Dimensions Online - Redbook Blues: Supplier Contracts
We are all learning to navigate the new business reality forced upon us by supply chain challenges, inflation, and post-pandemic market demand. Our industry would not have been able to survive, much less thrive, during the past two years without the dedication and support of our supplier partners. Thank you to AATC’s supplier members for all you do.
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. However, one of the best aspects of this article is that it focuses on four primary supplier types that onsite managers interact with regularly: 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 property owner/operator) 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, ensure you communicate your expectations 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 an 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.
Stranglehold Clauses. While competent legal counsel should review all contracts, the most frequent stranglehold clauses are:
- a clause that automatically renews for an exceptionally long term (as much as ten 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 six months nor later than three 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 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 about a stranglehold clause, 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 unfavorable sneak 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 critical 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 plenty of other competitors 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. Unfortunately, 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) potential 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.
AATC owner/operators value and appreciate our supplier partners. Just like good fences make good neighbors, good contracts make good partners.
Nicole Zaitoon, Allied Property Management, is AATC’s 2022 Government Affairs Committee Chair and a member of AATC’s Board of Directors.