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Red Flags - When to Watch Out For the Danger Signs

Over a period of years, sitting on the board of directors of an association can sometimes lull one into a false sense of security. You have been doing this for years; things are quiet. The manager is doing their job, meetings are running smoothly, assessments are being collected, property values are up and so on.

All of a sudden, the board president is served with a summons for a lawsuit where all of the board members have been named individually as defendants in a suit for an injunction to prohibit certain board actions. The board submits the suit to its directors and officers insurance carrier for defense and then finds out the policy excludes defending any cases that do not seek monetary damages. Sound farfetched? True Story!

A board of directors can become complacent because they have never had to address an owner uprising, or a belligerent member or a lawsuit attacking the board decision-making.

The following are actual examples of situations where the board and/or the property manager were caught off guard because a situation arose where the proper checks and balances were not put into place in advance:

A Board member used a racial epithet in voting to reject a proposed purchase of a unit, causing the association to exercise its right of first refusal. They had to defend a civil rights case with no insurance coverage.
A developer included language in a declaration granting rights of use to the swimming pool to a neighboring association and allegedly no one paid attention to that provision in the covenants when they purchased their home. They sued the new owners to bar them from the pool, the developer for putting them in this predicament and the Village for allowing it to happen. The hapless owners in the association with the pool had to pay tens of thousands of dollars in attorneys fees to the other side after the "frivolous" case had been dismissed.
An association sued the developer but no one checked the declaration to see that this required the approval of 75% of the owners.
After adopting a no-renter amendment, the board discovered that the developer put a provision in the declaration that it can be amended by 75% of the owners, except to eliminate leasing, it required 100% owner approval.
The developer kept ownership of the pool, clubhouse and parking area and leased it back to the association for 99 years. The association paid rent, all maintenance, insurance and taxes, in addition, costing each owner an additional $25.00 per month.
A group of owners begins circulating correspondence in the name of "Concerned Owners of ____________." (When you see the moniker "concerned owners," start checking your directors and officers coverage and availability of legal counsel.)
The president of an association instructed the security guard to break into the dry cleaner that leases space in the building, so she could take out a dress she forgot to pick up during regular business hours.
The board wanted to hire and give sole control over association funds to an owner who was a money manager.
One of the directors was a lawyer and started offering the board legal advice to save the association money.
The rules prohibit "for sale" and "for rent" signs on any lot, so an owner puts a "for sale" sign with an address and phone number in his car window.

It is obvious that the problems which arise in the course of day-to-day living can wind up in the board of directors’ lap. Quickly reacting to certain situations without overreacting, establishing a primary and secondary strategy and consulting with the property manager, legal counsel, the insurance agent and the accountant (when appropriate) can save the board hours of hand wringing and many thousands of dollars.