An HOA management auto renewing contract can spell disaster for a community that wishes to keep its options open. When entering into an agreement with any vendor, board members must carefully check each clause and provision to ensure the HOA doesn’t get locked into unfavorable terms.
What is an HOA Management Auto-Renewing Contract?
Homeowners associations are responsible for running the community. Board members must juggle a plethora of tasks, including dues collection, common area maintenance, financial management, rule enforcement, and legal compliance. While some choose to self-manage, most associations turn to professional solutions.
To secure HOA management services, associations must enter a contract with the management company. This contract stipulates the scope of work, fee structure, and terms and conditions of the agreement.
Most contract durations only span 1 to 5 years, but the agreement doesn’t necessarily end once the expiration date comes around. In fact, many contracts automatically renew, locking the HOA in for another X number of years. This is what’s known as an HOA management evergreen clause.
The evergreen clause is an automatic renewal provision in an HOA management contract. It extends the contract for a specific period unless the HOA or the management company terminates the agreement. Termination often requires formal written notice before a specific deadline.
How Does the HOA Management Contract Auto Renewal Work?
Once the initial contract term expires, the HOA management contract renewal comes into play. The agreement won’t end. Instead, it will roll over into a new contract with identical terms unless otherwise stipulated.
To prevent the automatic renewal, the HOA board must provide a formal cancellation notice to their provider. This notice must be sent within a specific window, and most companies strictly enforce this deadline. While windows can vary, most contracts require notice 30 to 90 days prior to the expiration date.
If the HOA misses this deadline, the contract locks in for another cycle. This means the board must wait another full term to switch or terminate the management company without suffering a penalty. The term of the renewed contract usually spans the same number of years, but this can also change depending on the original conditions.
Is an HOA Management Auto Renewing Contract Legal?
In most cases, the automatic renewal clause in HOA management contracts is legal. That said, this evergreen clause must be explicitly outlined in the signed agreement. It must also adhere to state and local laws.
Notably, Virginia contains language in its Property Owners’ Association Act and Condominium Act that protects communities from auto-renewal clauses. According to Sections 55.1-1837 (for HOAs) and 55.1-1940.1 (for condos), an association may terminate a management contract with an automatic renewal clause at any time without penalty, provided the board gives 60 days’ written notice.
This means an HOA or condo can end an agreement even after it automatically renews. The board must simply provide 60 days’ written notice and make sure that the contract has an evergreen clause in the first place.
The statute is meant to protect HOAs from predatory contracts that trap the board into another lock-in period or else face termination penalties. Some companies even increase their fees at renewal without prior approval or negotiation—all because the evergreen clause permits it.
Key Clauses to Look for in an HOA Management Contract
Board members have a fiduciary duty to review the HOA management auto renewing contracts carefully. Here are the most important clauses to watch out for.
1. HOA Management Evergreen Clause
The most obvious one, of course, is the evergreen clause. This clause states that the contract will automatically renew if the HOA fails to cancel the agreement within the specified timeframe.
2. Renewal Dates
Board members must verify the renewal date of the HOA management auto-renewing contract. This is when the agreement will automatically roll over into a new one with similar or slightly varied terms.
3. Notice Periods
This is the window when boards must provide notice to the management company. Most contracts require HOAs to give notice 30 to 90 days before the renewal.
Some companies aim to trap associations into another locked-in partnership. Boards may not even realize that the contract has already automatically renewed until it’s too late.
4. Termination Terms
Boards must confirm the termination terms. For example, a management company may require written notice of the cancellation delivered to their email address or physical office.
5. Fee Increases
Auto-renewal clauses may come with fee increases. This raises the monthly rate that an HOA must pay to the company for its services. Even if the board wants to renew the contract, an automatic fee increase eliminates the possibility of negotiation, often resulting in unfavorable terms.
6. Service Scope Changes
Similar to fee increases, an automatic renewal may also bring changes to the scope of work. The management company may attempt to cheat the HOA out of its services, offering much less for the same price or a higher rate.
7. Cancellation Penalties
When an HOA cancels the contract before its expiry or after it automatically renews, it may be liable for monetary penalties. Boards must inspect the agreement for this provision.
Best Practices for HOA Boards
An HOA management company auto renewal contract clause can lock the association into another term without even realizing it. Here are the best practices that HOA boards can implement.
1. Create a Contract Calendar
To avoid missing the cancellation window, board members must log all critical dates in a calendar. This includes expiration dates and notice deadlines.
Digital calendars work best, as they have an alarm feature that the board can set ahead of time. Boards should set the alarm for at least 120 days before the deadline. This way, they have time to review the company’s performance and consider whether renewal is a good decision.
Additionally, digital calendars can be shared across all board members. When board members change or transition, new accounts can access the calendar and get the alarm.
2. Negotiate the Notice Period
When signing a new or renewed contract, it is best to negotiate the notice period down to 30 or 60 days instead of 90 or 120 days. This might seem counterintuitive, but it actually gives the board more time to evaluate the company’s performance and consider a change.
A 90-day notice period means the HOA has to decide to cancel 3 months before the contract’s expiry. In comparison, a 30-day notice period gives the board an extra 2 months to get its ducks in a row.
3. Remove the Clause Entirely
If possible, the HOA board should try to negotiate the evergreen clause out of the contract altogether. Instead of an automatic roll-over, both parties must agree to the renewal through a written agreement.
A Better Deal
An HOA management auto renewing contract can entrap an association without even realizing it. Board members must thoroughly examine every potential agreement, not just because it’s part of their duty, but also because it helps the HOA avoid costly problems in the future.
Cedar Management Group provides effective management services to HOAs and condo associations. Call us today at (877) 252-3327 or email us at help@mycmg.com to get started!
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