Community association directors and officers sometimes feel as if they’re required to wear many hats. In the course of any given time span, a director may need to make decisions that touch on the realm of expertise of reserve consultants (what are the useful remaining lives of various common elements and the cost to replace them), contractors (what is the most cost effective method to use in repairing/replacing the common elements), engineers (how do we correct a structural defect once and for all) and attorneys (what actions must be taken to ensure that the restrictions are enforceable and assessments are collected timely), to name just a few. Not only are there very few of us who can legitimately feel comfortable wearing such an array of hats, but there are also some very good practical and legal reasons for not even making the attempt in the first place. Relying on professional advice can help shield the association directors from potential liability and ensure the more efficient use of finite association resources.
Picture this – you sit on the board of a 200-unit condominium project constructed in the late 90’s. Due to community concern over increased assessments, the association’s reserve fund is maintained at the minimum 10 percent of current annual budget level required by Michigan law. From the growing number of work orders to repair leaking roofs and frequent complaints about the deteriorating roadways, it is obvious that the project will require considerable expenditures to regain its former luster. Co-owners are already paying off an additional assessment for extensive and unexpected sanitary sewer repairs, and you have been notified of a substantial increase in the insurance premiums for the coming year. The mood in the community is vehemently against assessment increases. The Board is facing tough decisions.
How can you build a sufficient reserve to stem the flow of constant assessments? How much do you raise the annual assessment? Do you continue to dip into the reserve account to merely patch the roof and road problems? If so, how long will it be before this “band-aid” approach is no longer useful and more extensive repairs are needed? What is the remaining useful life of the project’s roofs, and how much longer can you expect the patches on top of patches on the roadways to hold up before a more comprehensive fix is needed?
If you are an expert in reserves, roofing and road construction, these answers may come easily to you. Even if you know the answers, you cannot help but be influenced by the mood of your neighbors, and may shy away from a necessary business decision. A consultation with the appropriate engineer or contractor will give you a better understanding of the best courses of action, both in the long and short term. A reserve study, conducted by a competent professional, could help your board map out an intelligent and cost-effective plan of action for the future without requiring you to switch hats from roofer to engineer to accountant to actuary, and without leaving you legally responsible for the resulting decisions.
Directors also wear the hat of neighbor to the constituents they serve and whose wallets they affect. Faced with the prospect of having to levy that $10,000 per unit assessment to repair association roofs, some directors may hesitate out of sensitivity to their neighbors’ reactions. They may then attempt to cut corners or delay the inevitable, only to find to everyone’s dismay that their inaction or “band-aid” approach has resulted in the need to spend additional sums to correct a deteriorating problem or to undo what should have been done right in the first place. In a worst-case scenario, these once friendly neighbors suddenly become armchair quarterbacks, second-guessers, or worse yet, litigants. If you are following professional advice, you have not only added protection against liability, but you can depersonalize a painful decision impacting your neighbors.
If these neighbors attempt to hold the directors legally accountable for their actions or non-actions, such conduct is reviewed under the standard of ordinary care. Because most associations are nonprofit corporations, the duties of a director or corporate officer are governed by MCL 450.2541, Section 1 of which states in pertinent part:
A director or officer shall discharge his or her duties as a director or officer including his or her duties as a member of a committee in the following manner: (a) In good faith. (b) With the care an ordinarily prudent person in a like position would exercise under similar circumstances. (c) In a manner he or she reasonably believes is in the best interests of the Corporation.
What would the “ordinarily prudent person” acting in good faith who knows nothing about broadband technology do when faced with the task of reviewing competing and complex proposals to supply the association with telecommunications services? To discharge their duties in a manner that would pass muster under the above standards, they have has two simple choices: one, devote the required amount of time to becoming an expert in contract and telecommunications law in order to intelligently advise the association of its options, or, two, pass the task to someone already wearing those hats. In almost all cases the second option is the smartest and safest choice.
In fact, the law encourages the use of experts. The same statute that sets out the standard of care continues:
In discharging his or her duties, a director or officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by… legal counsel, public accountants, engineers, or other persons as to matters the director or officer reasonably believes are within the person’s professional or expert competence.
These categories are not exhaustive, and a director or officer is entitled to rely in good faith on the opinions of other experts as well. However, the lesson is clear. The decision to a apply a short-term repair to a roofing problem, could come back to haunt the officer or director who reaches that decision on the strength of their own “expertise.” That same decision which might be ineffective, should not subject the director or officer to potential liability as long as the decision to go that route was arrived at in good faith in reliance on the advice of a competent expert.
Michigan Courts are reluctant to substitute their judgment for that of corporate directors unless there is a showing of bad faith or fraud, and in the absence of evidence to the contrary, will afford the director or officer a presumption of good faith and fair dealing. In other words, the association officer who relies upon the advice of a competent expert selected with reasonable care can rest assured that their actions taken as result of such advice will not be subject to second-guessing or the imposition of liability by the courts.
Very good legal and practical reasons exist for the association directors understanding their limitations and not trying to wear too many hats. Passing the hat to an expert can do away with the need to educate oneself in a technical or complicated area and minimize the disruptions in relationships with one’s neighbors, to say nothing of eliminating the need for a larger hat rack.
- Evan M. Alexander is a Michigan Condominium Attorney and an associate at Makower Abbate Guerra Wegner Vollmer PLLC. Mr. Alexander focuses his practice primarily in the areas of Michigan Condominium Association and Michigan Homeowner Association law. Mr. Alexander is a member of the Real Property Law and Young Lawyers sections of the State Bar of Michigan and also a member of the Community Associations Institute.
- Nathaniel (“Nat”) Abbate Jr. retired from the Firm in 2016 after practicing law for more than 35 years. Nat was an integral part of the Firm and was primarily responsible for all of the litigation work for over a decade. Nat is a member of Mensa, the Real Property Law and Master Lawyers Sections of the State Bar of Michigan and is also a member of the Community Associations Institute.