SERVING BEYOND TERM?
Problem: Some members of the board continue to serve after their terms have expired, because no one wants to take their place.
Solution: This is a common problem. Few condo owners want to volunteer for what can be a thankless role, at best; and even if there are candidates willing to run, associations can’t always attract the quorum required to elect them at an annual meeting.
Many boards take the path of least resistance, allowing board members to serve beyond their expired terms, or (if one or more members have resigned) continuing to operate with fewer members than the governing documents require, assuming that it won’t be a problem. And it may not be – until the association applies for a loan or is sued – when it may become a very difficult problem, indeed.
As part of its review of the association’s loan application, a lender will typically request a “due authority opinion’ from the association’s attorney or the lender’s attorney, verifying that all current board members have been duly elected. If that is not the case, the lender may reject the loan.
Unpopular board decisions – approving a dues increase or imposing an assessment to finance a major capital expenditure, for example –may also trigger questions about the board’s authority. In fact, one of the first things an attorney representing a plaintiff in a suit against the board will typically raise is whether the board members were authorized to make the disputed decision. If one or more board members were not duly elected, as prescribed by the association’s governing documents, the legitimacy of the decision may be in doubt.
Insurance ꟷ or the lack of it – is another potential concern. Directors and officers (D&O) liability insurance protects board members if they are sued for official actions. Board members who have not been duly elected may not be covered by this insurance. If these trustees become aware of their potential risk, the board is likely to have even more positions to fill.
There are remedies. If a decision is being challenged – or is likely to be – the board can call a special meeting, scramble to get a quorum or to collect the proxies required to elect the board members whose terms are in doubt. The board would then have to vote again on the disputed issue to legitimize it. This solution may work, but it would be far better to avoid the problem than to engage in the fire drill required to solve it.
So, our best advice is to be proactive.
Make sure your board is duly constituted and correct any problems before a lender, a disgruntled owner, an opposing attorney or an insurer identifies them.
Start by reviewing the governing documents to see what they require and what they allow. Some documents allow trustees to continue serving after their term has expired until a successor is elected. Some allow the board to appoint a successor to serve the unexpired term of a trustee who resigns. Both are temporary measures. Documents typically don’t allow trustees to serve indefinitely, but they often provide legal cover for the decisions they make until an election is held. You want owners to elect trustees as soon as possible, either at the next annual meeting or at a special meeting called for that purpose.
Finding candidates willing to run and achieving the quorum required to elect them are real problems. But that doesn’t mean you shouldn’t try. Sending an urgent letter to owners explaining that if a board can’t be constituted, a court could appoint a receiver, at the association’s expense, who will assume full control of the community, often brings owners to their senses. Once those alarm bells are rung, someone will almost always step up to run for the board, and owners will almost certainly vote to elect them.
Other steps the board might consider to avoid board legitimacy questions:
Amend the governing documents.
Add language authorizing the board to appoint members to serve unexpired terms if the documents don’t provide that authority.
Amend existing language that allows interim appointments to specify that an appointed trustee can continue serving until owners elect a replacement.
Reduce the quorum requirement from a majority of owners to a more readily achievable level ꟷ 33 percent is a common change. Authorizing mail-in ballots or electronic voting can also make it easier to meet the quorum requirement.
Take care of housekeeping details. When trustees resign or new trustees are elected, the trustee certificates on file with the Registry of Deeds should be updated to reflect the changes. The association’s manager or a member of the board should review the certificates annually to make sure they are up to date. This small step, often overlooked, can avoid problems that tend to arise at the most inconvenient times possible.
Reducing the risk that board decisions may be challenged is the primary reason for ensuring that the board is duly constituted, but not the only one.
Appearances matter. If the board is lax in following the rules about its own organization, owners might reasonably question whether it is lax in other areas – enforcing the rules or managing association finances, for example. You want owners to assume the board is focusing carefully on governance details; you don’t want to give them cause to question whether that is the case
Contact Mark Einhorn for questions concerning board members, terms and continuing same.