Hiring—and Paying—Contractors Who Holds the Purse Strings?

Co-op, condo and HOA living represents a unique social arrangement; it’s a paid-for membership club and a home at the same time. Many people enter into this arrangement without a complete understanding of the responsibilities of membership. Others, fully aware of their community responsibility, volunteer to help guide, shepherd and monitor the health and welfare of the community by serving on association or corporation boards.

A typical single-family homeowner employs the skills of various professionals over the course of years to maintain and manage their home; attorneys, accountants, contractors and others as needs arise. The management of a large residential complex, one that may contain hundreds of units, often requires more complex skills. A single-family homeowner might require an attorney to close the purchase or sale of their property, an accountant to do their annual personal income tax, a contractor to repave a driveway or fix a roof. In large residential complexes legal, accounting and other skills often come into play more frequently and in a more complex manner.

Those association or corporation members who volunteer their own time to serve on a board may not themselves have the skills, education, experience and time to provide the expertise for these functions. That’s why co-ops, condos and HOAs have managing agents. But sometimes, unfortunately, things can go awry. As much as we don’t want to think about it, and we’re not suggesting it happens often, what is a board to do to keep everything on the up and up?

Protecting the Association, Yourself and Your Fiduciary Responsibility

Frank Flynn, an attorney who represents co-ops and condominiums and is the principal in The Flynn Law Group, a law firm located in Boston with attorneys licensed in all six New England states, suggests the following as a rule of thumb for boards and board members in protecting themselves: “The board should have their hands in every stage of selecting contractors and vendors – especially with larger jobs, when it’s even more important. They should be working hand and hand with the managing agent to select contractors. They should go back several years if not longer to get references for the particular contractor, and they should go and check out the work themselves, if possible. At every stage, the trustees must be involved.” A passive board of directors runs the risk of effectively surrendering the decision-making function to the management agent, which could result in uninformed decision-making by the board, or irregularities in the bidding/selection process of which the Board would not even be aware. The board should designate one or two of its members to take act as the contact people for the interface with management.”

Arlen Lasinsky is a director in the Advisory Services Group of Marcum LLP, a full-service accounting and advisory firm based in New York City, with offices in Chicago. He and his firm offer forensic accounting services. According to him, “A board of managers is ultimately responsible for whatever happens. They have the fiduciary duty to do what’s proper. They have to do their due diligence.” But, he continues, “The board should rely on their management company to refer vendors. The management company and the manager have the connections and the expertise to locate the best vendors for a job. There should be two levels of vetting: first by the management and then by the board.” Perhaps most importantly he points out that like all vendors, “the management company is a not a substitute for the board. They are a contractor the board hires as well.”

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