Homeowners’ Association Directors May Contract with Association Subject to Members’ Right of Cancellation

March 17th, 2015

Posted in Business & Corporate Law

Are you concerned about a contract that your Homeowners’ Association has entered into with a company owned by a member of the board of directors?  Are you a director of your Homeowners Association who wants to provide a service to the Association but concerned with a potential conflict of interest? 

Section 720.3033(2) of the Florida Statutes addresses contracts entered into between the Association and a director or other entity in which the director is financially interested (called “interested director transactions”).  Specifically, Section 720.3033(2) provides:

[i]f the Association enters into a contract with any of its directors or a corporation, firm, association that is not an affiliated homeowners’ association, or other entity in which an association director is also a director or officer or is financially interested, the board must:

  • Comply with the requirements of s. 617.0832;
  • Enter the disclosures required by s. 617.0832 into the written minutes of the meeting;
  • Approve the contract or other transaction by an affirmative vote of two-thirds of the directors present; [and]
  • At the next regular or special meeting of the members, disclose the existence of the contract or other transaction to the members. Upon motion of any member, the contract or transaction shall be brought up for a vote and may be canceled by a majority vote of the members present.

Under 720.3033(2)(a), which incorporates section 617.0832 of the Florida Not For Profit Corporation Act, requires that:

  • The existence of the relationship of the director to the party to the contract with the Association must be disclosed or known to the board of directors or committee which authorizes, approves or ratifies the contract.  Also, the board or committee must approve the contract by a sufficient vote or consent without counting the vote or consent of the interested director; or
  • The existence of the relationship must be disclosed or known to the members entitled to vote on such contract transaction, if any, and they must approve the contract by vote or written consent (rare); or
  • The contract or transaction must be fair and reasonable as to the association at the time it is authorized by the board, a committee, or the members.

Additionally, in any vote to approve or ratify an interested director contract, the interested director’s vote is not counted, whether it is being exercised as a member or director.

It is important to understand that directors have a fiduciary obligation to act in the best interests of the members and should not seek a position on the Board for personal gain.  However, there are instances where a director or affiliated entity is in the position to provide a good or service to the Association in a manner that is fair to all parties.  Whether you are concerned about the fairness of a contract entered into between your Association and a director or affiliated entity, or whether you are a director who would like to provide a good or service to your Association but want to be sure that you are complying with your legal and fiduciary obligations, you should contact an attorney who practices homeowners’ association law for assistance.

Share Button