Q. “We live in a condominium development of 130 units. One investor own 48 of these units. He’s taken two seats on the board since 1986. No one votes for him, I suspect he always votes for himself and gets on the board. Can this be possible? He is the treasurer and in control of the board. How can we get him out?
—Out of Control
A. “Your question raises more questions,” says attorney Fran McGovern, principal of McGovern Legal Services, LLC with offices in New Brunswick and throughout New Jersey.
“How many seats are on the board? If the board is a three-seat board, control of two seats amounts to actual control but control of two seats on a five-seat board does not amount to actual control. This sounds obvious but, especially on older boards, longstanding members are often perceived to have control. If it is a five seat board, the other three board members can out-vote the investor and even remove him from his officer position (although typically not from the board altogether).
“Does the investor claim to personally fill two seats? If the investor claims to personally hold two board seats, his claim is improper and the second seat should be filled by another person. Even keeping in mind that not everyone in an association votes, 82 other votes could be cast against the investor.
“Was this investor the condominium’s sponsor? Sometimes the condominium sponsor retains units for rental purposes and argues that he has not sold enough units to compel him to turnover board control. Here continued ownership does not support continued board control because he is no longer “marketing the units for sale in the ordinary course of business.” Unit owner elections would likely be required even though 37% of the units are still owned by this investor.
“Why do you want to “get him out”? Although many investor-owners are conscientious, many others are not. Among other things, “bad” investor-owners may oppose proper funding of deferred maintenance and capital reserve accounts and foist tenant problems upon the association’s management.
Each board member has a fiduciary duty (the duty of “utmost care”). If the investor-owner is not fulfilling his duty, he risks a suit by other unit owners. Such a suit would normally be covered by the association’s directors and officer’s liability insurance; however, it may not be covered if it is shown that the investor was engaged in self-dealing. Examples of self-dealing might include using the association’s maintenance man to maintain his units, waiving charges against his units’ accounts and cannibalizing reserves to fund operating while selling off his units.
“Is your community professionally managed? Professional management will typically require the association to have proper elections. Your community is not large; however, it probably still warrants professional management. Too often the money saved by not hiring professional management and more is spent on attorneys and accountants straightening out governance, accounting and contract problems that could have been avoided if professional management had been on the scene from the beginning.
“Compelling a special election meeting. If no other resolution can be achieved, the membership can compel a special membership meeting to remove and/or elect trustees. This can be an arduous process and your bylaws and counsel should be consulted regarding the notice and votes required.”