Smart Board & Property Manager Legal Guide: Repair & Maintenance Obligations
Alan Tannenbaum, Esq.:
I'm Alan Tannenbaum, principal of Tannenbaum Lemole & Hill. I'm here with my partners Jon Lemole and Cindy Hill.
So let me tell you a little bit about our law firm. Prior to this year we were primarily construction lawyers and litigators working in the community association field. And Jon Lemole and myself led that practice and we have been representing in turnover claims, construction consulting, repair consulting, we have done covenant enforcement and we did that from the Space Coast across central Florida to the Tampa Bay area and down to Naples. We've stayed out of South Florida and stayed out of North Florida. And Jon and I, we're not doing general counsel work, but we've transitioned our practice. Jon and I are still leading our construction team and our claims team in all the markets I talked about from the Space Coast across the Tampa Bay and down to Naples, but we've also now become a general council firm and which is why Cindy Hill is here. We brought Cindy in experienced general counsel.
Now, to be clear on our boundaries the general counsel portion of our practice is from the northern reaches of Manatee County. We do some work also in East Bay and Hillsboro and down to Naples. We are practicing general council community association law, whereas, our construction practice is in the original market that I talked about. So the market has been a little bit confused about us, but here's the low down. Anybody on this call if you have a construction litigation or litigation issue or a turnover, we'd be happy to talk with you. If you have a general counsel issue and you're in from Manatee County Northline down or East Bay down, we'll be happy to talk to you about general counsel matters. If you're out of that market and have general questions, we're going to refer you to a great general council in St. Pete or Clearwater or Orlando or Melbourne, but we won't be taking on the general council work. So hopefully I haven't confused you, but we are a full service general council and a construction law firm but the region that we practice construction law in is broader than the region we do general counsel.
And I probably created more confusion with what I just said than clarity, but I did my best. Okay, so what we're going to be talking about today is Repair and Maintenance Obligations: Limits of Board Business Judgment. And one of the reasons we brought this topic back is that the legislature recently acted when it passed the Condo Safety Act, and passed two sections of that act that directly relate to individual board of director exposure on repair and maintenance activities. Which through all the lawyers in Florida [inaudible 00:04:08] because it was a diversion from where the law had been both from the common law, the court created law and what the legislature had said about breach of fiduciary duty. So part of the excitement of being a lawyer is that you think you have it all figured out and then either the judge or the legislature acts and you have to totally alter your thinking and your recommendations and your opinions because they threw you curve ball.
That's part of the excitement of the law, and then we have to try to explain it, what the court system and the legislature did which is not always an easy thing to do. So I'm going to talk first about the common law. So common law is literally the law that's created by the courts when a judge or an appellate court makes a determination and I'll give you an example. Many decades ago the Florida Supreme Court said that there's an implied warranty of fitness in merchantability that applies to the sale of new homes. It wasn't clear what the law was until the Florida Supreme Court decided that, and all of a sudden there's now based upon that decision an applied warranty in the sale of new homes. Now, the legislature has acted subsequently to that to alter things, but that's when a court says we're creating something new and making law in Florida, which courts do, that's the common law. So what was happening in, and especially in condo world in the early 1980s is there was a series of court decisions that were coming down.
Where a board of directors of a condo association decided that it was going to repair something in a certain way, and one of the owners challenged it. That you shouldn't do it that way, I have an engineer who says there's a different way to do, it'd be cheaper, it's going to last longer and it went to the trial court. The trial court's trying to decide which engineer was right, the association's engineer or the unit owner's engineer and the cases got up to the appellate courts. And finally the appellate court said, we're tired of hearing... I'm interpreting here, but we're kind of tired of hearing these disputes so we're going to establish a precedent. And the precedent ended up being the adoption of the Lamden Rule, which really clarified what a board's authority is to make decisions on repair and maintenance and what's challengable by an owner once the board has made those decisions. And it cut out a lot of that litigation when the courts adopted this Lamden Rule. And Jon, we can go to the next slide.
So this is the Lamden Rule, the basic court created law about board business judgment in Florida as it relates to repair and maintenance. So in order for the board business judgment to be a protection, the court system has said you have to meet these criteria. So the first criteria is a dually constituted community association board. That means that do your elections properly so that everybody who is sitting on the board where the decision's made is appropriately in a position as a board member. It also probably means, although it doesn't say it here, make sure your meeting notice is correct. So that when you make a decision about repairing maintenance and hiring an engineer or hiring a lawyer, whatever it is, then it's properly documented, was on the agenda for a board meeting, the board voted to go forward with and so forth. I think that would probably be subsumed within duly constitute community association board at a duly notice meeting. Now, the next criteria upon reasonable investigation.
So why do we as community association lawyers tell you that if you're going to do a major repair project you should involve an engineer? Well, the first reason is we think that there's a better opportunity under those circumstances to have a successful repair. But it also is applying this Lamden Rule. One of the things that allows board business judgment to be a protection is that the board has undertaken a reasonable investigation. Which means you've had professionals who have studied the problem, who have come up with a solution. We have groups where we have retired contractors and engineers who maybe are serving on the board, and they're out making decisions about how things should be repaired. Big mistake. We have former contractors who are doing supervision of jobs out in the field who are on the board. That's also a bad idea. So reasonable investigation is a key, and usually that involves some professional of some sort.
In good faith and with regard to the best interest of the community association and its members. So good faith means you're not entering into a repair project where you have a pecuniary interest, a board member has a pecuniary interest. You're hiring a board member's brother in law at a above market rate. Bad idea, that's bad faith for a board member. Or you're taking an action that's vindictive. You don't like a particular unit owner so you don't do repairs on their unit, you go to another building. You can't do that. That's not good faith and the best interest of the community has to be taken into account. Now, don't get confused, if you're in a condo for instance and it has 15 buildings and only one building's taking in water, you can't say, well, the best interest of the community is for us to ignore that building because most of the owners are not affected by the problem. You can't do that. You have to have the best interest of the community mind.
So if all those things are in place then if the board exercises discretion with the scope of its authority, does it have authority to make this maintenance and repair decision? And that selects among means for discharging an obligation in repair and the court should defer to the board's authority and presumed expertise. So what that means is if it's a duly constituted board, the investigation's been reasonable, it's acting in good faith in the best interest of the community, and it exercises discretion as to the extent of repairs that are necessary or how to undertake a repair it's not going to be challengable. An owner's not going to be able to come in and say, my engineer says it could be done a different way or a better way. Or I shouldn't have to pay this assessment because the board's spending too much money, it could have put off this repair another two years, it doesn't need to do it now.
None of those arguments are going to hold any weight in court applying the business judgment rule because of the adoption of Lamden rules. so just make sure all of the criteria are in place. Duly constituted, you've done a reasonable investigation, you're acting a good faith, and you have the authority to make the decisions that you're making about repair and maintenance. If all those things are in place, the court's not going to disturb it. The board's decision is protected. So that's the basic common law, courted created law. Now Jon Lemole is going to tell you how the legislature took that basic common law approach that the court system adopted and contorted it in all kinds of ways to create the dilemma that I talked about is how the heck do we advise people based upon now what the legislature has done? So Jon, tell us what our fine legislature over the years has done on the issue of fiduciary duty and board liability.
Jon Lemole, Esq.:
Thanks. So as Alan said, you have this weird commingling of common law, which is the business judgment rule under the Lamden test. And then the legislature has weighed in with various statutes that address primarily a director's fiduciary obligations. And so navigating that minefield of exercising business judgment while at the same time not doing things which may be statutory violations of your fiduciary duty can seem like a really difficult prospect or path to navigate for directors and officers and even managers because some of these statutes address managers as well. But let me stay at the outset and I think if you've been on these, you've heard Alan say it as well a couple of times, this is not to scare anybody. It's extremely rare for directors to find themselves in personal peril for their decisions as directors. Not only does the business judgment doctrine provide a strong layer of protection, the Florida statutes which actually address the fiduciary obligations of directors and officers are also in a way protective of a general level of immunity for directors from personal liability.
But that's not to say that there aren't circumstances where a director can face individual liability for their actions. There are instances where indiscriminate directors, officers can find themselves boxed in by their statutory fiduciary obligations. So what I'm going to talk about here is how that box gets created. Taking the box metaphor a little bit further, think of a wood crate, and what we're going to talk about is putting that wood crate together with hammer and nails. So let's talk about the hammer. Most of the penalties for violating your obligations as a director or officer or even manager are not self-executing. There are some rare instances where they can be, and we'll look at those in a minute, but they're not normally self-executing. And so the hammer, the thing that is held over everybody's head are provisions in both the condo statute and the HOA statute which authorize lawsuits by unit owners or by HOA members against either the association itself or in some instances a director or any one of the directors or even perhaps all of the directors.
So 718.303 in the condo statute, and 720.305 in the HOA statute both authorized member lawsuits against the association and/or directors and officers for failing to comply with the law, the statutes, and the governing documents of the association. Lawsuits can seek damages or they can seek injunctions. In other words, requesting a court to force the association to do something or to force a director to do something. And obviously, if you're faced with one of those lawsuits, they can be very expensive. But compounding the problem is that if you lose and if the member wins, both of these statutes also authorize the prevailing party in that case to recover attorney's fees and costs. So not only is the association or the director dealing with having to fund their own defense, the cost of defending the action, but if you lose, you may also be called on to pay the member's attorney's fees that they've expended in order to get the association or the director to do what they should be doing under the statute or under the governing documents.
Interesting thing to note about the condo statute, doesn't say this in the HOA statute, but a prevailing unit owner can also recover any assessments levied against them for the purpose of paying the defense of that lawsuit. So if the association gets sued and the association passes a special assessment in order to pay their lawyer to defend against the case and they lose, the assessments that unit owner incurred can also be reimbursable. So we can look at the statute and I've highlighted some of the relevant provisions. This is 718.303, the association shall be governed by and shall comply with the provisions of this chapter, the declaration, the documents creating the association, bylaws, all of the governing documents. And actions for damages or injunctive relief or both for failure to comply with these provisions may be brought by a unit owner against the association and/or any director who willfully and knowingly fails to comply with the provisions.
And you'll see that a little bit further down in that section of the condo laws where the prevailing party attorney's fee language appears. I'm going to run through this really quickly in the interest of time, but we talked about it. The prevailing party can recover their attorney's fees. And in the case of condos, if that prevailing party is the unit owner, they can also recover any assessments that were levied against them to pay for the association or the director's defense. Now, let's look at 720.305. Basically the same for HOAs. The language is essentially identical. The only thing missing here is that language about recouping assessments, and the HOA statute just says in the prevailing party in any such litigation is entitled to recover reasonable attorney's fees and costs. So those two sections are the hammer as this box is created, that's what provides the enforcement mechanism in situations where there's a potential breach of fiduciary obligation.
So let's talk about the nail. What is the nail? The nail are the fiduciary duties as their legislatively defined, and the breaches of fiduciary obligations as their legislatively defined in the condo law and in the HOA statute. So we're going to take a look at them broadly, condo, HOA and the general not-for-profit statute in 617 also comes to plain here because it's referenced and so there's some cross-reference to that statute as well. But taken together the condo law, the HOA law, the not-for-profit corporation statute impose on directors and officers of fiduciary duty towards owners. They impose that, they say that. And generally they define a breach of that fiduciary obligation in a series of things that you cannot do, and those things that you cannot do generally are receive kickbacks and freebies. Failure to perform your duties, and the failure is a knowing violation of criminal law. Or engage in self-dealing transactions directly or indirectly or act recklessly. Sorry, there's a typo in there. That recklessly should be at that last bullet.
Act recklessly or act or fail to act in bad faith or with a malicious purpose or in a manner exhibiting wanton and willful disregard human rights, safety or property. Let's take a little bit of a deeper dive into the statutory language. So first we'll start with the condo statute and the general parameters of the fiduciary duty of officers and directors is in 718.1 11. And in the section (1)(a), it provides that the officers and directors of the association have a fiduciary relationship to the unit owners. Now, here's what I want to look at next, is all the things that are deemed to be violations of that fiduciary duty. And notice I've highlighted manager here because while the duty, the fiduciary obligation refers to officers and directors, the things that cannot be done also include managers. So you may not solicit, offer to accept or accept anything or service of value or kickback for which consideration has not been provided for his or her own benefit or that of his or her immediate family from any person providing or proposing to provide goods or services to the association. Okay?
So that's pretty simple. You're going to hire a vendor to do something at the property, you can't hire that person or that company because they're giving you a tip or a kickback or some other money on the side as an inducement to hire them. That's pretty simple. I think we all get that. But the statute then goes on to say, and this is where it pulls in the not-for-profit corporate fiduciary obligation statute in 617 and it refers to it within the Condo Act and frankly repeats it. You're not going to see something similar in the HOA Act. In the Condo Act, it incorporates that into the statute. So in the condo statute a director, an officer who fails to perform his or her duties and the breach or failure to perform those duties either constitutes a violation of criminal law, constitutes a transaction in which the officer or director derived an improper personal benefit.
Now, don't confuse that with kickback. That can also include other forms of self-dealing like hiring a family member, steering a contract, a vendor contract to a family member. Or maybe you've got some a holding company somewhere that you've got a series of intricate corporate structures where you have a personal benefit, principle interest or financial interest, although it's not obvious. Those are the types of self-dealing acts which the condo statute prohibits. So self-dealing or the act constitutes an act of recklessness or an act or omission that was in bad faith with malicious purpose or in a manner exhibiting wanton or willful disregard of human rights, safety or property. We've heard that already. Now, these are the things that constitute violations.
Jon Lemole, Esq.:
Okay. Now, obviously if you're acting within the business judgment rule, if you're applying the Lamden test then you're probably going to not have a problem with these. I mean, there is some overlap here where if you're following that Lamden test that Alan spoke about before, you're probably not going to run into these situations because you will already have been anticipating these types of breaches and avoiding them. But just good to know that the statute's there and they define what the fiduciary obligations are and how to violate them. Look, you can turn... I'm sorry, I've had this cold for three weeks and I can't get rid of the cough. Excuse me. The HOA Act is somewhat similar. 720.303 defines that officers and directors of a homeowner's association have a fiduciary relationship to the members who are served by the association. So that's similar to the condo statute, it tells us that we have that duty.
It then says that the officer or director or manager, and this is the anti-kickback language, you can't take kickbacks. Now, I talked about self-executing penalties, this is where you find one in the HOA statute. If the board finds that an officer or a director has violated this subsection, the board shall immediately remove the officer or director from office. So be aware of that. Thank you. Michelle just brought me a cup of water. The HOA statute also incorporates in it a director or officer charged by information or indictment with a felony theft, not convicted, charged with a felony theft or embezzlement offense involving the association's funds or property is removed from office. So that's another self-executing penalty under the HOA law. But then the HOA law goes back and refers instead of taking the language from the not-for-profit corporation statutes and repeating it in it, it refers to chapter 617.
So in HOA land, you've got to go back and look at the language in 617.0834 because that's where the same types of things that we talked about before in the condo law are referred to for the HOA folks. And so again, you'll see that a breach of a fiduciary obligation happens when the officer or director breached or failed to perform his or her duties, and the breach or failure to perform constitutes either a violation of criminal law. There is a little bit of a relief valve here unless the officer or director had reasonable cause to believe his or her conduct was lawful. Or had no reasonable cause to believe his or her conduct was unlawful. Or the transaction from which the decision constitutes the transaction from which the officer or director derived an improper personal benefit directly or indirectly. We talked about that in moments ago, self-dealing.
That's the classic example of approving a vendor contract to a family member for example. Or the act was reckless or an act or omission, failure to act, that was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety or property. So those are the two statutory schemes which define A, fiduciary obligation that exists and then the ways that you can breach them. And as you can see, breaching those fiduciary obligations, you've done some pretty bad stuff if you've breached them. So you've really created the box for yourself with the hammer and nails. Now, the new condo safety legislation, and so this is just for condo folks. All of a sudden the legislature has thrown that scheme into a little bit of confusion, because what they've done is they've tacked on to the new condo safety legislation what may be an additional fiduciary obligation for officers, directors, and managers.
And so there are two different places where this appears. One in connection with the milestone inspections, the structural safety milestone inspections, and the other in regards to the structural integrity reserve studies. So in 718.112(2)(h), the legislature has now said that if an association is required to have a milestone inspection performed, you got to do it. And if the officers or directors of an association willfully and knowingly fail to have a milestone inspection performed when they're supposed to do it, such failure is a breach of the officers and director's fiduciary relationship to unit owners under 718.111(1)(a) which is the section we referred to earlier and we were looking at. And similarly, in 718.112(2)(g) it's essentially the same language and this time it's regarding the failure to conduct and arrange for and obtain a structural integrity reserve study if your condominium is required to have one of those. Now, as legislatures often do they put this here and it creates some confusion. We don't know and it's probably going to require a court to get a case and determine whether this is a whole new subsection for example of something that is a breach.
Or whether these sections are informed by or impacted by those other sections that we looked at, which talk about self-dealing, which talk about reckless acts, which talked about malicious purpose and bad faith, and whether those define the duties that are created in these two new sections. And we don't really know the answer to that, and we probably won't know unless we either get some clarification from the legislature or somebody gets sued for not doing this and the case goes up on appeal and we get some clarification from the court system. But from a conservative approach, I think a lot of lawyers looking at this language would say, look, the statute says what it says. If you've got to do this, you got to do it so do it because if you don't it's a breach. So that remains to be seen, and of course if you have some concerns about it, you should talk to your general counsel and get their opinion and recommendation of how they view the parameters of these two new sections addressing fiduciary obligation.
So with that, we're going to I think go to Cindy, and Cindy's going to talk about board liability for maintenance and repair failures versus association liability Because oftentimes there's this confusion as to who is really responsible? Is it the association or is it the directors or both? So Cindy's going to clarify that for us hopefully.
Cindy Hill, Esq.:
So this is an issue where Jon has discussed the incidents where personal liability for a board director can be an issue in terms of if you act in a self-dealing matter or fraudulent matter, all those bad faith actions. There's a difference between though a board member being individually liable or multiple board members being individually liable, and then the association itself being liable. So for instance, if a group of board directors decide they don't like their management company, I'll just give an example, and they decide that they're going to go ahead and fire their management company and they don't do so with the assistance council, they just tell them to go away. The management company had a contract that was good through the end of the calendar year and they fired them that year, and then they're surprised to find out the association gets sued to pay the remainder of the contract.
Well, that would be an example of a lawsuit where the association could be potentially liable. But it would also be an example where the board directors wouldn't be personally liable because maybe they made what could arguably be a bad corporate decision not consulting with counsel and following the terms of a contract and terminating the management company, but they didn't make a decision that was fraudulent, criminal, self-dealing, any of those higher standards of breach of fiduciary duty. So that being said, I cannot recommend that boards take that personal protection that the statute does offer them where they can make some arguably bad decisions and go ahead and make some arguably bad decisions. Because once the association is sued, those board directors are going to need to most likely attend depositions, answer discovery requests, be participants in the litigation to defend the actions they made although again, they will not be personally liable.
They won't have to be concerned about a judgment against them as a person, but they did have a fiduciary duty to act in the best interest of the association and now they have to defend their actions in a lawsuit. So I see board members who sometimes worry about being sued individually and then when I assure them that the standard is high and they're acting in good faith, they're going to be okay. But then they don't necessarily make that connection to, well, at the same time, going back to the point Alan made very early in the presentation, when a board reaches out to a professional such as an engineer, the attorney, the accountant, whatever the applicable issue is and gets guidance on certain issues it can be a very strong protection from liability. So that you don't as a board necessarily take steps that aren't in bad faith, aren't fraudulent, aren't self-dealing, but are still not the best corporate decisions because ultimately board directors are volunteers.
You are not trained professionals in all areas of the law that could in any time end up in a board meeting on the agenda that you need to discuss. So I always recommend best to reach out to professionals, get the advice that you need to go forward. It doesn't mean that you will not be sued either individually or as an association. Let me make that clear, no one can guarantee that. People can sue you for anything they want. I could be sued, I'm going to be a little facetious, but it's true somebody could sue me for having red hair. Does that mean the lawsuit will survive any sort of court proceeding and not be thrown out by a judge? No, but it does not mean that I could not get sued. So in acting in your best interest to your association, getting the advice of the professionals applicable to a situation can avoid that. And in the event that you do get an angry owner or I don't know how many of you might have encountered someone who is a lawyer in another state and now lives in Florida and is retired and is angry over certain issues.
If they decide to sue and don't follow the proper procedures and sue the board members individually, you have all your ducks in a row so to speak, in terms of defending yourself against what was a lawsuit that was not necessarily properly vetted before it got to the courts. Oh yeah, go ahead.
Alan Tannenbaum, Esq.:
Well, let me give a concrete example to highlight this difference between board liability and association liability. So let's say the board is making a decision, it has three buildings to reroof and the board makes a business decision that it's going to reroof the first building this year and the second building next year and the third building in the third year. And it's a business decision that the board can make, it may or may not require professional decision making. And then that third building has a major leak event and there's damage to the building and the interior units. It's not going to create personal liability on behalf of the director because of the high standard for breach of fiduciary duty. But when that owner sues the association for the maintenance failure, for not doing our building, the standard that's going to apply is a negligent standard. So let's say the board of directors had a report from an engineer that said all three roofs need to be replaced now.
So the owner finds that report or their lawyer finds that report, and the lawyer's going to go into court with that report and say they had an engineering report that said the roofs all had to be replaced today. It was not reasonable for the board to defer that third roof to two years from now, and therefore the association's liable for the damages that my unit suffered as a result of the decision to defer which was negligent. But that does not create individual liability, but the association and the association's liability carrier will need to respond to that claim. So what we're trying to portray is that the corporate liability of the association is a lower standard. It's a negligent standard. Whereas, individual board liability is this higher fiduciary obligation. And that's part of the reason why the legislature's addition of this new statutory language is concerning because all this was is to say, if the board has this obligation to have the reserve study and the engineering study under the Condo Safety Act. And if the board doesn't do it 'cause it wants to save the association money or wants a deferent or is concerned that we have a lot of owners who are already being lean for not paying their invoices and we just can't afford it, or insurance is too expensive and geez, we just can't comply with the statute.
All of which would seem to be at least arguably good faith decisions on a board of directors. The legislature said, if you make that type of decision relative to these two statutory provisions, it's a breach of fiduciary duty and you're going to get sued individually. So that's where in our view, it was an aberration for where the flow of the legislature had been before that and the common law. Which is you got to be really doing a really bad thing as a director in order to have personal liability and basically ignoring a statutory requirement for a reserve study or an engineering report on time now creates individual liability. That's concerning for us. What's our last segment, Jon? All right, in the last few minutes we're going to cover something that is really pertinent to post hurricane relief and some confusion that board directors have. So we are dealing with a number of groups in our market in South that have had substantial hurricane damage. They're working with public adjusters or first party insurance lawyers to try to get compensation to cover the repairs that are necessary.
And so we have communities that may have 50 roofs and half the roofs have a blue tarp on them. And the association has yet to hire a roofing contractor to replace the roofs that need to be replaced and the argument being that, well, we're waiting for our insurance claim to be processed. Interestingly in the Condo Act and in all of your documents, there's nothing that says that our repair responsibilities are suspended if we're waiting for an insurance company to respond. So it's really perilous for associations of board of directors in the face of having storm damage to really believe that you can wait too long of a period of time for an insurance claim to be resolved before you take action on the repair and maintenance front. And I was on a panel just a couple of weeks ago and with a couple of insurance agents, and the insurance agent said, well, don't go ahead with repairs because you want to make sure that the insurance company has documented all the problems. And I raised my hand and I said, well, I can't totally agree with that.
I definitely agree you have to protect the insurance claim, put the carrier on notice, let them know that you're going to be doing repairs and so forth, and make sure your engineers get in there and document the problems. But I said, I don't know how you would justify in a community with somebody whose roof is already tarped in October of 2022 that when May of 2023 comes on and our rainy season starts in Florida and that roof and that tarp doesn't hold up, which it's not intended to, and that unit now gets wet. It's going to be very difficult for the board to argue that we had to defer that work because we were waiting for an insurance company to respond. So that repair and maintenance obligation persists even in the face of that. And there some tough business decisions because the association says, well, where are we going to get the money from to fund this repair unless we have the insurance money? And what some groups do is they get a line of credit or they do a special assessment and they tell the owners, when we get the insurance company paid or the insurance claim paid, we'll come back and deal with it.
Cindy Hill, Esq.:
I would add many of my association clients who dealt with hurricane damage, storm damage, whether it was just landscaping or it actually damaged buildings have had to tap dance, so to speak, into a situation where they find that they're going to have to get funding 'cause the insurance companies are overwhelmed with the claims. They're not responding in a way that maybe everyone might have expected, and it's an issue that's been a learning curve actually for my associations down in Charlotte County and South Sarasota who are dealing with this problem. And it's something that going forward the area is no longer going to be able to assume that this is a Miami problem or a Fort Lauderdale problem, Sarasota is now on the radar for these problems. So these are things that definitely need to be thought about going forward before the next hurricane season.
Alan Tannenbaum, Esq.:
Let's take some questions. I'll go to our chat, and there's been a couple of really interesting questions asked. There's a question from Diane. What if a board member's relative is employed by a roofing company of questionable experience, but the board hires them in disregard and qualified roofing companies resulting in more leaks post storm than that there were prior? That's a very good question.
Cindy Hill, Esq.:
Answering that one in the chat just so you know Alan, and she clarified it's an HOA not a condo.
Alan Tannenbaum, Esq.:
Okay. Well, either way, hiring a relative is usually a bad idea so that should be avoided. If it's a relative who's qualified and that board member doesn't participate in the vote and the services are priced at a market rate, doesn't necessarily mean it's a violation but best avoid that whole situation. Especially if they're not qualified, that's another law, so not really a good idea.
Cindy Hill, Esq.:
Well, the Condominium Statute has a conflict of interest provision you have to follow for notifications and transparency to the ownership if a board director does recommend or wants to potentially hire someone who's family. So that's why I asked in the chat if it was condo or HOA, and I don't know if everyone's aware of that distinction. There is a specific conflict of interest statute in the Condominium Act.
Alan Tannenbaum, Esq.:
There's a question. Does reasonable investigations, this is from Lewis, require the board to obtain proposals from more than one expert? The answer to that would be no. If you have a qualified expert, you have vetted them appropriately those type of investigations are very expensive, there's really no reason for redundancy. Does it provide an additional protection if you get a second opinion? It would, but I wouldn't say at all that's required. But again, it's not only who you retain, but it's what you allow them to do. So if you have a high-rise building with major problems and you call an engineer in and say, we only want you to do a visual inspection we don't want to pay you to do any kind of destructive testing. And the engineer says, well, I can't really determine the problems without some level of destructive testing. You may have limited the scope, and limiting of the scope may be unreasonable. So it's not only hiring an appropriate engineer but also the scope.
Now, what's interesting about the Condo Safety Act is that there are provisions of the Condo Safety Act where the legislature's taking it outside of the board's discretion to limit the scope of what the engineer does. If they're going to do a phase two structural inspection, then it's up to the engineer who has total discretion as with the level of investigation they do. Which it's been joked about within the attorney community that if you have a child in college now, send them to engineering school or have them get an engineering degree because the Florida legislature has created enough work, especially for structural engineers in Florida to keep them all busy for the next five decades. So that may be something if you get a call from a college student who's trying to decide between a philosophy major and a engineering major, push them towards the engineering side, especially the structural end of it and you'll get there. I see Michelle has put a poll up. Thank you, Michelle, and I'm trying to see if there's any other questions we haven't answered yet.
Jon Lemole, Esq.:
Alan, there was a question about what does reckless mean? What is a reckless act? That's actually defined in 617.0834, the nonprofit corporation statute. Let me share my screen again because I actually have it here in the presentation so quickly you can see what it says there. And it says that for purposes of this section, the term recklessness means the acting or omission to act in conscious disregard of a risk that is known or so obvious that it should have been known to the officer or director. And known to the officer or director, or so obvious that it should have been known to be so great as to make it highly probable that harm would follow from such action or omission. So that's a pretty high standard, it really relates to knowing or a reasonable person would know that there's a risk and ignoring the risk makes it highly probable that some harm, and that could be personal harm or property damage or property harm, would follow from either the action of the failure attack. So you have a statutory definition for that, and I would argue that that applies in either the condo regime or the HOA regime.
Cindy Hill, Esq.:
I agree.
Alan Tannenbaum, Esq.:
One more question I see. Let's see, somebody has a question about one of the board members doing work. Let me see where it is again. Okay. Richard says, what minor repairs can members make or authorize an owner to make? Can a person with elevator controls reset or attempt to reset motionless elevator car? Does your answer change if people are stuck in it? Well, can owners and the board do simple screw tightening on hinges? I think moving propane tanks to secure a area would be okay. We have directors who are up on ladders today doing stuff at their property. I'm greatly in favor of maintenance work being done by either an employee of the management company or a hired maintenance company. I'm very much in favor of repair work being done by a contractor contracted for the association. Self-help by directors has several perils. Number one, if somebody performs negligently they can be held liable for it. So I've confronted an engineer from Illinois who's on the board of directors, and he's designing repair work at their condo. And I've said to this engineer from Illinois, I said, if you still have professional liability insurance I bet it doesn't cover unlicensed engineering in Florida.
And so you're undertaking an act that's completely uninsured. You're not licensed to practice engineering in Florida, so you're breaking Florida licensing laws. It's an unauthorized practice of engineering. Do you really want to volunteer your services under these circumstances? They would apply it to an accountant who was doing the association's books, or a lawyer who is second guessing their general counsel on giving legal advice. Really, really not a good thing. So there may be some really minor things that I could see a board member doing, certainly under an emergency circumstance. If you need to get somebody out of an elevator stuck in it, well, and ThyssenKrupp or the elevator company can't get out in time and you need to rescue somebody. I guess all holes you're open to take emergency action, but short of that I don't like to see board members or directors doing stuff. That's why you have a management company. That's why you have a maintenance person. That's why you have outside contractors and engineers. And it's virtuous 'cause you think you're saving the association money. Some folks just like to be handy and useful, but it's very perilous if you're undertaking it on behalf of the association.
Cindy Hill, Esq.:
And Alan, they may not also have insurance for that. Workers' comp can be a complicated issue, that's the insurance that covers people who are working. And it may be your volunteer falls off a ladder gets hurt and you find unfortunately, there's no insurance coverage for that for your community. So I also advise not to use volunteers for any dangerous circumstances. And do review with your insurance agent what your coverage is if you have volunteers doing much of anything 'cause people can get hurt crossing a room, holding something too heavy.
Alan Tannenbaum, Esq.:
I got a comment that I cut Cindy off before she was done with her portion of the presentation. So Cindy, is there anything you wanted to say that I didn't allow you to say?
Cindy Hill, Esq.:
Alan, you went ahead and gave an example that really just solidified the points I was making, which is that these decisions they're not get out of jail free cards. There's ramifications to the decisions the board make even when board directors are not personally going to be liable.
Alan Tannenbaum, Esq.:
Okay. There's a question from Tim. I will stay on for a few more minutes for the folks who want to hear some answers. What happens when boards alter replacement schedule for ruse, pavement, et cetera, delaying replacement by five years or so and leaving a community short on funding? Well again, if it's a condo, then under the provisions of the Safety Act that may cause the board some individual responsibility under the provisions that we talked about. Funding is a big problem with what's happened with the insurance premiums and boards have to look really closely at the rest of their budget. What can we defer in order to afford this exorbitant premium that we got to pay this year? And it's a really tough business decision, and again, the Condo Act and your documents don't say that the repair and maintenance obligation is suspended when the association doesn't have the funds to undertake the work.
Cindy Hill, Esq.:
Correct.
Alan Tannenbaum, Esq.:
And that's why the whole subject of condo terminations is coming to the forefront because with what the legislature has mandated, you might have an older condo with multi-million dollars of repair responsibility with a membership that is not in the position to be specially assessed and pay a special assessment to undertake that. And there may reach a point where the appropriate thing for that board to do is push towards a termination rather than try to keep this old building in very bad shape going, especially where the membership can't afford it. I had a termination situation in a condo in Tampa, and they needed to assess the owners $30,000 each to do repairs. And there was a potential of each owner realizing $300,000 if the land was sold and the condo is terminated. And I confronted a woman who actually was handicapped at the condo meeting where termination was being discussed, and she said, "Where am I ever going to find a unit where I can wheel my wheelchair right into the first floor unit?"
So she voted against termination and then the board said to her, well you're going to have to pay the $30,000 assessment for repairs. And she said, "Well, how could I possibly do that? I'm handicapped with no income." And the dilemma for the board was that, well, there were only two possibilities. The repairs had to be done or the condo terminated, but there was no third alternative, and this owner didn't want either. I don't want to be assessed and I don't want to lose my unit and those are some very tough conversations. We've had other condos that the owner said, you can't terminate my beachfront condo 'cause I'll never be able to afford another condo on the beach. Well, that may be true, but unless you're willing to come up with the $150,000 necessary to do your repairs where are you going to be? So I think we basically covered. Somebody's asking about the reserve studies and so forth, and that's a little bit too in depth to get into here.
Jon Lemole, Esq.:
One comment, and this always comes up when we do a presentation on fiduciary duties and business judgment rule, and now the new condo safety legislation is why would anybody want to be a director at this point? Cindy always has a pretty good answer to that. So I'm going to paraphrase it real quickly, but Cindy will maybe jump in and provide her perspective. But at the end of the day, these provisions are not... You have to do something really bad. You have to disregard your duty significantly to face any kind of personal responsibility as a director. So you shouldn't look at these talks as something that it's a big scary thing. And there is a need for directors and there is a need for good people to manage communities, manage them effectively and that should not be a scary thing. Comply with the statutes, use due diligence, rely on experts, vet the vendors, don't engage in self-dealing, act in good faith and you're going to be fine. Cindy, do you have anything to add to that?
Cindy Hill, Esq.:
That's really the synopsis other than some people are not necessarily going to want to be the bad guy, so to speak, the one with the bad news. So I think that's a reality that the managers are dealing with. So at the same time, their counsel should tell them exactly what Jon just told you, what I would tell the group if John had not. There really is no reason for board directors to feel that they're going to be personally liable for their actions as long as they're acting in good faith and using professionals. And if they are concerned, checking with your insurance agent over the directors and officers liability coverage is always a good conversation to have.
Jon Lemole, Esq.:
Right. Generally you have coverage for that, for your actions.
Alan Tannenbaum, Esq.:
And John and Cindy, the only counter I would have to say is if you're in an older condo subject to the Condo Safety Act and you have to meet those requirements. And again, the thought process, well, let's delay the reserve study or let's delay getting the inspections that are required 'cause our group can't afford it or we are paying too much for insurance, so let's do it next year and you're at that deadline. The Florida legislature seems to be saying or may be saying that that's an exception. That even though your heart was in the right place, so to speak, you're still going to have personal liability, so that would be the only exception. And again, the whole premise of the presentation today is the legislature always takes us lawyers on a journey and the associations with us.
Cindy Hill, Esq.:
Well, now that's why I said a board working with professionals. If a board is working with their general counsel, working with engineers on these issues, doing their due diligence, that's going to be the protection that they are needed. As opposed to ignoring it, kicking the can down the road, which is of course what created this whole statutory provision.
Alan Tannenbaum, Esq.:
All right, the last question somebody's asking about every year, this comes up about a freebees include cookies, candies, or gift back from vendors. Are they bribes or are they considered not valuable? Isn't there a dollar limit, Cindy?
Cindy Hill, Esq.:
$25 is the statutory limit. A bit unreasonable with today's inflation to think that anybody getting a benefit more than $25 is somehow getting a kickback. But that's what's in the statute.
Alan Tannenbaum, Esq.:
So what if a big gift basket is delivered to a management company. If they share it among like 10 managers and it's under $25 each, is that okay?
Cindy Hill, Esq.:
Well, honestly there's not a lot of law out there on this being enforced, which doesn't mean it shouldn't be recognized. I'm not saying that, but I think you could make a good faith argument that if a basket was sent to a group of people that a management company with five, 10 managers and the basket's worth maybe let's say $75, you're not in violation of the statute. I find again, the $25 is really rather unreasonable because if you went out to lunch with a manager at let's say a little more on the water upscale location, $25 for lunch could run up quite easily if somebody had some snow crabs and a few things. And that wouldn't seem to be a kickback. What I advise in these situations is don't take what appear to be obvious kickbacks. I mean, if a company's trying to send a manager, hey, we want to give you this TV 'cause we really want you to encourage your board to hire us. Again, acting in good faith is going to keep you out of this, but I can't give full advice on this 'cause there's not a lot of pointers and $25 is not a good measure in today's economy.
Alan Tannenbaum, Esq.:
And one of the exceptions is if it's an educational presentation which is why when you go to vendor lunches that they give educational presentations as part of it, besides the CEU credit, it's an exception. It makes that lunch not a bribe because you're actually learning something. That's what the legislature has said that as long as there's an educational component. So if we take you out to lunch, we're going to have to bore you for 10 minutes with an education on some topic and then we're good. All right, we are going to conclude. I think we covered most of the questions. If anyone has a question that wasn't answered, you can contact us and we will answer it if we can.
We always get the question about co-ops and we always leave you out because it's such a small population in Florida, but I think that fiduciary obligation requirements of the co-op statute are very similar to what's in the Condo Act. And so yes, you're going to be facing the same restrictions. So we're going to close down for today. Thanks everybody for attending, and we will figure out a great topic for January. Everybody have a great holiday season. Merry Christmas and happy Hanukkah if you do that, and we'll see you all back in 2023. Goodbye everybody.
