Q&A: Unethical Conflict of Interest?

Q I’m a board member of my condo. We have one member of the board who is a real estate broker. He brought an issue to our attention. Our condo is an owner of a very small piece of land that is adjacent to another building near ours. The owner of this building—through our board member who is a real estate broker—wants to rent this piece of land from our condo. He will pay commission to this broker and monthly rent to the condo. Some members of the board think that this represents a conflict of interest between client, customer and broker and others feel it’s unethical for a member of the board to conduct such business. We have to make a tough decision and we don’t know the right thing to do.

—Conflicted Board Member

A “New Jersey law has long held that the governing board of a community association owes a fiduciary obligation to the association corporation as well as the individual unit owners,” says Judith A. Fallat, Attorney at Law, based in Denville. “A person is considered to be a fiduciary when the business he conducts or the money or property he administers is not his own, but is for the benefit of another person. Trustees must act reasonably and in good faith; they must not make decisions based on knowingly false information, fraud, favoritism, malice or unconscionable advantage.

“Concerns about conflict of interest and self-dealing can arise if a trustee is engaged by the association to perform contractual services. Many associations, to avoid even the appearance of personal gain by trustees, or favoritism by the board, adopt a strict policy prohibiting trustees (or any unit owner) from entering contractual relationships with the association. Unit owners can never serve as association accountant, attorney, manager, landscaper or in any other contracted capacity.

“However, there is no legal mandate that associations adopt such a policy and many associations employ unit owners and/or board members in contractual relationships without incident. In the case posed, while the realtor/board member will receive a commission based on the transaction, the association will presumably derive an ongoing monetary benefit from the rental. The lease agreement is actually between the association and the ­adjacent property owner; the realtor/trustee is a simply a third-party beneficiary of the contract as pertains to the commission. Assuming the board has the right to the lease the property under the terms of the master deed, the fact that the trustee will benefit in his capacity as a realtor does not constitute self-dealing.

“To avoid an actual conflict of interest, the trustee must disclose the situation to the other trustees, excuse himself from any discussion of the subject, and ultimately abstain from voting on the lease issue. The disclosure, withdrawal, and abstention should be noted in the board meeting minutes.”

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Comments

  • Our board recently fired the property management company and decided to self-manage. Now they want compensation and are calling themselves The Management Team. I feel this is Breach of Duty. As managers they don't want to give up their seat when their term expires and someone wins the election. Additionally they are sending out a mailing regarding a vote for the compensation. Isn't that self-dealing? Some boards do get compensated for the work that is performed but shouldn't we form a committee to discuss the compensation and the board follow the recommendation?