REDBOOK Blues: Supplier Contracts
We are all learning to navigate the new business reality forced upon us by the COVID-19 pandemic. After a year and a half, it still feels weird to do staff, investor, supplier, and Association meetings using Zoom. I’m hoping that Zoom will be a distant memory soon – but I’m afraid Zoom is here to stay.
One of the challenges that my company has faced during the pandemic is interacting with our suppliers. It was fantastic to see so many supplier partners face-to-face at last month’s AATC-AAGD Business Exchange.
Whether it is in-person or virtual, interacting on a regular basis with our suppliers strengthens our partnership and ensures the financial success of our assets.
As a multifamily owner/operator, one of the best ways to ensure a successful supplier relationship is to understand and review your supplier contracts.
As always, the TAA REDBOOK is a great resource. Start by having all your company colleagues read the REDBOOK article “Everything You Wanted to Know About Suppliers but Were Afraid to Ask.”
Written for the residential rental property owner/operator, this article discusses contracting and maintaining relationships with various suppliers. For most of us, supplier contract negotiation and interactions occur at the corporate level. One of the best aspects of this article is that it focuses on four primary supplier-types that onsite managers interact with on a regular basis: cable television companies, laundry room operators, trash removal companies, and telecommunications providers.
While this information is very product-specific, the principles in this article apply to all supplier relationships. Following are highlights of the article:
You Are the Customer. It is important to remember in the landlord-supplier relationship that you (the landlord) are the customer. Yes, it is a partnership, but the owner/operator is the buyer – suppliers are the sellers. As you would in your personal life, make sure you communicate your expectation for high-quality customer service.
Manage Your Suppliers. We are in the management business. We manage residents, employees, investors, and properties. Managing your relationships with suppliers can be as challenging as managing your relationship with residents. Wearing your well-earned management hat when interacting with suppliers will help ensure a fruitful, long-lasting relationship. Communicate, communicate, communicate, and communicate so more.
Take Your Time. You should devote a significant amount of time and effort when you first execute a supplier contract. Too often, members of the rental housing industry fall prey to clauses in supplier contracts that put a virtual stranglehold on the owner's ability to freely obtain competitive bids in the future and change to a better, more affordable supplier at the end of the contract term. These stranglehold clauses are often found in contracts covering laundry rooms, trash removal, cable TV, and telecommunications. It should be emphasized that not all suppliers in these areas use these stranglehold clauses; some do, some do not, but be sure you know the difference.
Stranglehold Clauses. While all contracts should be reviewed by competent legal counsel, the most frequent stranglehold clauses are:
- a clause that automatically renews for a very long term (as much as 10 years in some cases) if you miss the deadline for notice of termination or non-renewal.
- a clause that limits the ability to exercise the right to non-renew to a specific window in time, for example, "owner cannot give notice of termination or non-renewal sooner than 6 months nor later than 3 months before the end of the contract term," and
- a clause that gives the supplier a right of first refusal, i.e., the right to match any competing bid at the end of the lease term.
Some practical advice. Here are some practical recommendations from TAA general counsel regarding stranglehold clauses.
Before signing a supplier contract. Read it carefully read it again and re-read it. Consult an attorney to detect any loopholes, missing information, unfavorable language, stranglehold clauses, etc. Consider announcing to the suppliers ahead of time: "Don't submit any proposed contracts to me that contain a stranglehold clause." The supplier may profess ignorance as to what a stranglehold clause is, and you can then inform them or give them a copy of this article.
Fine Print. Make sure you and your attorney read the “fine print.” Remember, a few suppliers may try to slip sneak unfavorable clauses by you in their small print "standard" forms. If they are trying to “hide the football” at the beginning of this partnership, perhaps you need to find a more reputable supplier partner. Transparency and honesty are key to any healthy relations, especially business relations when money is involved.
Strike them out. If you or your lawyer find these clauses in proposed contracts, strike them. If the supplier objects, simply say that there are plenty of other competitors who do not insist on these clauses. (The odds are overwhelming that the supplier will give in and say "okay" to the deletion).
Before buying a property (preferably during the contract feasibility period), read all supplier contracts carefully. Many new owners fail to do so and do not find out about stranglehold clauses in existing supplier contracts until it is too late.
After purchasing a property. If you close the purchase, immediately write letters to all suppliers, terminating their contracts at the end of the current contract terms--or if there is a limited window for giving such notice, set up a tickler system to remind you to write the termination letters during that period. To soften the blow to a supplier, state in your letter that you are writing it as a precaution against (1) your own forgetfulness in the future, or (2) possible future changes in supplier ownership that might result in deteriorating service.
When taking over management. Follow the above advice. Do the same thing as an owner should do when buying the property.
Only once. If you have never paid attention to the fine print in the supplier contracts you have already signed, read them as soon as possible. You’ve’ all make this mistake: once! Fool me once, shame on you. Fool me twice, shame on me!
John Gillespie, WAK Property Management, is the AATC Government Affairs Committee Chair.