Pitfalls for agents on the boards of HOAS
07/31 Agents often serve as directors on the Boards of the HOAs in which they reside. Service on the Boards serves the community in several ways. Agents bring real estate expertise to the Board. They bring financial expertise. As agents hoping for leads and sales, they are interested in preserving and enhancing property values. This motivation coincides with the interests of all the Members and the HOA. Agents are motivated to enforce the covenants to maintain the standards in the community.
Conflicts of interest can arise when an agent represents a homeowner in the community, if the agent also serves on the Board of Directors. Consider the following example. The homeowner hires the agent to sell the home. The homeowner is in financial difficulty. There is a trustee sale scheduled. The agent brings an offer that is sufficient to cover the first mortgage. However, there is not enough money to pay the delinquent HOA assessments in full. As a Director on the Board, can the agent try to persuade the other directors to compromise the HOA's assessments to close the deal?
Consider another transaction. The homeowner has a ramada that is visible from neighboring property. The homeowner did not submit the ramada for architectural approval. In its resale disclosure, the HOA lists the ramada as a violation. Can the agent serving on the Board try to convince the Board that the Board has waived the violation?
Arizona law has recently changed on conflicts of interest for directors on Boards of HOAs. This law firms encourages directors to think in terms of divided duties of loyalty, rather than conflicts of interest. In the scenarios described above, the agent has a duty of loyalty to the selling homeowner. The agent serving on the Board also has a duty of loyalty to the HOA. The duties collide, or are divided, in the scenarios above. The interests of the selling homeowners do not coincide with the interests of the HOAs. ARS sections 10-3860 to 3864 cover Director's Conflicting Interest Transactions. These laws provide legal protections to a director who has a conflict of interest on a transaction, if the director complies with the statute. The director must make a full and fair disclosure of the divided loyalty. The director should not participate in the deliberations on the matter. The director should not vote on the transaction. This law firm advises directors with divided loyalties to leave the room during the deliberation. If a majority of the Board approves the transaction under these circumstances, the director with the divided duty of loyalty receives legal protection.
Arizona law has changed on this point, but just for HOAs. The legislature passed HB 2311 effective August 2004. The bill is codified at ARS section 33-1811 for planned communities, and 33-1243(C) for condominiums. This new law provides that if there is a transaction on which a director has a divided duty of loyalty, the director must declare the conflict in an open meeting. The director must make the disclosure before the vote is taken. The covered transactions include those in which the spouse or family member has an interest. The statute provides that the director can vote on the transaction, if the director makes the disclosure. If the director does not make the disclosure, the transaction is void and unenforceable. The suggestion that the director can vote on the divided loyalty transaction is at odds with ARS sections 10-3860 to 3864.
In both scenarios set forth above and under ARS sections 3860 to 3864, this law firm still advises that the agent who serves on the Board should leave the room while the Board deliberates on the transactions. If the agent follows the new law for HOAs, makes the disclosure and votes on the issue, the agent still risks losing legal protection if the transaction is challenged. The new HOA law seems to "bait" directors to vote on divided loyalty transactions. Don't take the bait.
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