Board Member Responsibilities and the Reliance on Experts
Recent events in Florida have illustrated how deferred action can potentially result in catastrophic and tragic consequences. Although an extreme example of how things can go awry, it is certainly not unusual to hear of boards and associations failing to identify, or deciding to postpone, significant repair work. As industry experts, policy makers, and legislators endeavor to create standards to help prevent the re-occurrence of similar disasters, board members and managers seek practical guidance on their obligations and liabilities.
The standard of care is well recognized. As codified in Sections 3303/5303 of the Pennsylvania Uniform Condominium (UCA) and Planned Community Acts (UPCA):
… [M]embers of the executive board stand in a fiduciary relation to the association and shall perform their duties, including duties as members of any committee of the board upon which they may serve, in good faith in a manner they reasonably believe to be in the best interests of the association and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances …
This standard applies to every officer and member of an association board, regardless of a community’s age. A board that is transitioning from the developer must thus meet the same standard as one of a forty-year-old condominium. The standard is relevant to every task and obligation imposed on a board by statute and the governing documents – this discussion will focus on the responsibilities to maintain, repair and replace common (and in particular significant or structural) components of the association.
Board members are not required or expected to have special knowledge or experience, or to be engineers, architects, contractors or lawyers. What is expected is that they exercise due care and reasonable inquiry – which essentially means that they must ask questions and seek advice on matters outside of their realm of knowledge and expertise. The ability to obtain and rely upon such advice is also codified in 3303/5303 of the UCA and UPCA:
….In performing his duties, an officer or executive board member shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:
(1) One or more other officers or employees of the association whom the officer or executive board member reasonably believes to be reliable and competent in the matters presented.
(2) Counsel, public accountants or other persons as to matters which the officer or executive board member reasonably believes to be within the professional or expert competence of such person.
(3) A committee of the executive board upon which he does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the officer or executive board member reasonably believes to merit confidence.
While easily the subject of a separate article, recognizing when an expert is needed, and choosing the correct expert, are equally important. Perhaps structural analysis is a bad example (because it is such a specialized field); however, boards should generally err on the side of caution, and should seek independent advice when there is doubt as to the extent of their own capabilities. Once the decision to seek such advice is made, the UCA and UPCA permit reliance only on consultants as to matters which the board member “reasonably believes to be within the professional or expert competence of such person”. Moreover, the following caveat applies:
An officer or executive board member shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause his reliance to be unwarranted.
Board members must therefore be reasonably satisfied with the qualifications of its consultants, and cannot ignore their own personal experience or knowledge which could call such reliance into question. This applies not only to the qualifications of the consultant, but also to the opinions or advice which is rendered. For example, an attorney board member cannot reasonably rely on legal advice given by a non-lawyer, nor on conclusions which the attorney board member otherwise knows to be incorrect. While it may be obvious, “reliance” is only warranted if the board indeed listens to, and acts in accordance with, the advice that is given.
The advantages of obtaining and following the advice of a qualified expert are clear:
1) The association receives correct advice on a particular subject (is informed and is able to defer to the information if questioned by owners);
2) the retention of a qualified expert is evidence that the board has performed its due diligence (is meeting the standard of care); and
3) decisions which are made in reliance on that expert should withstand legal challenge (are generally protected by the business judgment rule).
OK, but what does all of this mean? For members of a first unit-owned elected board, best practices recommend a transition study, which is an independent evaluation (independent from the developer or the municipality) of the quality and function of initial construction – a document to confirm that what the developer promised is in fact delivered. It consists of an engineering/architectural review and analysis of the design, construction, and performance of the components of the association. Generally included are all common infrastructure, stormwater management, and building/structural components of a community. In many cases, a transition study results in a punch list of construction deficiencies which then forms the basis of negotiations with a developer; in some cases, it reveals significant defects which are thereafter the subject of litigation. In either event, having a transition study completed provides written confirmation that components of an association are properly constructed (or not), and that the lifespan of these components will be as expected.
A reserve study is an essential budgeting tool. Typically prepared by engineers, their main purpose is to evaluate the condition and life span of the components and installations for which an association is responsible , and to prepare methods of funding to assure that ongoing maintenance and ultimate replacement are properly financed. For example, if the association is responsible for roof replacement, this study will evaluate the condition of the roof, determine the anticipated remaining life, estimate the expected cost of roof replacement at the end of that time period, and recommend funding methodologies to meet that expense at the time. Reserve studies not only consider the condition and quality of the relevant component (and may indeed reveal significant defects that require immediate attention), but also the anticipated costs of materials, labor, investment income, and inflation. For that reason, it is important to update a reserve study every 3-5 years to 1) confirm that the association’s reserve components are not failing prematurely (appear to be meeting their expected life span) and 2) that predictions as to anticipated costs, interest income, and inflation remain valid. A reserve study will also confirm the amounts currently on hand, and whether increased contributions are necessary to meet expected costs.
Whether structural evaluation or invasive testing are appropriate depends on the component, construction, and age of the association. Transition and reserve studies generally describe their scope, and within them, may recommend further structural evaluations or forensic analysis. This advice is sometimes contained in a narrative enumerating limitations, exclusions, or exceptions. Structural evaluations are not limited to high rise concrete and steel, and may be necessary during transition or any time thereafter. Stormwater management systems, roads, decks and many other building components all contain “structural aspects”. It is thus essential to work with the engineer (during a transition study or a reserve study) to determine whether, and the extent to which, further investigation of a specific item of construction is indicated. As stated above, these recommendations should be evaluated and followed.
As volunteers, board members take on significant responsibilities; serving is serious business. While this article does not address common expenses and the constraints on (and often vehement objection to) increases in assessments to fund them, the standard of care requires due diligence and reasonable inquiry. Board members need not be experts; they should recognize, however, “what they don’t know”. The reliance on experts is not only an important factor of meeting a legal standard, it provides boards with the information necessary to make and support difficult and impactful decisions (and may reduce the number of sleepless nights).
This article is not legal advice and is provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction.