Condominium Boards and Ethics: The Top 5 Reasons Your Association Needs a Code of Conduct

Condominium Boards and Ethics: The Top 5 Reasons Your Association Needs a Code of Conduct

All members of a condominium association board have legal duties. These duties include a fiduciary duty of care and a duty of loyalty to act in the association’s best interests.

But, many board members are not aware that these duties exist. Or, if they are aware that these duties exist, board members have only a fundamental (if not flawed) understanding of what they entail. As a result, breaches are fairly common; and, while some minor breaches may go overlooked by unit owners, others have the potential to lead to legal action against the condominium association.

One of the most effective ways for condominium associations to address this concern is by adopting a Code of Conduct.

A Code of Conduct is a document that outlines board members’ legal and ethical responsibilities. By adopting—and ensuring that all board members review—a Code of Conduct, condominium associations can reduce the risk that their board members will breach their duty of care or duty of loyalty. While having a Code of Conduct may not prevent an unscrupulous board member from engaging in self-interested business, it can help prevent inadvertent violations by those who would otherwise lack a clear understanding of what is required, what is permitted and what is prohibited.

Condominium associations can adopt a Code of Conduct through three primary means. The first is by amending the association’s governing documents to include a Code of Conduct. The second is by amending the association’s governing documents to “incorporate by reference” a standalone Code. Alternatively, a condominium association may be able to implement a Code of Conduct through the board’s rulemaking power. In all three scenarios, it is important that the association work with its legal counsel to ensure that its Code of Conduct addresses all pertinent legal and ethical concerns.

5 Reasons All Condominium Associations Should Have a Code of Conduct

What are some examples of these legal and ethical concerns? Here are five of the top reasons why all condominium associations should have a custom-tailored and well-drafted Code of Conduct:

1. Compliance with (and Enforcement of) the Association’s Governing Documents

Enforcement of a condominium association’s bylaws and governing documents can present a variety of legal and practical challenges. But, enforcement can become even more challenging when (i) the unit owner who is in noncompliance is a board member, or (ii) the board members who are seeking to enforce other unit owners’ obligations are not subjecting themselves to the same standards.

To address both of these concerns, a condominium association board’s Code of Conduct can include provisions that:

  • Require all board members to remain current on their assessments and other obligations as unit owners;
  • Require all board members to consistently enforce unit owners’ obligations regardless of an individual unit owner’s identity or relationship to a member of the board; and,
  • Require board members to voluntarily resign (or face removal) if they fail to remedy a continuing violation of the association’s governing documents in a timely manner.

2. Confidentiality of Non-Public Association Matters

Board members should have a general obligation to maintain confidentiality with respect to all non-public association matters. As unit owners, board members will likely receive questions from their neighbors regarding matters to which they have become privy in their official capacity. Discussing options that are on the table before a final decision is made, discussing matters that pertain to individual unit owners, and discussing other matters that have potential legal implications can all lead to unnecessary issues for the association. As a result, it is a best practice for condominium associations to impose appropriate confidentiality and non-disclosure obligations on their board members.

3. Self-Dealing and Other Conflicts of Interest

Board members’ duty of care and duty of loyalty requires that they make decisions in the association’s best interests when acting in their official capacity. While self-dealing and engaging in other conflicts of interest are generally prohibited regardless of whether an association incorporates these prohibitions into a Code of Conduct, putting board members’ obligations in writing can help avoid any ambiguity regarding whether particular transactions are prohibited.

An issue that frequently comes up in this area is the selection of contractors. Board members will often want to award contracts to companies that they own or with which they (or their family members) have personal or financial relationships. However, it is imperative that condominium associations award contracts through a competitive bid process and that awards are based on the association’s best interests rather than the interests of any individual board member.  

4. Board Member Compensation and Misuse of Association Funds

In addition to non-competitive procurement, various other financial issues can create problems for condominium associations—and these issues can also be avoided (or at least mitigated) by adopting a Code of Conduct. This includes issues related to board member compensation and the misuse of association funds, among others. If board members receive compensation, they should be prohibited from abusing their position to unreasonably increase their pay. Board members should also have clear obligations to make informed and reasonable decisions regarding necessary maintenance, improvements and other expenditures.

5. Exercising Due Care in All Association Matters  

A condominium association board’s Code of Conduct should require that board members exercise due care in connection with all association matters. As board members are often volunteers who perform their duties on their own personal time, it is important to ensure that board members acknowledge the importance and implications of their responsibilities. With this in mind, a Code of Conduct should also generally address matters such as:

  • Regular Attendance and Good-Faith Participation at Board Meetings – Board members should be expected to regularly attend all meetings, whether in person or remotely. They should also have an obligation to participate in all meetings in good faith and not give short shrift to their duties. Condominium associations may choose to include mandates or expectations regarding non-hostile communication, decorum, procedures for informal dispute resolution and other similar matters as well.
  • Decisions that Impact the Association – Board members should have a documented obligation to exercise due care when making decisions that impact the association. This includes decisions regarding matters such as amendments to the association’s bylaws and other governing documents.
  • Decisions that Impact Unit Owners – The same obligation should apply to all decisions that have a direct impact on unit owners. These decisions are among the most likely to lead to disputes and litigation, and this is a factor that board members cannot ignore. Dues increases, special assessments, changes to maintenance schedules, improvements to common areas, and other similar types of issues must all be addressed carefully to protect the association’s best interests.
  • Financial Management and Accounting – Board members should also have a documented obligation to exercise due care in managing the association’s finances and handling accounting matters. Financial mismanagement is another common cause of unit owner litigation; and, when unit owners have concerns about things like budgeting, reserves or loans taken out by the association, they may demand to review the association’s accounting records through discovery or other means.

A condominium association board’s Code of Conduct should require the board to engage outside professionals when necessary. This may mean engaging accountants, lawyers, engineers, consultants or other professionals depending on the specific issue under consideration. While board members should be capable of handling their day-to-day responsibilities independently, they should also make the right decision to seek outside help when matters exceed their knowledge or capabilities.