The motivation for volunteering to be an uncompensated (and sometimes underappreciated) condo, HOA, or co-op board member is usually a sense of civic duty combined with the desire to protect one’s own investment and quality of life. This means that the majority of board members actually live in the buildings and communities they serve. And that means that most board members are neighbors, serving with and for people who share not just common areas with them, but maybe even actual walls and ceilings.
Such closeness has its benefits: familiarity with the community’s unique issues, people, and history; easy access to documents and other on-site information; and proximity to other board members for meeting quora, for example. But closeness also can lead to conflicts, from the personal to the professional. So how do directors separate the business from the kibbitz in the boardroom?
Upon election, board members become fiduciaries, charged with making policies and decisions in the best interest of the community. A fiduciary has two primary duties: duty of care and duty of loyalty. The former means a board member must exercise reasonable care when making decisions that will impact the building or community. The latter is a standard that requires a board member to act in the best interests of the corporation or association.
Both of these duties prescribe a responsibility to put one’s personal interests aside in execution of board business, says Mary-Joy Howes, partner in the law firm of Goodman, Shapiro & Lombardi, LLC with offices in Massachusetts and Rhode Island. “Board members must always have the association’s best interest as their number-one priority,” she says, “and unit owners need to be able to trust that the elected board is acting in the association’s best interest at all times. The board members’ loyalty must be to the association and the association only.”
In practice, however, fiduciaries carry out their business more or less on the honor system—and much of real estate is a family affair. The stewardship of buildings and communities where multiple families live—served by the boards of directors and boards of trustees in condos, HOAs, and co-ops—often follows bloodlines. But on a residential board, close family relationships between members can lead to a concentration of power that does not serve the common interests of the membership. Additionally, existing family dynamics and inherent conflicts can also become problematic on an association board of directors.
Because of the broad decision-making powers bestowed upon residential boards, state statutes provide very little in the way of board oversight or regulation, including whether family members or spouses can serve together on a board. Most only include the basic condition that there be a board, and that it be elected by the membership. In most states, residential boards are governed by corporate law that leaves board candidacy and directorship qualifications up to individual building communities.
However, says Mark Axinn, partner in Brill & Meisel, a New York City law firm specializing in co-op and condo representation, “Many bylaws require only that the individual be a resident of the State of New York and over 18 to qualify for board membership.” That means that unless a building’s or association’s governing documents specify otherwise, spouses and other family members are free to run for and serve on the board together.
That doesn’t mean it’s advisable, though. Attorney Bruce Cholst, shareholder at Manhattan-based law firm Anderson Kill, thinks such a situation would be “a terrible idea…. I have seen on many occasions an attempt to use the leverage [spouses] have from two votes on the board to spearhead their own private agendas. The opportunity and the inclination are both rampant, and often it’s too hard to resist the temptation.” He goes on to say that even though blood-relative board members may have the purest of intentions, “It’s still insidious and invidious and it’s just not a good idea.”
Whether by appearance or in actuality, even the most well-intentioned couple will be a voting block. Axinn therefore recommends “that co-ops amend their bylaws to prohibit more than one board member from any one apartment.” Such a prohibition would only prevent spouses and other family members from serving on a board together if they own one unit in the building or association. In most states, if members of the same family own more than one unit, they can all serve simultaneously (with no more than one representative from each unit owned) even with Axinn’s recommended bylaw change.
Attorney Alessandra Stivelman, Esq., partner at Eisinger, Brown, Lewis, Frankel & Chaiet, P.A. in Hollywood, Florida, gives the example of her own family. She and several of her relatives own five homes within the same homeowners association. Since there are more than 10 units in the association, state law provides that co-owners of the same unit couldn’t simultaneously serve on the board (a provision that does not apply to buildings and associations with fewer than 10 units), but hypothetically, the board could include up to five members of her extended family.
While related owners could technically serve on the board together, it could get tricky in the boardroom (not to mention at family get-togethers). “It depends how many directors there are, right?” Stivelman theorizes. “Because whenever you have a majority of the directors discussing association business in person, then it’s considered a quorum. So if you have a three-member board and two of them are talking [about] anything related to the association, it should be at an open board meeting”—not at Aunt Edna’s dinner table. Because as soon as someone starts talking about the association’s assessment while hanging out watching the NCAA Championship, it could constitute a de facto board meeting (albeit an inappropriately noticed one).
Cholst points out that “it’s the small building … where this kind of a situation is especially rampant, because small buildings have small boards, and two people can very often constitute a majority,” thus technically being able to make decisions overriding the other members. There’s also a smaller pool from which to pull candidates, “so ... if they have to resort to a husband and wife in order to fill board seats, that too is a real problem.” Cholst therefore advises smaller buildings to proactively involve every shareholder/owner so that everyone is motivated to run for the board. He then goes a step further, characterising board service as “imperative” for every shareholder/owner in a smaller building. In fact, he’s “had small buildings where at least one member of the household is mandated to serve on the board.”
Is There a Broker in the House?
In addition to familial relationships, professional relationships also can be problematic for boards. Any time a board member stands to gain personally or financially from a transaction or relationship in which the board engages, there’s a strong chance of conflicting interests. According to Axinn, “If a member of the board is a lawyer or real estate broker with a transaction at the building, many issues arise—including whether the professional has access to information or influence...that someone else who is not on the board does not have.” He speaks from his own professional experience. “I have a co-op right now that is dealing with a broker on the board,” says Axinn, “and it can lead to several potential conflicts.”
New York and Florida have recently added provisions in their state statutes for conflict of interest disclosures, but neither fully precludes a potentially conflicted member from running for or serving on the board. Therefore, if a real estate professional such as a broker is elected to serve on a board in those states, Cholst advises, “At an absolute minimum, the broker has to be shut off from all admissions decisions, all discussions on the board package, all discussions on admission policy”—a practice that Cholst says is hard to administer. Even if it were seamless, a board member’s perpetual recusal is not a good look for a board and can stymie its deliberations and decision making.
Love Thy Neighbor
Even where no familial or professional affiliations exist, there are certainly opportunities for close relationships on a board to foster conflicts. After all, most board members are neighbors first—with each other, and with their electorates—and being neighbors can lead to its own set of challenges.
Naturally, friendships and alliances develop among people who live in close proximity and share common spaces. This is arguably one of the more appealing aspects of multifamily living. But familiarity has its pros and cons. For one thing, depending on the size of the board, a couple or small group of friends can amount to a voting block or a majority—or at the very least, be seen as such. And in an elected fiduciary role, appearances can be as powerful as reality.
A co-op board member in Manhattan recounts a time when the intertwinings of friendship, neighbor-ness, and board service created conflict during her directorship. She considered many of her fellow board members—who had also been her neighbors for upwards of 15 years—good friends. When the apartment adjacent to one of them came up for sale, an ethical dilemma ensued. Certainly the board member adjacent to the unit for sale would recuse herself from that transaction’s discussion and vote—not because she stood to gain from it financially, but because of the possibility that her fellow shareholders would assume she would try to influence the board to reject the sale so that she could buy the unit herself and connect it with her own. The other board members who were friends were conflicted as well. With one director already recused, if they all—or even some—abstained from voting, as might be recommended in such a circumstance, there would not be enough approvals for the sale to pass. Even if they had good reason to reject the sale, any opposing votes would have the same result. No matter how they voted, they all risked being seen as conspiring with their friend—even if they acted in accordance with their fiduciary duty.
Indeed, there are plenty of scenarios that could really throw a wrench into a board’s duties. In addition to the operational, policy, and financial decisions they make, boards are also tasked with resolving resident issues. What happens when one of them has an issue with a fellow unit owner? What if that fellow unit owner is also a fellow board member? Managing a lawsuit against the co-op where the plaintiff is a board member presents a really tough situation. Luckily, none of the attorneys or board members we spoke with for this article have personal experience with such a conundrum.
It all comes down to the bylaws, the provisions of many of which attorney Axinn says come up short in addressing the conflicts a board may face. At the very minimum, he recommends that “co-ops should amend their bylaws to require that board members be shareholders (or representatives of shareholders in the case of sponsor designees) to ensure that the board members have some ownership interest in the building. … Also, many condos require a unit owner to be in good standing (i.e., not in arrears or default) in order to vote, but there is no similar requirement that a unit owner or shareholder be in good standing to run for the board. That means that a person can be in default or in a litigation with the apartment corporation and still run for the board, which would lead to many problems down the road when the board meets to discuss litigation strategies.”
So go ahead and love thy neighbor, and keep your friends close … but if you serve on a board with them, tread carefully, especially if you are married, related, financially beholden to them, or involved in a business that may benefit from contracting with the association. And while you’re out for drinks on a Friday night, try not to discuss board business.
Darcey Gerstein is Associate Editor and a Staff Writer for New England Condominium.