract is unconscionable.  For instance, if the contract is for a period of 50 years, and charges double the market rate for cable, then it may be unconscionable and terminable without penalty by the association.  However, if the agreement is only for 5 years and charges the going rate for cable services, the association may have to ride it out.

If you have any questions regarding terminating developer contracts, or any other contract for that matter, feel free to contact Mark Sahl or any other attorney in our firm.