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The following article was published in our article directory on September 11, 2012.
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HOA Management Fiduciary Requirements

Article Category: Real Estate

Author Name: Charles H. Maness, MSACC

Conflict of interests between condominium boards and management often center around whether the management company has outside influences that affects the fiduciary relationship between broker and client. For example, new condominium associations are controlled by the builder or developer for a certain period of time or until a certain number of units are sold. The builder or developer usually makes the choice for the first management company. The relationship between the builder or developer is well seated with the management referral and this referral action often and directly conflicts with the company fiduciary responsibility to the board and the association as a whole.

Lets look at a recent scenario that led into the removal of a management company for perceived conflicts of interest. Management was contracted by the builder while the builder had control of Association. Do you see the conflict of interest building?

The builder had several defects in the roof construction causing major water intrusion issues. The builder was not wanting to spend additional funds to make repairs to the roofing system. Management recommended that the association accept a roofing warranty vs. incurring a legal suit on replacement of the defective roof. Was this a compromise between parties or was this where the conflict of interest actually crossed the line.

The management company should have excused their recommendation and referred the association and builder to legal counsel or arbitration. By making the recommendation to the association to accept a warranty in lieu of a replacement of the defective roofing system, the manager failed to provide a fiduciary duty to the association. The association needed to be aware consequences of their decision to accept a warranty to their future ability to litigate. The also needed to be aware that the warranty was issued without third-party assurances and guarantees. Essentially, the warranty was only as good as the builder's word.

Why was the recommendation a fiduciary breach for the management company? The management company recommendation and association acceptance started the Statute of Limitation for suit against the builder and the warranty failed to provide assurances that future repairs would be honored. If Management had referred both parties to legal counsel or arbitration, each parties counsel could have provided full disclosures of the legal risks and benefits to each party. In essence, the breach deprived the association of such counsel and they specifically relied on the management's recommendation. The recommendation and reliance thereof caused the breach of fiduciary responsibilities.

Should the association sue the management company? Yes, is the answer; but, the Statute of Limitations also started for management when the recommendation was accepted or relied on by the Board. In order to recover, the Board has to show damages from the reliance and that the breach of fiduciary duty was the causative agent for the damage. The Statute of Limitations will depend on the state statute. In this case, two years was the statute.

What damages you ask? Between three and fives after the breach and warranty, the builder relocated to another state and closed his company. The association began experiencing leaks shortly afterwards from the failed roofing system and yes, you have it- the builder was long gone. The helpful management agent recommended that the board not assume a suit for breach of warranty as the company was closed and the chance for financial recovery would be minimum. This advice was somewhat correct in regards to incorporated businesses without personal guarantee; however, the association failed to consider that the management agent was the one who recommended the warranty to the association and that the agent was protecting their own liability exposure.

So to emphasize the key components here, the association placed too much trust and reliance on the management and their agents. As a result of that trust and reliance, the association was forced to invest in a new six digit roof. Likewise, the management contract failed to provide any assurances in the fiduciary relationship and the indemnification clause essentially left no recourse for suits against the management company. Upon further inspection, the Board failed to consult corporate counsel to review or approve the contract. This was a valuable lesson for the association; however, the costs for the lesson was extremely painful.

Be wary of any management company that does not recommend that the Board have counsel to review contracts. If the management company recommends the attorney group, have the attorney to give the association in writing that he or she is working on their behalf in the contract review. Always insist on some form of remediation when encountering builder issues or other conflicts of interest. The remediator should not be recommended by the management company or the builder/developer. An independent party should be insisted on by the Association. Always ensure that the management company provide fiduciary assurances with a fiduciary commitment in writing.

Keywords: Atlanta condo associations, Atlanta homeowner associations, Real Estate Accounting, Accounting, Atlanta Self Managed Condominiums, Real Estate Investors, Real Estate Agents and Brokers, Taxation, Appraisers

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