Amid rising costs and scrutiny of the operations of condominium associations across the state, your condominium association has likely placed an emphasis on doing business with people and companies it can trust. After all, wouldn’t you prefer that in your own business dealings?
But what if these trusted people and companies have close ties to your association, such as a member of the Board? Wouldn’t that be an inherent conflict of interest and prohibited? What about a manager or a unit owner? Can your association do business with these people? As always, it depends.
Section 718.3027, Florida Statutes, which primarily governs conflict of interest issues as they relate to directors and officers of a condominium associations, provides, in pertinent part as follows:
- 718.3027 Conflicts of interest.—
- (1) Directors and officers of a board of an association that is not a timeshare condominium association, and the relatives of such directors and officers, must disclose to the board any activity that may reasonably be construed to be a conflict of interest. A rebuttable presumption of a conflict of interest exists if any of the following occurs without prior notice, as required in subsection (5):
- (a) A director or an officer, or a relative of a director or an officer, enters into a contract for goods or services with the association.
- (b) A director or an officer, or a relative of a director or an officer, holds an interest in a corporation, limited liability corporation, partnership, limited liability partnership, or other business entity that conducts business with the association or proposes to enter into a contract or other transaction with the association.
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- (6) As used in this section, the term “relative” means a relative within the third degree of consanguinity by blood or marriage.
As you can see, Section 718.3027, Florida Statues, expressly provides that a rebuttable presumption of a conflict of interest exists if a director or an officer of an association, or their relatives, or a company they hold an interest in, enter into a contract for goods or services with the association or other transaction with the association. In other words, a rebuttable presumption of a conflict of interest attaches to a contract between a member of the Board and the Association, but not to a contract between a member of Board or the Association and a unit owner. This nuance is important to note, as you may have heard of members of your Board that, for example, are parties to the agreement for the sale or lease of units at the very condominium they help operate.
With that said, you should note that Section 718.3027, Florida Statutes, separate and aside from describing specific activities that trigger a rebuttable presumption of a conflict of interest, also applies to “any activity that may reasonably be construed to be a conflict of interest.” In other words, just because an activity in question does not neatly fit the statute’s description of activities that raise a rebuttable presumption of a conflict of interest, does not mean that said activity is free and clear.
Fortunately, Section 718.3027, Florida Statutes, also outlines a process whereby activities that may be construed as a conflict of interest, may still be pursued by the Association. To that end, the statute provides, in pertinent part, as follows:
- 2) If a director or an officer, or a relative of a director or an officer, proposes to engage in an activity that is a conflict of interest, as described in subsection (1), the proposed activity must be listed on, and all contracts and transactional documents related to the proposed activity must be attached to, the meeting agenda. The association shall comply with the requirements of s. 617.0832, and the disclosures required by s. 617.0832 shall be entered into the written minutes of the meeting. Approval of the contract or other transaction requires an affirmative vote of two-thirds of all other directors present. At the next regular or special meeting of the members, the existence of the contract or other transaction shall be disclosed to the members. Upon motion of any member, the contract or transaction shall be brought up for a vote and may be canceled by a majority vote of the members present. If the contract is canceled, the association is only liable for the reasonable value of the goods and services provided up to the time of cancellation and is not liable for any termination fee, liquidated damages, or other form of penalty for such cancellation.
- (3) If the board votes against the proposed activity, the director or officer, or the relative of the director or officer, must notify the board in writing of his or her intention not to pursue the proposed activity or to withdraw from office. If the board finds that an officer or a director has violated this subsection, the officer or director shall be deemed removed from office. The vacancy shall be filled according to general law.
- (4) A director or an officer, or a relative of a director or an officer, who is a party to, or has an interest in, an activity that is a possible conflict of interest, as described in subsection (1), may attend the meeting at which the activity is considered by the board and is authorized to make a presentation to the board regarding the activity. After the presentation, the director or officer, and any relative of the director or officer, must leave the meeting during the discussion of, and the vote on, the activity. A director or an officer who is a party to, or has an interest in, the activity must recuse himself or herself from the vote. The attendance of a director or an officer with a possible conflict of interest at the meeting of the board is sufficient to constitute a quorum for the meeting and the vote in his or her absence on the proposed activity.
- (5) A contract entered into between a director or an officer, or a relative of a director or an officer, and the association, which is not a timeshare condominium association, that has not been properly disclosed as a conflict of interest or potential conflict of interest as required by this section or s. 617.0832 is voidable and terminates upon the filing of a written notice terminating the contract with the board of directors which contains the consent of at least 20 percent of the voting interests of the association.
As you can see, while the aforementioned statutory process imposes various obligations on the association and is rife with consequences and penalties should a requirement be ignored, an association can nevertheless engage in activities that could be otherwise construed as a conflict of interest.
This is important to note because, at times your association may just decide that the best person to do business with is someone who knows your property like the back of their hand, such as your manager. So, what if the association wants to enter into an agreement with your manager, or similarly situated vendor, for good or services?
If that is the case, then your association will need to, at the very least, review section 468.4335, Florida Statutes, which primarily governs conflict of interest issues as they relate to community association managers (which includes managers of condominium associations). The statute provides in pertinent part as follows:
- 468.4335 Conflicts of interest.—
- (1) A community association manager or a community association management firm, including directors, officers, and persons with a financial interest in a community association management firm, or a relative of such persons, must disclose to the board of a community association any activity that may reasonably be construed to be a conflict of interest. A rebuttable presumption of a conflict of interest exists if any of the following occurs without prior notice:
- (a) A community association manager or a community association management firm, including directors, officers, and persons with a financial interest in a community association management firm, or a relative of such persons, enters into a contract for goods or services with the association.
- (b) A community association manager or a community association management firm, including directors, officers, and persons with a financial interest in a community association management firm, or a relative of such persons, holds an interest in or receives compensation or any thing of value from a corporation, limited liability corporation, partnership, limited liability partnership, or other business entity that conducts business with the association or proposes to enter into a contract or other transaction with the association.
- ….
- (6) As used in this section, the term “relative” means a relative within the third degree of consanguinity by blood or marriage.
As you can see, the same nuances and concerns that come into play that apply to contracts between a member of Board and your association, come into play when it comes to contracts between a manager and your association.
Ultimately, this article is not intended to serve as an exhaustive list of issues and concerns that your association may need to address in evaluating its contracts with persons or businesses closely affiliated with the association. Rather, this article is intended to emphasize that you should always consult your legal counsel early and often when it comes to such contracts, as conflict of interest issues can be nuanced to navigate and costly to address if addressed after contracts are signed and in effect.
To read the original FCAP article, please click here.
Nicolas M. Jimenez is a Community Association attorney in the Miami office. Mr. Jimenez has experience representing clients in Florida state and federal courts and has a diverse range of subject matters, including matters relating to contractual disputes, non-compete litigation, intracorporate disputes, landlord-tenant disputes, employment disputes, class actions, and condominium related litigation.