“What Association Boards Should Know About Conflicts of Interest Transactions” – FCAP Managers Report
Conflicts of interest transactions remain one of the most complicated and misunderstood aspects of community association governance in Florida. While the term itself often carries a negative connotation, Florida law does not treat every conflict as improper, so long as the proper disclosures and procedures are followed. Florida Statutes Chapters 617 (Not-For-Profit Corporations Act), 718 (Condominium Act) and 720 (Homeowners Association Act), directly address conflicts of interest. Florida Statutes Chapter 719 (Cooperative Association Act) does not directly address conflicts of interest.
The statutory framework does not prohibit associations from engaging in contracts or business relationships that involve such conflicts. Instead, it draws a critical distinction between transactions that are disclosed, follow proper procedures, and are structured to benefit the association and those that are concealed or exploited for a director or officer’s personal interest. The statutes are not aimed at punishing directors who, in good faith, offer their expertise or business services to an association on reasonable terms. Rather, they are designed to deter self-dealing, secrecy, and the misuse of a fiduciary position at the expense of the community.
Of course, it should be noted that there are certain conflicting situations in which a disclosure or procedure cannot be overcome. It is critical to distinguish between permissible conflict-of-interest transactions and prohibited conduct that may carry criminal consequences. While Chapters 720, 718, and 617 allow associations to engage in certain transactions involving interested directors if statutory disclosures are made and procedures are followed, Florida law draws a firm line at undisclosed compensation, or “kickbacks.” Conduct that falls within the kickback prohibition under Chapters 720 and 718, or that otherwise involves fraud, falsification of records, or intentional concealment of material facts, will expose individuals to criminal and civil liability.
Of course, any conflict-of-interest scenario shall be carefully considered, avoided, if possible, and it is strongly recommended to consult with competent counsel to evaluate any possible conflict, determine if it can be overcome, and if so, ensure the necessary statutory disclosures and procedures are followed.
Not-For-Profit Corporations (Chapter 617, Florida Statutes)
Homeowners’ associations, condominium associations, and cooperative associations in Florida are typically organized as not-for-profit corporations and are therefore subject to Chapter 617, Florida Statutes. Chapter 617 does not replace Chapters 720 or 718; rather, it provides the foundation for more stringent requirements set forth therein.
Section 617.0832, Florida Statutes, provides that a contract or transaction between a not-for-profit corporation and one or more of its directors, or an entity in which a director has a financial interest, is not automatically void or voidable solely because of that conflict or because the interested director participates in the meeting or vote, provided that one of three statutory safeguards is satisfied.
First, the transaction is valid if the material facts of the director’s interest are disclosed or known to the board or a committee, and the transaction is authorized, approved, or ratified by a sufficient vote of the directors, excluding the votes of the interested director(s). Approval requires an affirmative vote of a majority of the disinterested directors, and at least two disinterested directors must participate. Approval may not be accomplished by a single director. When a majority of disinterested directors vote in favor, they constitute a quorum for that action.
Second, a conflict-of-interest transaction may be valid if the material facts of the conflict are disclosed or known to the voting members, and the members authorize, approve, or ratify the transaction by vote or written consent. Approval requires a majority in interest of the members entitled to vote. A director who has a conflicting interest may not vote on the conflict-approval itself.
Third, even if neither board nor member approval occurs, a conflict-of-interest transaction is not void or voidable if the transaction is fair and reasonable to the corporation at the time it is authorized.
In sum, the Not-For-Profit Corporation’s Act does not prohibit conflict-of-interest transactions, but instead establishes specific disclosure, approval, quorum, and fairness standards. In practice, Chapter 617 provides as general foundation for conflict of interest, but association must further comply with the more stringent requirements of Florida Statutes Chapters 718 and 720.
Homeowners’ Associations (Chapter 720, Florida Statutes)
Florida Statute Section 720.3033(6)(b) provides that a rebuttable presumption of a conflict of interest exists if any of the following acts occur without prior disclosure to the association: (1) a director or an officer (or their relative) enters into a contract for goods or services with the association; or (2) a director or officer (or their relative) holds an interest in a legal entity that conducts business with the association or proposes to enter into a contract or other transaction with the association. In any situation that may be reasonably construed to be a conflict of interest, directors or officers must disclose to the association any such activity at least fourteen (14) days before voting on any issue or entering into a contract that is the subject of a conflict of interest
Florida Statute Section 720.3033(2)(a) provides that in the event the association enters into a contract or other transaction with any of its directors (or a legal entity in which they are financially interested), the board must: (i) comply with the requirements of Section 617.0832 (as set forth above); (ii) enter the disclosures required by Section 617.0832 into the written minutes of the meeting; (iii) approve the contract or other transaction by an affirmative vote of 2/3 of the directors present; and (iv) at the next regular or special meeting of the members, disclose the existence of the contract or other transaction to the members present. The presence of the conflicted director or officer counts toward quorum, even though they do not participate in the discussion or vote. Upon a motion, the members have the right to cancel the contract or transaction by majority vote. The Association is required to post any contract or transactions regarding a conflict of interest, or possible conflict of interest on the Association’s website.
Condominium Associations (Chapter 718)
Section 718.3027, Florida Statutes, governs conflict-of-interest transactions involving condominium directors (or their relatives). As with homeowners’ associations, directors and officers of a board of a condominium association (that is not a timeshare condominium association), must disclose to the board any activity that may reasonably be construed to be a conflict of interest. There is no 14-day disclosure requirement for condominium associations. Similar to homeowners associations, a rebuttable presumption of a conflict of interest exists when a director or officer (or their relative) enters into a contract for goods or services with the association or conducts business with a legal entity in which the director (or their relative) holds and interest.
If a director or officer (or their relative) proposes to engage in a conflict-of-interest activity, the activity must be listed on all contracts and transactional documents related to the proposed activity. Such contracts and transactional documents must also be attached to the meeting agenda.
The association must comply with the conflict-of-interest procedures and disclosure requirements of Chapter 617, and those disclosures must be reflected in the written meeting minutes. Approval of the transaction requires an affirmative vote of two-thirds of the disinterested directors present. The existence of the approved contract or transaction must then be disclosed to the membership at the next regular or special members’ meeting, where any member may move to bring the matter to a vote. The contract or transaction may be canceled by a majority vote of the members present. If canceled, the association’s liability is limited to the reasonable value of goods or services provided before cancellation, and the association is not responsible for termination fees, liquidated damages, or penalties.
If the board votes against the proposed conflicted activity, the director, officer, or relative involved must notify the board in writing that the activity will not be pursued or that the director or officer will withdraw from office. If the board determines that a director or officer has violated these requirements, that individual is deemed removed from office, and the resulting vacancy must be filled in accordance with general law.
A director or officer (or their relative) who is involved in or has an interest in a potential conflict may attend the board meeting at which the matter is considered and may make a presentation to the board. After the presentation, the interested individual and any involved relative must leave the meeting during board discussion and voting, and the director or officer must recuse themselves from the vote. The presence of the conflicted director or officer counts toward quorum, even though they do not participate in the discussion or vote. As with homeowners associations, condominium associations are similarly required to post any contract or transactions regarding a conflict of interest, or possible conflict of interest on the Association’s website.
Any contract between the association and a director, officer, or their relative that is not properly disclosed as required by this section or Chapter 617 is voidable and automatically terminates upon the association’s receipt of written notice of termination that includes the consent of at least 20 percent of the association’s voting interests.
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