Most directors on condominium and homeowners association boards are volunteers, and most also have little or no experience in running an association – which is, after all, a not-for-profit corporation subject to a variety of statutes in addition to its own governing instruments. Consequently, board members, new or not, often make mistakes that can have potentially serious consequences for themselves, the association and its members. This article will discuss ten common mistakes that board members make and provide brief recommendations on some practices for avoiding them.
According to the law in Illinois, officers and board members of condominium and common interest community associations are required to exercise the care required of a fiduciary of the Unit Owners in the performance of their duties. If this standard is not met, association assets and those of individual directors and even former directors may be at risk. A number of common board mistakes may lead to board members’ violating their fiduciary duties. Among such mistakes are the five which follow:
- Failure to obtain and provide necessary education. Because Board members’ power and authority arises from and is limited by the association’s governing instruments and applicable State statutes, and because board members must use reasonable business judgment in decision-making, board members must educate themselves to understand clearly what is required of them. Information sources include association managers and attorneys, who each must be licensed and qualified, and also participate in continuing education that helps keep them up to date. Board members should typically refrain from trying to interpret their associations’ governing instruments on their own – especially if there are complex or interrelated provisions that may appear to conflict. Instead, they should refer to appropriate consultants for information and advice, which may include requesting opinions from current legal counsel and reviewing prior written legal opinions.
- Failure to clearly define officers’ and committees’ responsibilities and powers. Often, the terms in the association’s governing instruments specify the officers that the association must have and lay out their specific responsibilities (in addition to their general duty to consider and decide on matters of association administration and business). For example, the by-laws may provide that the board President has the authority to sign contracts and checks on the association’s behalf. This specified duty is separate from the power and duty of the President as a member of the board as a whole to participate in determining whether to approve the contract, how much will be paid and to whom. Some officers’ responsibilities are traditional even if not spelled out – such as the Secretary keeping the minutes and the Treasurer keeping the books and financial records. If spelled out, however, these requirements must be followed.
- Failure to consult – and listen to –experts and professionals. A common mistake board members make that can get them into serious trouble is taking action on association business that involves subjects about which they know little or nothing without first obtaining sufficient information. The fiduciary responsibilities of board members include the duty to diligently inquire on matters of association business, which is a key element of a defense to liability under the business judgment rule. Unless each board member has particular expertise regarding the matters that come before the board, including maintenance, construction, contracts, and insurance issues, courts say that board members are required to consult with appropriate experts/professionals. Such consultants may include contractors, engineers, accountants, insurance agents, property managers and attorneys. This requirement applies within added force in the case of large, expensive or complex projects and contracts. The bonus in relying upon such experts is that under the business judgment rule, even if the expert is wrong, board members who made decisions based upon their recommendations will generally not be held personally liable for the error.
- Fiscal/financial mismanagement or ‘under-management.’ Board members sometimes make the mistake of mismanaging association finances or not paying sufficient attention to finance and accounting issues. As a significant part of their fiduciary duties, board members are responsible for the financial practices and condition of the association and must therefore read and understand relevant financial statements and pay attention to association finances and budgets. Failing that, board members must consult with experienced management or qualified financial professionals. Fiduciaries must prudently and reasonably invest and safeguard association funds and not incur significant risk. In keeping with this standard, association payment authorizations should have appropriate safeguards, such as a requirement of a board vote on disbursements over a certain dollar limit or requiring two signatures on association checks.
- Holding closed or “informal” meetings. Some board mistakes arise from a failure to follow required procedures. Readers may be familiar with the so-called “Palm II” court decision issued in 2014, which had the practical effect of condemning and outlawing numerous common board practices for taking action informally. The Palm II case mandates that all official association action be taken at a board meeting for which due notice has been given and that members are entitled to attend. Statutes define a board meeting as a gathering of a quorum of board members to conduct association business. Though board members customarily and historically have discussed association issues outside of a board meeting, including their positions on them and even their planned votes, the law actually prohibits all such actions or communications outside of a meeting held pursuant to notice. The Palm II court stated this rule applies any time a quorum of board members (or more) get together, if any association business whatsoever is discussed mentioned. Further, even when a board is permitted to conduct a closed or executive session to address one of the categories of matters specified by law, all votes on matters discussed in closed session must still take place in an open portion of a meeting. Following these procedural requirements is a part of board members’ fiduciary duties.
Certain other board mistakes regard actions that relate to whether directors and officers are good neighbors, as well as good board members. They generally relate to matters of efficiency, consistency, and consideration toward association members. For example:
- Failure to collect overdue assessments. Board members sometimes hesitate to aggressively collect unpaid assessments or do so inconsistently. Though sympathy for owners during hard times may be a natural emotion, delaying or foregoing collection may harm the association’s cash flow and open the association to a wide range of problems – from maintenance needs to lawsuits. In addition, the Illinois Condominium Property Act forbids condo boards from forbearing payment of common expenses. Leniency toward a particular unit owner, though it may feel “neighborly,” may be viewed by other owners as setting a ‘precedent’ and may affect the association’s principal source of revenue. Board members should bear in mind that if collection is delayed or ignored, unit owners who pay on time end up shouldering the load unfairly for those who do not. To maintain consistency, boards should establish (and provide to all association members) a collection policy that spells out when an owner will be turned over for collection, and should stick to that policy. Managers are typically adept at helping boards deal with these issues.
- Enacting or enforcing governing instruments inconsistently or without proper procedures. As with collections, it is generally also a mistake for board members to be inconsistent in enforcing association rules and restrictions. Board members should strive to avoid playing favorites, or even the appearance of favoritism, when it comes to rules and rule violations. In addition to fair and consistent enforcement, board members should also consider whether the rules and regulations they are enforcing and fines being imposed are reasonable in purpose and effect. Note that for both condominiums and homeowners associations, no fines may be imposed until the alleged violator has been given written notice and has at least been offered an opportunity for a hearing. If a hearing is requested, no fines may be levied on the owner’s account until the hearing is completed.
- Failure to maintain confidentiality and to avoid gossip. In keeping with Boards’ interest in being consistent and considerate, board members should avoid openly discussing matters that are not appropriate for broadcast to all association members. Some, like violations, delinquent accounts and employee matters, may be discussed in closed portions of board meetings pursuant to statutes. Others, like legal matters, have the additional protection of the attorney-client privilege when they involve the association’s lawyers. Boards should take care not to “leak” confidential matters to residents. Further, individual board members do not technically have the authority to release any privileged legal communications or documents even if it may benefit them personally or support their position on an issue in dispute. Such releases require a waiver of the association’s privilege which should only be done via a decision by the board. A release of privileged communications without the board’s approval may open up the “leaker,” as well as the entire association, to litigation.
- Attempts to micromanage and any abuse of power. Boards often make the mistake of trying to control every aspect of association life. Attempts to do so are often tied to matters on which board members have a personal stake or issue. Instead, boards should govern for the common good and with an eye toward what the members themselves want. Note also that boards sometimes make the mistake of pushing through restrictions with little fanfare even though all board action requires a vote at an open meeting. Any board hesitation to have open and fair discussion of proposed restrictions may be a signal to re-evaluate the motive behind the proposed restriction.
- Not being prepared or running meetings improperly. Finally, boards may make the mistake of not sufficiently planning and preparing so as to ensure their board meetings run smoothly and efficiently. Associations with property managers can usually count on the managers to take care of such matters. Preparations begin with adequate notice per applicable by-laws and statutes and should include an agenda – which the board should follow. Then, the board should run the meeting with courtesy and respect toward the members and follow proper procedures and order. Finally, the board should keeping sufficiently- (but not overly-) detailed minutes, which can be a priceless resource for the board and members alike, and document what the board did and how it was done. In this effort, the guidance and involvement of a property manager is also typically invaluable.
James Arrigo, Senior Counsel