Flat Fee vs. Hourly Rate: Attorneys Argue Before the Court of Board Opinion
Dec. 27, 2012 — John W. Toothman, president of Virginia-based firm The Devil's Advocate, which advises housing associations nationwide on ways to lower legal costs, says condo and co-op boards should treat attorneys no differently than how they treat other contractors who are seeking employment: they should be subject to competitive bidding. That doesn't just mean getting a schedule of hourly rates for partners and associates (although that's part of it). You also want to examine the financial arrangements.
Most firms, explains attorney Tara Snow, a partner at Novitt, Sahr & Snow, offer at least two ways to bill: hourly or monthly. In the former, you get billed every time you call. In the latter, you pay a monthly retainer, which usually covers all calls, and provides a few free visits by the attorney. It does not cover "extraordinary expenses," such as litigation, contract negotiations, closings or refinancings. On those expenses, you're back on the hourly clock (although you usually get a significant discount).
The hourly rate "basically gives them an incentive to drag things out," argues Toothman. "You are rewarding them for quantity, not quality of work, and with the monthly retainer that is often an incentive for them to be efficient." Attorneys counter that argument by pointing to the increased competition as a check on "dragging things out."
Be Flat
The flat rate, or monthly retainer (not offered by all firms), may help solve one problem: boards being overly frugal when talking with legal counsel. Boards with the hourly rate often try to save by keeping their conversations brief. For instance, attorney Kenneth Jacobs, a partner at Smith, Buss & Jacobs, points to co-op and condo board members who call and try to get him to give them "yes or no" answers. "In an effort to save money, they send you an e-mail in which they might say, ‘Can we assess the building $800,000, payable in March?' and the correct answer is yes." But this is being "cost deficient," says Jacobs, noting: "I wouldn't be doing my job unless I said, ‘Why are you asking this question?' You can't answer in a vacuum."
It is better, say lawyers such as James Glatthaar, a partner at Bleakley Platt & Schmidt, to involve your counsel before you get to the crisis point. The money you spend up front is nothing next to the money you'll pay in the back end if an attorney has to clean up a mess. Explains attorney Richard Klein, principal in the Richard Klein Law Office: "With objectionable conduct issues, with quality-of-life issues, with delinquent shareholders, sometimes I send a letter in the beginning before the person owes thousands and thousands of dollars. At that point, we can work out a payment plan. That's better than waiting until the person is too far behind the eight ball."
The condominium or co-op board should also ask for a proposed budget of annual expenses, with as much detail as possible. Attorney Geoffrey Mazel, a partner at Hankin & Mazel, says that preparing sample budgets is possible. "We do monthly budgets to give them an idea of cost," he reports. "It's easier to do when you have them on a monthly retainer, harder to do without one. But I can do it. We've been doing this long enough so we know where the possible [extra] expenses are. We ask, 'Are you refinancing? Are you doing a lot of capital improvements?' Things like that help give us a sense of what it will cost." But in either case, it can be only a rough estimate.
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