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This is a common problem. Few condo owners want to volunteer for what can be a thankless role, at best; and even if there are candidates willing to run, associations can’t
As part of its review
of the association’s loan application, a lender will typically request a “due
authority opinion’ from the association’s attorney or the lender’s attorney,
verifying that all current board members have been duly elected. If that is not the case, the lender may
reject the loan.
Unpopular board
decisions – approving a common charge increase or imposing an
assessment to finance a major capital expenditure, for example –may also trigger
questions about the board’s authority. In
fact, one of the first things an attorney representing a plaintiff in a suit
against the board will typically raise is whether the board members were authorized to make the
disputed decision. If one or more board
members were not duly elected, as prescribed by the association’s governing
documents, the legitimacy of the decision may be in doubt.
Insurance or the lack of it – is another
potential concern. Directors and officers (D&O) liability insurance
protects board members if they are sued for official
actions. Board members who have not been
duly elected may not be covered by this insurance. If these trustees become aware of their
potential risk, the board is likely to have even more positions to fill.
There are
remedies. If a decision is being
challenged – or is likely to be – the board can call a special meeting,
scramble to get a quorum or to collect the proxies required to elect the board
members whose terms are in doubt. The
board would then have to vote again on the disputed issue to legitimize it. This solution may work, but it would be far
better to avoid the problem than to engage in the
fire
drill required to solve it.
So, our best advice is
to be proactive. Make sure your board is
duly constituted and correct any problems before a lender, a disgruntled owner,
an opposing attorney or an insurer identifies
them. Start by reviewing the governing
documents to see what they require and what they allow. Some documents allow trustees to continue
serving after their term has expired until a successor is elected. Some allow the board to appoint a successor
to serve the unexpired term of a trustee who resigns. Both are temporary measures. Documents typically
don’t
allow trustees to serve indefinitely, but they often provide legal cover for the
decisions they make until an election is held.
You want owners to elect trustees as soon as possible, either
at
the next annual meeting or at a special meeting called for that purpose.
Finding candidates
willing to run and achieving the quorum required to elect them are real
problems. But that doesn’t mean you
shouldn’t try. Sending
an
urgent letter to owners explaining that if a board can’t be constituted, a
court
could appoint
a receiver, at the association’s expense, who will assume full control of the community,
often
brings owners to their senses. Once those alarm bells are rung, someone will
almost always step up to run for the board, and owners will almost certainly
vote to elect them.
Other steps the board
might consider to avoid board legitimacy questions:
·
Amend the governing documents.
n Add language
authorizing the board to appoint members to serve unexpired terms if the
documents don’t provide that authority.
n Amend existing
language that allows interim appointments to specify that an appointed trustee
can continue serving until owners elect a replacement.
n Reduce the quorum
requirement from a majority of owners to
a more readily achievable level 33 percent is a common
change. Authorizing mail-in ballots or
electronic voting can also make it easier to meet the quorum requirement.
· Take care of housekeeping details. When trustees resign or new trustees are
elected, the trustee certificates on file with the Registry of Deeds should be
updated to reflect the changes. The
association’s manager or a member of the board should review the certificates annually
to
make sure they are up to date. This
small step, often overlooked, can avoid problems that tend to arise at the most
inconvenient times possible.
Reducing the risk that
board decisions may be challenged is the primary reason for ensuring that the
board is duly constituted, but not the only one. Appearances matter. If the board is lax in following the rules
about its own organization, owners might reasonably question whether it is lax
in other areas – enforcing the rules or managing association finances, for
example. You want owners to assume the
board is focusing carefully on governance details; you don’t want to give them
cause to question whether that is the case.
Mar is a partner at
Marcus Errico Emmer & Brooks, P.C., concentrating his practice on
transactional and condominium law. He
routinely advises condominium associations and association managers on the full
spectrum of matters affecting condominium communities, including: governance issues, rules enforcement, lien
enforcement, asset management, casualty loss claims, document amendments, land
acquisition and development rights, election and transition procedures,
contracts and general liability issues.
Mark’s email is meinhorn@meeb.com.