The motivation for volunteering to be an uncompensated (and sometimes underappreciated) co-op or condo 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?
According to Mary-Joy Howes, a partner in the law firm of Goodman, Shapiro & Lombardi LLC, which has offices in Massachusetts and Rhode Island, upon election, board members become fiduciaries—a term derived from the Latin word for ‘trust’—who are charged with making policies and decisions in the best interest of the community. A fiduciary has two primary duties: the duty of care and the duty of loyalty—meaning that a board member must exercise reasonable care when making decisions that will impact the community, and that regardless of personal feelings, board members must act in the best interests of the corporation or association.
“Board members must always have the association’s best interest as their number-one priority,” Howes 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.”
Decisions made out of self-interest or to benefit a group of directors are therefore in violation of fiduciary duty—but in reality, board business runs more or less on the honor system. At least in the state of New York, residential boards are not really overseen by any other regulatory or governmental body. It is solely up to their electorate—the other shareholders and unit owners of their communities—to exercise their essential duty: voting in their annual elections for a board that will faithfully represent their interests.
Much of real estate is a family affair. Not only does our cultural tradition of living in discrete family units mean that ‘home’ is a decidedly kinship-based concept, but the prospect of generational wealth-building that comes from owning real property has been a bedrock of American culture since the country’s founding. Even the business side of real estate has become a generational undertaking. Families in New York development, brokerage, investment, and management are in second, third, even fourth generations of ownership—the Trumps and the Kushners easily come to mind, but there are also the Dursts, the LeFraks, the Rudins, and the Tishmans, just to name a handful.
But when the boards of directors in co-ops, condos, and HOAs also follow bloodlines, family relationships between members can constitute a concentration of power that doesn’t serve the common interests of the membership. Additionally, ordinary family dynamics with their inherent conflicts and complications can be problematic on a residential board that’s trying to govern efficiently and objectively.
That does not mean that it’s flatly illegal for, say, a pair of spouses to serve together on their board. In spite of—or, some might say, because of—the broad decision-making powers bestowed upon residential boards, state statutes governing board directorship provide very little in the way of oversight or regulation. Most only include the basic condition that there be a board, and that it be elected by the membership.
In New York, residential boards are governed by Business Corporation Law (BCL), which leaves the criteria and qualifications for board candidacy and directorship up to individual communities’ Certificates of Incorporation (CofOs) and bylaws. However, according to Mark Axinn, a partner with the Manhattan-based law firm of Brill & Meisel, which specializes 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 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, a shareholder at Manhattan-based law firm Anderson Kill, thinks such a situation would be “a terrible idea.” “On many occasions,” he says, “I’ve seen spouses attempt to use the leverage [they] have by having 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 a pair of spouses might not join the board together with the intention of causing trouble, the dynamic “[is] still insidious and invidious, and it’s just not a good idea.”
Attorney Adam Leitman Bailey of Adam Leitman Bailey P.C. in Manhattan agrees. In his opinion, “The married couple will almost always be voting the same way with the same interests to protect. Instead of having two independent, free-thinking voting members to benefit the building, every vote will be handicapped in favor of the married couple holding two votes.” No matter how seriously they take their fiduciary duty, even the most well-intentioned couple will be a voting bloc, in appearance or in actuality.
For that reason, Axinn recommends that co-ops amend their bylaws to prohibit more than one board member from any one apartment. Note, however, that even with Axinn’s recommended bylaw change, if members of the same family own more than one unit in a given building or association, in most states it would be perfectly legal for them all to serve simultaneously, as long as there was no more than one representative from each unit owned.
Such is the case with attorney Alessandra Stivelman, a partner at Eisinger, Brown, Lewis, Frankel & Chaiet, P.A. in Hollywood, Florida. She says that she and several of her relatives own five separate homes in the same homeowners association—so hypothetically, the board could include up to five members of her extended family.
While related owners could technically serve on the board together, such an arrangement could easily get very tricky in the boardroom. “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, that [conversation] should be had at an open board meeting”—not at Aunt Edna’s dinner table, or during Superbowl halftime. Why? Because as soon as someone starts talking about the association’s assessment, it could constitute a de facto board meeting—albeit an inappropriately noticed one—and that could cause legal and procedural headaches down the road.
Cholst points out that it tends to be small buildings that run into this kind of issue, “Because small buildings have small boards, and two people can very often constitute a majority,” thus technically being able to make decisions without the other (unrelated) board members. There is 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,” he continues, “that too is a real problem.” Cholst therefore advises smaller buildings to make a conscious effort to involve every shareholder/owner in the governance of the community so that everyone is motivated to serve on the board, and says that board service is really “imperative” for residents in smaller buildings.
Is There a Broker in the House?
In addition to familial relationships, professional relationships also can be problematic for boards. Axinn explains that “If a member of the board is a lawyer or real estate broker with a pending transaction at the building, that raises many issues, such as whether the professional has access to information or influence with other board members that someone else who is not on the board doesn’t 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, says Cholst, if a real estate professional such as a broker is elected to serve on a board in those states, “At an absolute minimum, the broker has to be recused from all admissions, discussions of board packages, or right of first refusal decisions”—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.
Stivelman says that Florida statutes also provide that “An association cannot employ or contract with any service provider that is owned or operated by a board member, or any person that has a finite financial relationship with a board member, officer, or relative within the third degree of [blood or marriage relationship] of a board member or officer.” This provision, she explains, somewhat contradicts the disclosure provision, since it’s unclear whether the relationship is completely banned, or would merely need to be disclosed.
Love Thy Neighbor
There are certainly opportunities for close relationships on a board to foster conflicts even without familial or professional affiliations. After all, as previously mentioned, most board members are neighbors first—and being neighbors can lead to its own set of challenges. Familiarity has its pros and cons in the boardroom. Depending on the size of the board, a couple or small group of friends can amount to a voting bloc, or even a majority—or at the very least, be seen as such. And in an elected fiduciary role, appearances can be more powerful than 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 a board member’s unit came up for sale, an ethical dilemma ensued. The adjacent board member had expressed interest in buying the next-door unit herself and combining it with her own. So clearly, she would have to recuse herself from that transaction’s discussion and vote—not because she stood to gain from it financially, but to eliminate even the possibility of anyone thinking she would pressure the board to reject the sale so that she could buy the unit. In this case, the other board members who were friends were conflicted as well. If they all—or even some—abstained on the vote, as might be recommended in such a circumstance, with one director already recused, they wouldn’t have the requisite number of approvals for the sale to proceed. Even if they had good reason to reject the sale (notwithstanding that boards have the statutory right to reject any transaction for any reason, or for no reason), any opposing votes would have the same result. They all risked being seen as conspiring with their friend no matter how they voted, even if they acted with the duties of loyalty and care required of their position.
Navigating these dynamics usually comes down to the bylaws, the provisions of many of which attorney Axinn says are “definitely not enough!” to mitigate the potential conflicts a board may face. At the very minimum, he recommends that co-ops amend their bylaws to require board members to also be shareholders (or representatives of shareholders in the case of sponsor designees) to insure that the board member also have some ownership interest in the building. “Also,” he adds, “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; keep your friends close … but if you serve on a board with them, tread carefully, especially if you are married, related, financially beholden, or involved in a business that has the potential to benefit from contracting with the co-op or 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 The Cooperator.