Sara Benson Real Estate Expert and Consumer Advocate Delivers Advice

Condo Association Boards Have Duty to Be Transparent

Posted in advice, Chicago Real Estate, condominium, homeowners association, money, Real Estate, value by sarabensonexpert on July 27, 2012

The very word, secrecy, is repugnant in a free and open society, and we are as a people, inherently and historically opposed to secret societies, to secret oaths and to secret proceedings.

-President John F. Kennedy

Transparency is the heart of a board’s ethical standards.  So why would any association keep records and financials secret?  There are many reasons, but the first is power.  Organizations that hoard information have all of the knowledge–thus, all of the power.  Secrecy stands to maintain their powerful status quo. Board members may also suffer from an exaggerated sense of their mission.  They may forget their function is simply administrative.

A well run board should make transparency a firm priority. Florida attorney Jean Winters observes some boards are defensive.  “It is sad, but true, that most homeowners don’t care about seeing records unless they suspect something is wrong. So when boards are asked for records, a common response is evasiveness,” stated Winters.  “Unfortunately, when that occurs, there often is something wrong.”

Fear may be a motivator as well.  Some boards fear having their actions criticized noted Virginia architect Amy Reineri.  Boards fear someone may find something in the records to sue them for personally–or that they may be accused of doing things improperly. “When you remind them that not allowing review of their records is a legal violation, it simply makes the fear more concrete in their minds that you know more about how they should be conducting business than they do–and they will get in trouble if you see the records,” observed Reineri.

Another extremely prevalent reason is very simple lack of knowledge.  Some boards simply do not understand the legal requirements and their duty to provide records to the owners. Ignorance of the law, however, is no excuse.  Training is what is most needed.

“Most people mismanage their own money so, when they are elected to HOA boards, they mismanage the HOA’s money.  They are secretive because they are embarrassed,” noted San Francisco homeowner Daniel Howard.

All too often, association secrecy results in needless and costly litigation. Gary Palm, attorney and Emeritus of Law, University of Chicago Law School professor, sought production of his association’s financial records when certain issues became increasingly suspect.  The board refused to comply.  After a 10 year court battle, he finally won. In Palm v. 2800 Lake Shore Drive Condominium Association, # the court came down strongly on Palm’s side and granted him substantial attorney’s fees–nearly $100,000.

 Sunlight is the best disinfectant. 

-U.S. Supreme Court Justice Louis Brandeis

Keys to Transparency:

  • open communication
  • open records
  • open voting
  • open spending
  • secured open web portals

Florida’s nickname is the “Sunshine State” so it’s no wonder it has a “Sunshine Law”–an open government law.  What does it mean to hold a meeting in the “sunshine?”  Basically, Florida’s Sunshine law requires governmental agencies–including community associations–to hold their board meetings in an open and transparent fashion.  Boards of directors must not meet in the shadows. They must follow the law and not hold meetings behind closed doors.

The general exception is when the board directors need to meet with the board’s attorney to seek legal advice with respect to proposed or pending litigation, or, if the board is meeting to discuss employee and personnel matters.

All associations should operate in the “sunshine” and let their members know when, where and why the board is meeting and adhere to open meetings requirements.  One recent disturbing trend is directors that hold meetings via Skype or in a private chat room–or conduct business among themselves via email.  These are clear and notorious violations and do not conform to open government laws.  Again, directors should make decisions at an open meeting where owners can view firsthand the business operations of their association and how their money will be spent.

The following documents should be available to owners for inspection:

  • all financial records,
  • contracts, including the management contract,
  • minutes of both member meetings and board meetings,
  • names and addresses of the unit owners and their respective undivided interests in the common elements.

(Note that communication with legal counsel pertaining to pending litigation, contracts being actively negotiated and information that pertains to personnel matters should be excluded from owner examination.)

Financials should be disclosed at each board meeting. Approval for the expenditure of funds should always be a resolution of the board in an open meeting. (That means any association money spent should be voted on at the meeting by the board directors in front of all the members.) Contracts–including garbage removal, management, maintenance and landscaping to name a few–should also be voted on and approved in an open meeting of the board. Further, the vote should be recorded in the minutes and become a permanent record of the association.

If you believe that your board is not acting property, you can demand to inspect the minutes of their meetings and the records.  “You must allege that you suspect mismanagement, waste or misconduct and then the board is required to allow you to look at the minutes,” noted New York attorney Steve Wagner.

“The by-laws may also provide that you have the right to inspect the “books and records of account” which will let you look at the financial records of the condo.  If the board or the managing agent does not let you look at the records after a proper demand, you can compel them to provide the minutes and financial records through expedited court proceedings,” stated Wagner.

Insurance expert Joel Meskin notes that the key to successful board management is communication.  “Mystery is one of the board’s worst enemies as it only exacerbates membership concern and mistrust,” states Meskin.  The challenge of volunteer boards is that they often lack experience and communication skills.

Attorney Winters further notes, “Each board member is equally responsible and liable for the association affairs.  I cannot think of one good reason why any board member should not have access to records “at will,” as long as protections are in place to preserve the integrity of the records.”  

If a board is hoarding information and proper demand has been made for documents, one powerful tool is to copy both the association’s attorney and the association’s insurance carrier–via Certified Mail–advising them of the improper board behaviour.  If they investigate and find that an association’s directors are acting improperly, they can address the impropriety or choose to terminate their services.  Further, the association may be at risk of losing insurance coverage. Director’s and Officer’s insurance won’t cover them if they break the law. (The insurance carrier will wonder if they are ignoring state statutes, what other issues are they ignoring?) The association, although not for profit, is a business and must operate in a business-like manner to ensure protection from any insurance claim or litigation.  In many states, condominiums and HOAs are governed by separate legislation.  So not all homeowner associations have specific legislation pertaining to records inspections.  Many states such as Ohio and Florida have recent legislation that provides HOAs with similar rights to records inspection as existing condominium law.  Check your state statutes as it pertains to the type (condo, co-op or HOA) of property you own.

Secure Community Web Portals

Some associations have exceedingly transparent secured websites where owners can go for community information.  Quick 24/7 access is available to owners, board members, board directors and committees. Some associations and property managers use an integrated and secured community portal such as SenearthCo. Senearthco allows the poster of documents to assign levels as to who can view a document, public, owner, or board directors only.  Communities that utilize such software can have a user-friendly web presence at a fraction of the cost of developing a traditional website.

The benefits of utilizing a community web portal include:

  1. Maintenance requests can be handled smoothly with owners, service providers and property managers staying connected.
  2. Messages can be broadcast with ease.  The board can communicate with owners via email or USPS.
  3. Documents are made easily available to the owners, including financials, meeting agendas and minutes, board calendar and newsletters.
  4. Accounting can be integrated.
  5. Management reports can be seamlessly integrated.
  6. Shopping for vendors and service providers can be streamlined. A request can be created and the association can have a complete history of every job.
  7. Polls, surveys and voting information can also be utilized.
  8. Cost savings to associations can be substantial compared to doing things the way they were done in pre-Internet days. More and more people seek advanced, streamlined technology to receive information.

Many well-respected community managers and attorneys will refuse to work with a secretive board as it creates potential liability for all involved.  Some even try to educate the misled board members.  Unfortunately, there will always be the attorney or manager who looks the other way when the board of directors acts improperly.

If a board refuses to be open and “get with the times,” experts agree that the best course of action when dealing with secretive directors is to take over the board and elect new members.  It’s not easy, but it is possible with persistence and organization.

A veteran real estate broker and appraiser, published author and national speaker on real estate issues, Sara Benson, CRB, ABR, is president of Benson Stanley Realty in Chicago. Email: Telephone: 312-337-4600