Court Holds Early termination of Manager causes Condo Association to Breach Property Management Contract
In Vista Property Group, LLC v Schulte, unpublished per curiam opinion of the Court of Appeals, issued September 17, 2020 (Docket No. 347471), the Michigan Court of Appeals vacated a no-cause judgment in favor of a condominium association and remanded the case back to the Kent County Circuit Court for entry of judgment in favor of an ousted property management company. This case presents a cautionary tale to condominium associations undergoing board turnovers and their ongoing contractual obligations, whether the new board entered into the contract or not, and the dangers of cancelling a contract based on a breach when one has not actually occurred.
The Northwood Hills Condominium Association (the “Association”) underwent a change many condominium associations decide to make – ending a relationship with one property management company (in this case, Landmark Realty Advisors, Inc. (“Landmark”)) and signing a contract with a new one (in this case, Vista Property Group, LLC (“Vista”)). In October 2016, the Condominium Association’s then-president terminated the Association’s relationship with Landmark and executed a contract with Vista, which would formally provide services effective January 1, 2017. In the transition between October 2016 and January 1, 2017, Vista’s contractual obligations were limited to providing only certain oversight services and only in the event Landmark failed to continue to provide services in the remaining months.
Soon after, there was a recall of all the Condominium Association’s board members and all new board members were installed. Once installed, the new board members cancelled the contract recently executed by the old members with Vista and, instead, on December 4, 2016, the new board members renewed the Condominium Association’s contract with Landmark. Vista then filed a lawsuit against the Association, alleging, in part, that the Condominium Association breached their contract. The Association defended against this claim, alleging that Vista first breached the contract by failing to provide the new board members with a copy of the contract, justifying the cancellation. In the trial court, Vista’s claim was presented to a jury, which found that Vista first breached the contract due to its failure to provide the new board members with a copy of the contract.
The Michigan Court of Appeal’s decision first began with a review of the elements necessary to prevail on a breach of contract claim, which include:
- There was a contract;
- That the other party breached;
- And the nonbreaching party suffered damages because of the breach.
Dunn v Bennett, 303 Mich App 767, 774; 846 NW2d 75 (2013). Importantly, a party who commits the first breach cannot bring a breach of contract claim against the other party for their later failure to perform; however, a party defending against a breach of contract claim because the other party committed the first breach must establish that the first breach was substantial. Able Demolition v Pontiac, 275 Mich App 577, 585; 739 NW2d 696 (2007). The Court specifically noted that not every contractual breach is enough to walk away from a contract without consequences. Rosenthal v Triangle Dev Co, 261 Mich 462, 463; 246 NW 182 (1933). A contractual breach is only substantial based on the following scale of considerations:
- Was the breach so bad that the nonbreaching party could not even perform their own side of the bargain?
- Did or can the nonbreaching party still receive the services or benefits they contracted for, even with the breach?
- Can the nonbreaching party be compensated for any damages resulting from the breach?
- Has the breaching party already began performing its side of the bargain?
Walker & Co v Harrison, 347 Mich 630, 635; 81 NW2d 352 (1957).
The Court rejected the Condominium Association’s defense that Vista first breached the contract when it failed to provide the new board members with a copy of the new property management contract on three different bases.
First, the Court rejected the Condominium Association’s argument that it could get out of its contract with Vista because it considered Vista “untrustworthy or cooperative”, reasoning that Michigan does not recognize implied covenants of good faith and fair dealing on which this argument relied.
Second, the Court held that the Association’s contract with Vista did not require Vista to a provide a copy of the contract to anyone. Instead, because Vista still was in the transition period with Landmark still serving as the property manager, Vista’s obligations at the time were limited to only obtaining documents, not providing them, meaning that Vista had no contractual obligation to provide the Condominium Association’s new board members with a copy of the contract at the time the Association decided it no longer wanted to transition to Vista.
Third, the Court held that even if Vista did have a contractual obligation to provide the Association with a copy of the contract, it already did so in October 2016 when the Association’s then-president, Debra Schulte, executed the contract, finding that Ms. Schulte executed the contract in her capacity as the Condominium Association’s president, which was the same as the Association itself signing and receiving a copy of the contract. Moreover, the Court specifically noted that “subsequent internal strife –and the ouster of the old board—does not change these facts or justify Northwood Hill’s repudiation of its contract with Vista.”
As a result of all the above, the Court determined that the Condominium Association breached the contract when it purported to cancel its contract with Vista and renew its contract with Landmark. The Court remanded Vista’s breach of contract claim back to the Kent County Circuit Court for a determination of the monetary damages the Association would owe to Vista.
The Condominium Association took a risk when its new board members decided to cancel its property management contract on the basis of a purported breach by Vista. As noted by the Michigan Court of Appeals,
Ultimately, the “injured party’s determination that there has been a material breach, justifying his own repudiation, is fraught with peril, for should such determination, as viewed by a later court in the calm of its contemplation, be unwarranted, the repudiator himself will have been guilty of material breach and himself have become the aggressor, not an innocent victim.”
Walker, 347 Mich at 635. As evidenced by this case, a breach of contract must have actually occurred and that breach must be substantial in order to justify failing to further perform under or cancel a contract. The Condominium Association here failed to even show that Vista breached the contract – instead, the Association is now liable for its own breach when it purported to cancel the contract and failed to pay the property management company the money it owed under the contract.
Condominium associations have many contractual relationships with vendors such as property management, landscaping and snow removal companies. If a condominium association believes its vendor has failed to perform its obligations under a contract, then the association should first reach out to legal counsel knowledgeable in community association law and contracts before deciding to no longer perform its own obligations under or cancel the contract. Getting a legal opinion early as to whether a breach has actually occurred, whether that breach is substantial enough to justify cancelling the contract and the legal options based on the particular facts of the case may help your condominium association avoid inadvertently breaching the contract and liable for money damages.
Kayleigh B. Long is an attorney with Hirzel Law, PLC and focuses her practice in the areas of appellate law, community association law and civil litigation. Ms. Long received her Bachelor of Arts degree in International Studies from Indiana University. Prior to attending law school, Ms. Long joined Teach for America, teaching kindergarten in Harper Woods, Michigan and southeast Washington, D.C., and received a Master of Arts in Teaching from Oakland University. Ms. Long then obtained her Juris Doctor degree from Indiana University Robert H. McKinney School of Law, where she graduated in the top 5 of her class and served as the Senior Executive Editor on the Indiana Law Review. Her law review note was published in the Indiana Law Review, and she has published a law review article in the Denver Law Review. She can be reached at (248) 478-1800 or [email protected].