What About Advantages for HOA Developers and Commercial Owners and Who Can Serve on the HOA Board?

In these bullet point blogs of the day, here is another one.

Question posed to me: “Many condos have commercial units whose ownership is retained by the developer. Years ago, the developer turned over the property to the HOA. Are there any restrictions on the commercial units owner becoming a member of the “homeowners” association board? How would the HOA validate that a person claiming to represent the commercial unit owner is a legitimate representative? Finally, unlike homeowners, the commercial unit owner has significant financial interests in many board decisions. How does the HOA protect itself from a conflict on interest?”

Answer:

  1. I would have to review the association documents to find out what restrictions are placed on the commercial units, if any, and what restrictions are placed on commercial unit owners serving on the board. Generally, the developer has voting rights 3-1 with owners and can stack the board in the developer’s favor until a certain time or event (sale of a percentage of units), or an outside date in time (often 5 years after the first sale). But again, one would have to consult the regulatory documents to see what those restrictions are.
  2. Some documents specifically state who from a business-owned or trust owned unit can serve on the board and/or can vote as the member. If there is nothing in the document then generally, a business owner or trust owner (Trustor), or Trustee of a trust  if the Trustor is deceased, would be entitled to exercise the rights but one would have to examine the documents and the situation to provide a definitive legal answer to the question.
  3. By HOA I assume you mean all of the non commercial owners or board members, what can they do to prevent a conflict of interest? Under California law, the Davis Stirling Act, there are some limitations. And also under case law, there are some restrictions on developer decisions made on the HOA Board. As for specifically stated restrictions here is the law, and also the comment that appears with it in my book that is available on my website for sale (www.californiacondoguru.com) called THE DAVIS STIRLING ACT IN PLAIN ENGLISH.

ARTICLE 8. Conflict of Interest [5350- 5350.]

5350.  CONTRACTS INVOLVING DIRECTORS/DIRECTOR CONFLICTS OF INTEREST, INTERESTED DIRECTOR

(a) Notwithstanding any other law, and regardless of whether an association is incorporated or unincorporated, the provisions of Sections 7233 and 7234 of the Corporations Code shall apply to any contract or other transaction authorized, approved, or ratified by the board or a committee of the board.

(b) A director or member of a committee shall not vote on any of the following matters:

(1) Discipline of the director or committee member.

(2) An assessment against the director or committee member for damage to the common area or facilities.

(3) A request, by the director or committee member, for a payment plan for overdue assessments.

(4) A decision whether to foreclose on a lien on the separate interest of the director or committee member.

(5) Review of a proposed physical change to the separate interest of the director or committee member.

(6) A grant of exclusive use common area to the director or committee member.

(c) Nothing in this section limits any other provision of law or the governing documents that govern a decision in which a director may have an interest.

Comment: This section is new to the DS Act; however, the concept is not new. Before now, many directors did not realize they should not be voting on matters that could benefit them. As before in the law, seeing a conflict of interest because of some benefit to a board member did not mean there was a legally actionable one. If disclosed, contracts that benefit a director are not void just because they exist, but that does not mean that an owner or other director is barred from filing a legal action to challenge the board decision, whether or not the interested director voted. There are considerations about how far a board could go before a judge would find it breached its fiduciary duty by approving a contract that benefited one of their fellow board members.

 

But this statute is not the end of the inquiry. There are fiduciary duty issues to consider, meaning all of the Directors have a duty to do what is best for the community, and not themselves personally or any one or a group of the owners, and have a duty to protect the assets they are responsible to care for in their decision-making capacity. So even the commercial owners as well as the developers serving on the board have this fiduciary responsibility, and it is supported by case law in California.

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