2018 Legislative Update – Condominium Association Board of Director Conflicts
In this third blog post in a series providing 2018 legislative updates, we discuss legislative changes clarifying condominium conflict of interest statutes. Parts one and two of this series addressed record keeping of condominium associations, material alteration requirements, and material alterations as they relate to electric vehicle owners.
CONFLICT OF INTEREST UPDATES AND CLARIFICATIONS
Effective July 1, 2018, HB 841 clarified condominium conflict of interest statutes by combining pre-existing Condominium Act requirements with the new conflict of interest regime that the Florida Legislature adopted in 2017. In 2017, the legislature created Section 718.3027 to add various new requirements and remedies in relation to condominium association board of director conflicts. The changes were a legislative response to a Grand Jury Report issued by Miami-Dade County State Attorney Katherine Fernandez Rundle that identified corruption and election issues as a major challenge facing South Florida condominium associations. However, in adopting Section 718.3027, the Legislature did not address or change the already existing Section 718.3026(3), Fla. Stat., which already governed the procedures required to adopt “interested director transactions”. This left two overlapping and confusing statutory frameworks in place.
HB 841 now eliminates Section 718.3026 (3) and incorporates it within Section 718.3027 (2). Section 718.3027 (inapplicable to timeshares), established a rebuttable presumption of a conflict of interest if either of the following occurs without prior notice: (1) a director or officer, or their relative, contracts to provide goods or services to the association; or, (2) a director or an officer, or their relative, holds an interest in a corporation, LLC, or other business entity conducting business with the association or proposing same. If a director or officer, or their relative, proposes to engage in an activity that presents a conflict, the proposed activity must be in the meeting agenda, which must also attach all related contracts and transactional documents. The new law establishes detailed requirements for the meeting and the conduct of the conflicted director/officer. The 2018 legislation ensures that these detailed requirements now incorporate and are consistent with previously existing requirements for interested director transactions (incorporating and updating a framework from the not-for-profit corporate act).
A contract entered into between a director or officer, or their relative, and the association, not properly disclosed as a conflict or potential conflict, is voidable and terminates upon the filing with the board of a notice terminating the contract containing the written consent of at least twenty percent of the voting interests. Even if the Board properly approves the contract, there is another cumbersome and confusing mechanism for members to void the contract at the next membership meeting.
Various unresolved ambiguities include, without limitation: defining “an interest” in an entity, especially in the pre-turnover context; voidability of contracts entered into in violation of Section 718.3027 when the Board had notice of the conflict; and, the interplay between 718.3027 and 718.112(p), which outright prohibits association contracts with service providers if at least one percent of the provider’s equity is owned by a director, officer, or their relative. One statute now prohibits such service contracts while another seems to permit them under certain circumstances. It will be up to the Courts to reconcile these various ambiguities.
When seeking representation from a condominium or association law attorney, be sure to speak with attorneys who stay abreast of the latest legislative developments. Contact us to schedule a call to discuss your homeowners association’s needs.