How Co-op and Condominium Boards Can Avoid Conflicts of Interest

More cooperative and condominium the constitutive documents emphasize that insider deal by board members forbidden. However, there are some important practices to employ to further prevent any claim from a breach of fiduciary dutyreports Brick Underground.

Annual disclosures on conflicts of interest are legally bound under State Law. This means that the board must prepare a report each year, to be shared with share owners or shareholders, disclosing contracts or transactions in which a board member had an interest. These minutes will generally be signed by each director and will include the names, addresses, amounts and reasons for the contracts with the vendors or service providers.

“It can be provided to residents each year when the annual financial report is published,” explains Lauren Tobinlaw firm associate Lonergan wood.

In the event of an insider allegation, as a member of the board of directors, you can review the report to show that each transaction was negotiated as a fair and reasonable contract and that you treated the decision as you would any other decision, with a cost=benefit analysis which demonstrates that the transaction received no special attention due to the interest of a director. Even if no conflict of interest arises in connection with the business activity of the condominium or cooperative, you must still submit a report.

To challenge or not to challenge? “If it seems impossible for a board member to make a fair and unbiased decision, they should recuse themselves from the decision and from the entire process,” Tobin says. This means that the board member concerned must leave the room when the specific topic is being discussed and avoid any discussion of the matter being voted on.

For example, in a scenario where a board member is a broker involved in the sale of an apartment, when the co-op board is considering approving the buyer (or when a condo board is considering exercising the right of first refusal), the council member concerned should avoid participating in the decision.

An extra layer of protection. Some councils require members to sign ethics policies highlighting some of the penalties for personal transactions. Your co-op or condo lawyer can draft the policy to give shareholders peace of mind.

“The policy should clearly spell out the consequences of board members‘ personal dealings so that there is no confusion when people become board members,” Tobin says. This is important because an alleged breach of fiduciary duty may cause shareholders or unit owners to sue the board or individual board members.

“It also inevitably leads to the erosion of trust in the board,” says Tobin, “which can be very damaging to the building.”