Understanding Maintenance Agreements: A Comprehensive Guide

What Is a Maintenance Agreement?

Service providers and clients alike know that with a scheduled maintenance agreement (an "MA"), the benefits outweigh the disadvantages. An MA promises reliable support for the client from the service provider, specifically relating to the performance of scheduled services. MAs also promise the clients that they will not incur any costs relating to parts or labor for the term of the MA.
Further , MAs provide a guaranteed source of income for the service provider, and ensure the continued maintenance of the work that the contractor has performed.
MAs are common in the following industries: electrical, plumbing, mechanical, painting, drywall, etc.

Key Components of a Maintenance Agreement

A maintenance agreement is a type of service agreement that sets forth the key details of the relationship between a property owner and its maintenance vendor. The elements contained in a maintenance agreement should ideally include a clearly defined scope of work, response times, costs, levels of service, and liability.
Scope of Work
A clearly defined scope of work is the part of the maintenance agreement that best helps to set reasonable expectations for all parties. For example, if the parties are defining the scope of work for snow removal, the scope of work should be detailed about locations for removal, what equipment will or will not be used and what is included and excluded. The more detailed the scope of work, the less likely the parties will be confused about what types of work are included and when execution of those tasks will occur.
Response Times
Response times are a crucial component of a maintenance agreement. If, for example, the maintenance provider is required to address a leaking sink within two hours of notification, any delay in that timing should trigger a discussion among the parties about how the maintenance provider is paid or any other issues that arise. A clearly set response time helps to set reasonable expectations, can reveal flaws in a maintenance provider’s planning, and aids in dispute resolution when results do not match expectations.
Costs
A maintenance agreement should be clear about costs. For example, does a maintenance provider charge the property owner a flat monthly fee, a flat weekly fee, a flat hourly fee, or some other metric? Is the vendor required to obtain the property owner’s prior approval prior to incurring any costs? How does the property owner reimburse the vendor for materials? Is the property owner responsible for paying the vendor’s legal fees for enforcing the contract? Are there any late fees for unpaid invoices? Answers to all of these questions may help determine the ultimate cost of the relationship and the property owner and maintenance provider should be in it for a mutually beneficial purpose regardless of the activity at hand. Where there are variable costs, it is often helpful to define a cap on how much the vendor can bill the property owner per month.
Level of Service
The vendor should be required to maintain a particular level of service. For example, a particular tenant may call for the maintenance vendor to respond to an issue within two hours. Other tenants may call for the maintenance vendor to respond within six hours to a particular issue. A well-written maintenance agreement can help to ensure that the maintenance vendor provides the same quality level of work to all tenants to prevent complaints and confusion.
Terms of Service
A maintenance agreement should also have a clearly defined term so that the property owner can evaluate the vendor’s performance over time. A maintenance agreement also should specify how either party may terminate the contract; for example, either party could terminate the agreement for cause or both parties could have the option for termination without cause. Where termination without cause is allowed, notice of termination should also be defined. The property owner and maintenance vendor should give consideration to the timing of either party’s termination of the agreement.

Benefits of Maintenance Agreements

Maintenance agreements provide a range of benefits for the parties involved, from lowering costs to increasing planning and predictability. For instance, although the lump-sum upfront cost may be higher than simply paying an annual fee at the time service is performed, generally, a series of maintenance agreements can be a cost-effective way to maintain and repair property. For the property owner, an agreement helps with long-term budgeting since the owner can avoid unexpected expenses later on. For the contractor, an agreement can prevent future disputes over pricing as well as help build a relationship over the long term. Since most maintenance agreements require regular maintenance on a set timetable, the property owner appreciates the predictability. For the contractor, especially one that relies on invoicing or third-party payment arrangements for maintenance work, a regular schedule provides steady cash flow. Further, establishing a regular schedule for maintenance enhances reliability and performance, which can increase customer satisfaction. In addition, with regular maintenance or communication, contract performance issues can be identified and addressed before a minor issue becomes a major problem. Usually, any resulting disputes between a contractor and a property owner are easily resolved where the parties have established a working relationship over years of performance.

Common Types of Maintenance Agreements

There are several types of maintenance agreements that cover a variety of services provided. These include preventive maintenance agreements, predictive maintenance agreements, and corrective maintenance agreements.
In this type of maintenance agreement, the maintenance vendor agrees to provide regular services, such as scheduled system cleaning, part changing, supply replenishing, and system inspections, checks, and tests. The agreements usually set out a list of services or actions to be performed along with defined frequencies (daily, weekly, monthly, etc.). Often, these agreements also estimate the time required for performance of these services. While it is difficult to determine the cost savings that can occur as a result of this type of maintenance agreement, there is no question that, by keeping the system in good working order, emergency repairs can be minimized. The costs saved on emergency repair services due to preventive maintenance often are equal to or greater than the costs of the preventive maintenance itself.
This is a program of maintenance and repair of equipment that depends on predicting equipment failures. The parties negotiate and agree upon which predictively maintained elements will be included in the predictive maintenance program. The predictive maintenance program might be limited to any or all aspects of the equipment, including vibration, oils and lube, electrical resistances, insulation, thermal imagery, air leaks, or others. Generally, the predictive maintenance program is designed to identify equipment needs, identify and/or eliminate performance or operational problems, and improve overall efficiency. Predictive maintenance is generally used for more critical equipment or systems.
While this type of maintenance agreement is intended to provide for corrective maintenance when an infrequent or irregular problem occurs, parties’ use of this type of maintenance agreement differs from traditional maintenance agreements in one critical way; the corrective maintenance under this type of maintenance agreement is not covered by warranty for mechanical failure that is typically included in all original equipment manufacturer warranties. A corrective maintenance agreement requires the maintenance vendor to provide corrective maintenance for a specified number of requests. This maintenance may or may not be performed by the same vendor performing preventive maintenance.

How to Draft an Effective Maintenance Agreement

When it comes time for a party to a deal to initiate the negotiation of a maintenance agreement with the other party/ies to the deal, it is best practice for the party initiating the negotiation to: In addition to being clear in terms of defining the particular equipment covered by the agreement, the parties should also address with specificity the type of maintenance services being provided (i.e., are they repair services, preventive maintenance services, or both?) and when such services will be performed (i.e., on an on-going basis, during system outages, or both?). Additionally, the parties should consider including service level agreements that include performance benchmarks and remedies for failing to meet agreed upon service levels. This will help position the party being asked to provide maintenance services as business partner, rather than a vendor. Finally, when entering into a maintenance agreement, the parties should consider provisions regarding the notice requirement to be provided to the party who is responsible for supervising or monitoring maintenance services. For example, parties should consider including a notice provision requiring prior written notice of any maintenance work that may impede or interfere with operations as well as any required time period to remediate such maintenance work before the effective date of remediation. An example of a remedial notice provision is as follows: Any notice or demand sent by either party to this Agreement shall be in writing and either delivered by hand, facsimile, email, overnight express or mailed by first class mail, overnight courier, return receipt requested, to the party. Unless otherwise provided herein , any notice or demand delivered personally shall be deemed to have been duly given upon receipt by the receiving party. Any notice or demand delivered by email or facsimile shall be deemed to have been duly given on the date sent if sent prior to 5:00 p.m. (recipient’s local time) on such day or on the next succeeding business day thereafter if sent on another day. Any notice or demand delivered by overnight express or mail shall be deemed to have been duly given on the day of actual receipt or refusal if reception can be proven by a written receipt or an official postal receipt. Any notice of demand that is returned to the sending party shall be deemed to have been served as of the date of which the attempted delivery was made. If the recipient refuses to accept delivery of such notice or demand, the sender may advise the recipient that it may be accessed by retrieval by such party from the delivery service in use. Unless otherwise provided herein, any notice that is to be delivered hereunder shall be deemed to have been duly given upon the day being sent, as said term is defined herein, and the receiving party may not take any action or perform any task under this Agreement until the required notice period has been satisfied. The parties agree that the following are conditions precedent to performing maintenance services upon the system: (i) the notification requirement set forth herein has been satisfied; (ii) the receipt of written approval by the authorized representative of the party performing the maintenance services; and (iii) the receipt of the requisite permits or licenses having been received by the developer/developer’s representative, in the event permits or licenses are required to be obtained from the governmental authority having jurisdiction. The party performing maintenance services shall be under no obligation to perform maintenance services upon the system until all of the foregoing conditions have occurred.

Challenges in a Maintenance Agreement & How to Solve Them

For those unaware, a maintenance agreement is contractual provisions requiring the maintenance of the common areas of a community. While these provisions may seem straightforward and thus, easy to enforce, there are numerous challenges Managers, Boards, and Attorneys encounter, day-to-day.
The most prominent issues involve violations of the maintenance requirements by owners of Units in the community – to the detriment of everyone. For example, depending on the terms of the contract, one may be required to replace a deck that has reached its expected life, or to have work completed by a licensed contractor or to refrain from using the areas for any purpose except as intended. When maintenance does not occur, as it should, your community could be exposed to liability and/or the aesthetics of the community can be compromised. Common scenarios involve: In the above-noted examples, the Board will have to weigh its interests in enforcing the obligations versus the consequences of bringing an action against the offending party. Sometimes, it is worth the time and effort to have a unit owner comply. Other times, it is more cost-effective to encourage the owner to sell and move-out. In the case of a deck, for example, the deck can be dangerous for other owners if it is unsafe and presents a risk of falling into the community below. The board has several options to address the violation of the maintenance obligations: Communicate with the offending party. This should be done through a letter which outlines the specific concern, the provision in the Declaration or other document that the offending party has violated, and what steps are necessary in order for the offending party to comply. The notice should give the offending party a reasonable amount of time (typically 30 days) to comply before further action is considered. If the offending party fails to comply with the requirements outlined in the Association’s notice, the Association has the ability to levy a fine against the offending party for the continued failure to comply. The fine process is a very low-risk and cost-effective method to consider. Fines start small in order to encourage compliance and grow larger with the continued violation. The fines can be used to offset the cost incurred by the community in order to have the work completed by the association. If a unit owner refuses to comply with the terms of the Declaration, the association has no choice but to seek judicial intervention in order to force the offending party to do so. By acquiring a court order, your Association can have the offending party complete the work (or pay the Association to do so) along with an award of attorney’s fees incurred to pursue the necessary action. Communication with a violator and notices regarding violations of a Maintenance Agreement can prove very valuable in the life of a community association. The communication illustrates your commitment to the terms of the agreement and can foster positive reactions from your community.

Maintenance Agreement Success Stories

Maintenance agreements often promise significant potential benefits to both buyers and sellers in a commercial transaction. However, the degree to which such agreements assist in achieving the intended results on an acquisition of a target business may vary, and in some cases the intended benefits may fall short of the expectations of the parties. The following case study illustrates how maintenance agreements have assisted the buyer in making an informed acquisition decision and settling in quickly and effectively with the seller to ensure the operational efficiency and customer satisfaction contemplated by the transaction.
Case Study 1: In connection with the acquisition of a full service gas station, the buyer was able to negotiate favorable terms for the seller’s credit card processing and gasoline supply agreement which provided the buyer with the flexibility to change suppliers and processors on a timely basis, critical to ensuring the ongoing attractiveness of the purchased business model. Some of the issues that arose in negotiating the terms of these agreements included:

Reviewing the interconnections between the client’s credit card processing and gasoline supply contracts to ensure that fundamental rights were preserved (i.e. changing suppliers/switching parties, maximizing flexibility in payment processing terms) while still reflecting the business model;
Negotiating contract provisions to ensure that pricing and fees for the credit card processor would be industry competitive (requiring, inter alia, the disclosure of current market rates); and
Negotiating price adjustment mechanisms (such as time based discounts) in either or both of the contracts to minimize market volatility risk, including the right to pass these price increases through to the end consumer, as well as ensuring the integrity of the supply agreement with respect to such price adjustment rights.

Such an evaluation and negotiation process can result in tangible economic benefits for the acquiring business; in the past, this process has helped clients save thousands of dollars on a monthly basis, providing the flexibility to change processors/suppliers in the future, while allowing the buyer to define its business model from the outset with respect to acceptable margins and affordability to the end consumer .
This process can also assist the seller in preparing for an impending sale by optimizing the terms of its agreements to build up the value of the company and make the commercial offering more attractive to any potential buyer, thereby maximizing the consideration to be received on a sale.
Case Study 2: A bakery client of the firm streamlined its operations through the acquisition of a competition in its area of business. In settling in with the competition, the two businesses were able to integrate their operating expenses (by which is meant expenses other than raw materials, such as labour, rent, utilities, motor vehicle fuel and insurance) and properly distribute them among the merged retail locations through an effective telecommunication network connecting the stores with a single software platform (as opposed to requiring investment in the establishment of a separate operating system for the competition), while also achieving simultaneous cash register operation so that sales at all locations are captured in real time.
The negotiation of the operating expenses allocation in this case involved a number of factors:

Identifying what operating expenses would be aggregated and which should remain separate between the businesses (e.g. advertising costs), and what operating expenses would be subject to the allocation mechanism (and to what extent, based on percentage of market share, sales, square footage, etc.);
Determining the volume of costs required to be borne by the stores and determining why the costs are incurred in the manner presently observed, if such will not be required post-closing; and
Establishing criteria for measuring operating expenses in the future and how the factors used in the allocation mechanism can be maximized (this provides consideration for issues related to performance once synergies are achieved, and can assist when negotiations are difficult).

The client was able to maximize the profitability of the business through the elimination of redundant operating expenses while also ensuring a reliable high-level information technology stream and management system to reduce future costs related to accounting and inventory tracking.
As the above case studies show, negotiating the terms of a maintenance agreement can assist a buyer in streamlining and maximizing the profitability of a target business by ensuring that it has a clear picture of the operating expenses and obligations of the seller and that it has optimized the terms of the actual agreements themselves.