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

Most co-op and condo governing documents underscore that self-dealing by board members is prohibited. However, there are some important practices to employ to further prevent any claims of a breach of fiduciary duty, Brick Underground reports. 

Annual disclosures about conflicts of interest are legally required under state law. This means the board must prepare a report each year, to be shared with unit-owners or shareholders, disclosing the contracts or transactions in which any board member had an interest. This report will generally be signed by every director and will include the names, addresses amounts and reasons for contracts with vendors or service providers. 

“It can be provided to residents each year when the annual financial report is issued,” says Lauren Tobin, an associate at the law firm Woods Lonergan. 

If there is a claim of self-dealing, as a board member, you can refer to the report to show each deal was negotiated as a fair and reasonable contract and that you treated the decision as you would any other, with a cost=benefit analysis that demonstrates the transaction did not receive any special attention by virtue of a director’s interest. Even if no conflicts of interest arise within the course of the business for the condo or co-op, you still need to submit a report. 

To recuse or not to recuse? “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 the interested board member should leave the room when the specific topic is being discussed and avoid any discussion of the issue that is 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 whether to approve the purchaser (or when a condo board is considering whether to exercise the right of first refusal), the interested board member should avoid participating in the decision. 

An extra layer of protection. Some boards will have members sign ethics policies underscoring some of the penalties for self-dealing. Your co-op or condo attorney can draw up the policy to give shareholders peace of mind. 

“The policy should clearly state the consequences for self-dealing by board members so there is no confusion when people become board members,” Tobin says. This is important because an alleged breach of fiduciary duty can result in shareholders or unit-owners suing the board or individual board members. 

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