Joe Wise: Are you a homeowner in a condominium or homeowners association who believes your board is out of bounds?
Nathan Flora: Have board members or board officers run amuck?
Joe Wise: Have things run off the rail leaving you and your neighbors with concern about how the association is being operated?
Nathan Flora: And what can you do?
Female: Welcome to Community Wise brought to you by Wise Property Solutions.
Nathan Flora: So let’s talk about what hopefully and generally are rare instances where boards actually behave in such a way that homeowners ought to have significant concern. Significant enough to take action.
Joe Wise: Certainly. I think one of the things it bears repeating – you know, we work with a lot of homeowners associations across the region and overwhelmingly they are being led by conscientious and committed volunteer board members who are volunteering their time and really making a positive difference in their community. But in our work we will also come across situations where boards really begin to abuse their power or will hear from homeowners that are concerned about impropriety they perceive going on. And so what we want to talk about today in this podcast are just some examples of that – things that ought to send up big red flags. And what you as a homeowner can do if you’re concerned about the governance of your homeowners association.
Nathan Flora: So we’ve got a few examples of things that give us things to talk about when we’re at the water cooler in our profession. That is notable stories that sometimes spark both humor and fear.
Joe Wise: That’s right. We’ve, you know, I’m mindful of one board president who took it upon himself to go out and solicit bids for landscape services.
Nathan Flora: Didn’t solicit them the right way.
Joe Wise: Oh, absolutely not. Went out and gathered bids from landscapers and didn’t use what we would recommend – a sealed bid process for a contract that large but rather went out one-on-one and got bids from various landscapers. And then after he did that showed up at a board meeting with all of those bids plus one. And the plus one you might ask is – who was that? Well lo and behold the board president had decided to get into the landscaping business.
Nathan Flora: And he had the cheapest bid.
Joe Wise: Not surprisingly because he had seen all the other bids and so that’s an example of a big red flag where his interests first and foremost should be for the good of the association and its homeowners. It should not be landing a landscape contract for his new entrepreneurial endeavor. And yet that’s not what happened.
Nathan Flora: Yeah, one of the places where you can sense that board members are veering from the course is when they start to comingle their personal interests with the interests of the association or the interest of particular neighbors. They should always be acting responsibly according to a fiduciary duty they have to put the association’s interests above their own and certainly anyone else’s.
Joe Wise: Well I’m gonna call a five dollar word on you there, Nathan. The fiduciary duties an awfully big and sort of lofty sounding word that might be unfamiliar to some of our listeners. How would you describe the fiduciary duty?
Nathan Flora: Well in community associations each board member is considered a fiduciary or a trustee if it’s helpful to think of it that way. And that person is bound to act in the best interest of the association. In general terms fiduciary duty is the highest standard of care imposed under law when they are entrusted or responsible for money or property of another. The fiduciary is expected to act honestly, free from fraud and faithful to the obligation and community associations to preserve, maintain and enhance the common property.
Joe Wise: Sounds like a pretty reasonable definition and one that I think all board members need to be mindful of. And that’s where I would go back to the community association’s institute model code of ethics for board members because it really provides a framework, kind of a test. Various issues that can present themselves to boards that help them be mindful of areas where, without realizing it, they may be entering into territory where there’s some sort of conflict of interest that they need to guard against or they need to disclose to insure that they’re living up to that high standard.
Nathan Flora: Just the other day I was on the phone with a homeowner who was describing an interesting scenario in her homeowners association where the board members had actually begun to arrange for paying themselves. Now every bylaws that I have read include provisions that prohibit board members to be paid for their service on the board of directors. But it would appear that even in this case there was some sort of vote taken at some point where they were going to dispense with that provision of the document.
Joe Wise: Where not only in policy but in practice they chose to ignore their governing documents and do something different than they provided for. And I think that’s one of the first things that I would say is as an association board functions it’s important to keep an eye on what authority they actually have. You know, it’s not – the board is not the all-powerful overlords of the association. The board is given specific rights and responsibilities in the governing document. And if the governing document is silent in all likelihood the board does not have authority to be doing those things. And if the document expressly prohibits something, the board doesn’t have within its rights or authority the ability to simply ignore some sort of imperative statement that the document creates. And if there’s a question, that’s where you need to consult with your association attorney to say the document says this, in practice we want to do that. Do you envision a scenario in which we can do that and still be procedurally in compliance with our document.
Nathan Flora: And it’s important. If some of these significant infractions are occurring, the cost of an attorney is worth the potential liability that the association and the homeowners may face in terms of fraud and damages as these situations play out. Another similar situation could be a slippery slope is where boards are hard pressed to find volunteers to serve and so they begin having board members who outlast their terms according to the governing document. Or even you have board members assuming more than one role. Like I’ve heard of a situation where a board member functioned as both president and treasurer and later as a contractor, a repair contractor.
Joe Wise: A repair contractor. Yeah and I think it’s important to know what you’re talking about there is term limited board seats. Some governing documents set forth a scenario in which the board is elected on some sort of terms and that a person can continue to serve for year after year after year as long as they are continually being elected in a properly called and conducted meeting. Some governing documents do limit a board member service to some prescribed period of time. And what you’re describing is somebody who overstays the bounds of that prescribed period of time.
Nathan Flora: Or holds more than one office.
Joe Wise: Certainly. And related to that is a loss of segregation of duties. We have a number of blogs that are available on our site that talk about ways to segregate duties, the value of the segregation of duties in terms of protecting the association’s finances. But the big red flags that homeowners really ought to be looking for are boards functioning out of line with their governing documents. If the governing document permits or prohibits rather something then the board ought to be respectful of that governing document and complying with it. If the board is a fiduciary, has a responsibility to go to market seeking bids for services the association needs, it needs to do so in a way that will stand up to the review and scrutiny of people outside immediate proximity to that decision. How did you arrive at the vendors you invited to bid? How were they asked to provide pricing? How did they turn in their pricing? Would one person have had the advantage of additional information that might have changed their bid and given them a leg up? Was a family member of a board member given some preference in bidding. Those are all things that really genuinely ought to cause concern or certainly pause. And so the first thing I think is the model code of ethics. You know, we assume that most people want to do the right thing and if they’re not doing the right thing it may just be that they didn’t see it coming. They didn’t appreciate it, they didn’t realize that that was a consideration that they needed to make. But let’s assume that you’ve done those things and you’re a homeowner and you’re looking in at your association and you see these things – board being compensated or getting special favors or contracts being awarded to family or related individuals, a process that does not represent first and foremost the Board’s obligation to function in their fiduciary duty to the association and its homeowners. What can you ?
Nathan Flora: So at some point you can’t sit idly by. You have to participate. One small step is to take action to be present in board meetings and to force those proceedings to be open so that everybody – and invite membership to come and observe how decisions are being made and what decisions are being made and what the Board’s aims appear to be.
Joe Wise: And that may sound adversarial or fraught with conflict and it doesn’t have to be. You know, encouraging the open meetings is sometimes just a matter of being interested. It’s sometimes just a matter of attending the meetings to say you care about your community enough to show up for an annual meeting, to show up for board meetings. These things don’t necessarily have to be full on conflict or strife-ridden experiences.
Nathan Flora: But at some point when the situation is as outrageous as we have described in some of these stories, there is a way that the membership can demand change and take action.
Joe Wise: That’s right. And I think for many homeowners who are confronting this on the other side, they’re looking at it through the lens of I go to meetings when they’re called but the people I have concerns about are the very people who call the meetings. And I attend the meetings but the very people I’m concerned about are the ones who control the discussion and the flow of information and the context of that meeting. And so how can I as just one homeowner influence the governance of my association for the better if it appears the deck is rigged against me and my fellow neighbors who are concerned about that. And that’s really what we wanted to talk about in this podcast was if you get to a point where attending the meetings and trying to be a positive and encouraging voice of accountability and participation are proving fruitless and you’re increasingly concerned that the association’s best interests are being ignored at its peril, what can you do? And I’m gonna speak from personal experience in that regard having been in a condominium association that I had, as did the majority of my neighbors, genuine concerns about the folks who controlled the checkbook and were making the governance decisions for our association. The first thing is to recognize that the only opportunity to take action, to elect board members or to remove board members occurs in a meeting of the membership. It does not occur generally in a board meeting and it does not occur in sort of informal gatherings. And so you want to look to your governing documents to find out what are the requirements, what’s the process by which a special meeting or an annual membership meeting are called. And generally those meetings will be initiated by one of two means. One, the board can call the special meetings but there are also provisions in most documents that allow for the membership to initiate the call for a meeting. Now it may be a bit of a threshold. It may be that you need 25 percent or 50 percent of the eligible homeowners to request a meeting. But a meeting can be called with the request of the homeowners. So that’s the first step is to get the environment in which that decision can be made and that’s the special called meeting. Look at your governing documents. Read through how that’s set up and follow those steps. The second piece of that is now the meeting occurs, you need to read through the governing documents and determine what the criteria are for removal of a director, a board member. And generally that’s going to be spelled out as some number of votes or a percentage of the membership. It’s probably going to be a simple majority of the people in attendance at a meeting for which a quorum is achieved. But it’ll be different in each – like I said a government documents. And so at that point you’ve initiated the call to prompt the special called meeting and then you’ve pursued removal of those board members if it has come to that. Now sometimes special called meetings can only act on business that is stated in the call for the meeting. So you can’t have a special called meeting to talk about landscaping and then turn around and start talking and taking action on insurance or some other topic that’s not related to the stated call of the meeting. Oftentimes removal of board members is not included in this. Oftentimes your government documents will say that a vote to remove board members can occur in the context of any called meeting but you need to check your governing documents. Association documents will differ and so sometimes you may just be able to take that up as an action item at any meeting that achieves a quorum and in other instances you may need to have made it clear that that’s the underlying purpose for initiating that called meeting.
Nathan Flora: One of the things I heard throughout those steps, Joe, is that pertains even to what causes board members to veer astray is that the governing documents are the anchor. They’re the anchor for how an association operates. They are what prescribes the duties and the responsibilities of board members and they are what prescribe the duties and powers of the membership. And so the first thing anyone wanting to be more active and responsible in their association can do is read the governing documents.
Joe Wise: With those specific questions in mind. Those things will help guide what you need to do. Don’t let the documents be intimidating. They’re meant to provide a framework that allows homeowners and allows the association to effectively govern itself. And you know, there may be a bully or two in the neighborhood and they may have breached the trust and relationship with their neighbors and homeowners need to recognize that they’re not powerless to change that. And they may do it in the circumstance of a called meeting and a removal of officers or they may do it by simply paying attention year over year at the annual meeting and taking a more active role in identifying candidates to serve on the board who are conscientious trustees of the common good in the community and begin to tilt the balance of that board so that it can really be functioning at its optimal level serving the interests of all homeowners, not merely the select few who occupy seats on the board.
Female: This episode of Community Wise was hosted by Nathan Flora and Joe Wise and is a production of Wise Property Solutions. For more helpful information visit us on the web at wisepropertysolutions.com where you can view our blog and sign up for our e-newsletter.