A community association’s board of directors is responsible for, and has the duty to, look out for the best interests of the planned community. To do this, directors must confidently make sound decisions that will benefit all owners. This blog, discusses the role of the board of directors, examines the fiduciary duties of board members, provides an overview of the protections offered to board members’ reasonable decisions, and, finally, recommends best practices for making sound decisions.
The Role Of The Board Of Directors As A “Government.”
In many ways, a community association acts like a government. Unit owners, as citizens, elect their board of directors to govern and make decisions that will affect the entire planned community. Yet, a community association is not a democracy; at the end of the day, it is a business. One of the essential functions of a board of directors is to preserve and maintain the association and its property values, including, but not limited to:
– Upkeep and repair of the property;
– Contracting with services (landscaping, solar energy providers, etc.);
– Acquiring necessary insurance;
– Accounting and bookkeeping of the financial affairs of the association;
– Establishing and maintaining the annual budget, including reserve funds;
– Architectural controls;
– Supervisory authority; and
– Implementing and overseeing assessment collection from owners.
To enforce these functions, the association’s board of directors must make rules and regulations for the community and unit owners (like a government would). Such rule-making power is not absolute, however. Any rules promulgated by the board of directors, in order to be enforceable, must be rationally related to the protection, preservation, and proper operation of the association, its property, and purposes, as set forth in the governing documents.
Defining Fiduciary Duty.
Given this authority to regulate others’ activity and conduct, boards of directors have more than just a common obligation to the unit owners; they have a fiduciary duty to the community. Fiduciary duty carries, as a part of it three (3) sub-duties: the duty of care (exercising the same degree of care and diligence that a prudent person would exercise in their own business affairs); the duty of loyalty; and the duty to act within the scope of loyalty. Taking all three (3) together, fiduciary duty means that board members must act in the best interest of the association, rather than what may advance their own personal interests.
For example, if a board of directors is reviewing several bids for maintenance on the project; an officer who votes for the cheapest bid (based on his or her concern that the owners would have to pay higher assessments for the more expensive options), rather than selecting a more experienced and thorough contractor, is not acting in the best interest of the association; he or she is in violation of their fiduciary duty because an objective individual would have voted in support of a better contractor’s bid, even though more expensive.
Another, more common, example is in the setting of maintenance fees. The board of directors is responsible for establishing what these assessments will be for all unit owners. Naturally, owners would prefer to have low maintenance fees. Yet, lower fees (and consequently minimal assessments collected to fund the budget) are not always in the best interest of the association. For this reason, board members must act in a fiduciary capacity and make rational decisions that benefit the community, writ large, even if such a decision is an unpopular one.
Under this heightened fiduciary duty, board members must, at all times:
Act within the scope of their authority, as spelled out by the governing documents of the association;Avoid conflicts of interest, whether apparent or incipient;Act with transparency; andAvoid any and all self-dealing.
This is because the entire planned community is relying on the board of members to fairly and adequately represent their interests; as well as to maintain, upkeep, and enforce the rules and regulations of the association.
Board Decisions Are Protected, If Reasonably Made.
Yet, such duty and obligation should not paralyze boards for fear of misconduct. Rather, it should empower an association director to be proactive!
Courts generally tend to defer to board decisions; if and only if the board of directors: (1) Conducted a reasonable investigation; (2) Makes their decision in good faith and with the consideration and regard for the best interests of the unit owners and community association as a whole; and (3) Exercise its decision-making powers, as set forth in the governing documents of the association. In other words, where a board of directors acts responsibly and complies with their fiduciary duties, their decisions will be upheld. To this end, if a board member makes a decision he or she believes is in the best interest of the association, after thoroughly researching and understanding the impact and consequences of that decision, the officer will be protected from any liability or legal backlash, even if the decision turns out to be ill-advised.
Under the business judgment rule (similar to the judicial deference rule), the law protects board members who diligently investigate the facts, situation, and underlying principles prior to making a decision, and act reasonably and in good faith.
Both of these legal theories are tempered by the “rule of reasonableness,” which requires a board of directors to act fairly, non-discriminatorily, and ensure that decisions are rationally related to the protection, preservation, and proper operation of the property and the purposes of the association as set forth in the governing instruments.
The fundamental view is that, so long as the interest of the community is paramount in a board of directors’ decision, it is acting within the scope of its authority, and such decision will be preserved.
Best Practices And Recommendations For Sound Decision-Making.
Given this framework, it is strongly recommended that boards of directors of associations undertake, at minimum, the following best practices:
1. Familiarize themselves with the governing documents of the association;
2. Speak to their association attorney on regular basis to proactively inform him/her of recent developments and/or concerns;
3. Prepare for, attend, and actively participate in all board meetings;
4. Take, keep, maintain, and regularly review accurate and detailed minutes at all board meetings, to preserve a record of the board of directors’ due diligence;
5. Devote time to understanding the association and its operation;
6. Stay informed and up-to-date with association conditions, conduct of unit owners, and business matters of the association;
7. Act inclusively and transparently, which means taking public votes so that all unit owners are aware of the decisions being made which affect them;
8. Thoroughly review the underlying facts and circumstances to make a sound and logical decision; and
9. Avoid any and all conflicts of interest.
Remember, these duties need not be borne in isolation. The board of directors can, and should, responsibly discharge their duties using any and all resources available to them. This means that an essential aspect of sound decision-making is carefully vetting and retaining an experienced, responsive, and proficient certified public accountant, association management company, and legal counsel to advise th