Recently, I have been seeing more issues concerning co-op and condo boards omitting to discharge their fiduciary duties. These situations often arise when unit owners perceive differential treatment or feel ignored by the board or managing agent.
Before addressing the applicable legal standards, it is crucial to consider the long-term eff ects of differential treatment of unit owners and the consequences of ignoring unit owners’ issues. Disappointed unit owners often react with mistrust, anger and resentment. Left to linger, these issues create dissension within a building and may result in persistent division among unit owners. For instance, when one apartment receives attention for a water or insect issue, while another with similar problems does not, hard feelings will persist. Without changes in the managing agent and board composition, nothing will ameliorate those feelings.
The legal standard for finding a fiduciary duty is a relationship “between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.” See EBC I, 5 N.Y.3d at 19, quoting Restatement (Second) of Torts §874, Comment a. Boards of cooperatives and condominiums are routinely considered to owe unit owners/shareholders a fiduciary duty.
A fiduciary duty consists of three distinct but interrelated responsibilities: the duty of care, the duty of loyalty and the duty to provide full, timely and truthful disclosure. Overlaying these duties is the obligation to act in good faith.
Briefly, the duty of care requires board members to act in the unit owners/shareholders’ best interests and consider all reasonably available information. The duty of loyalty obliges board members to require the individual board members to put the interests of the unit owners/shareholders and the building above their personal interests. They must act for their principal, not themselves. The duty of full disclosure requires transparency in the affairs of the building. There are instances where detailed information should not be disclosed, such as when the privacy needs of a unit owner outweigh the need to disclose specific facts or staff personnel issues.
Roof leaks into a unit may provide practical guidance. Assume the roof on the building leaks and only a few top-fl oor apartments are aff ected. Notwithstanding that board members may not be experiencing the leaks, their duty of care requires them to prioritize the best interest of the building. This means preventing water from eroding the slab, rusting rebar or damaging others’ property.
Having the roof membrane replaced or repaired is necessary. Under the duty of loyalty, board members must contribute to repair costs, even if their own units are unaff ected. Finally, the duty of disclosure requires informing residents of the leaking roof issue. Photographs of damaged personal possessions, as opposed to damaged walls or ceilings, should not be shared as they may compromise the privacy of the apartment dwellers suffering the leak.
Two simple rules will help board members navigate these issues. First, when these issues arise, imagine a headline in “ The New York Times” and shape your conduct to make the best public-facing result. Second, consider how you would like to be treated if you were the unit owner or shareholder and someone else was a board member.
Never personalize these issues; that is the path to trouble. These issues generally need to be analyzed from the perspective of the best interest of the building, that is, the physical structure. No matter how costly a repair may appear, letting the condition deteriorate will cause expenses to rise significantly. Once a problem arises, it will progressively become more severe and expensive. Addressing issues early will save money in the long run.
This column presents a general discussion. This column does not provide legal advice. Please consult your attorney for specific legal advice.
