Monday, September 22, 2014

Does your board undertake "Due Diligence"?

Directors are often told they should "do their due diligence" before making certain decisions on behalf of their associations. How many people actually understand what steps are needed to fulfill that directive?
"Due diligence" is defined as an investigation of a business or person prior to signing a contract, or an act with a certain standard of care.
The foregoing definition, however, might not be enough for some boards or managers to map out a plan. The steps needed to diligently assess something or someone will change depending on the circumstances but what follows are some basic methods to undertake due diligence.
1.      When evaluating a potential association hire, using a thorough application, holding a personal interview, making calls to former employers, requiring a skills test and perhaps even a personality test can all give the board a better picture of the person they may be hiring. Naturally, your board will want to pick and choose from this list depending on the type of employee you are hiring. It is also important that the person with whom the job candidate will be interacting most closely post-hire has some contact during the evaluation process to ensure a productive working environment.
2.      When hiring a professional advisor such as an attorney, accountant, manager, engineer or architect, you will want to confirm that the candidate has the skills and resources your community needs. For example, if you are considering complicated litigation, you should hire a firm that specializes in your specific problem or issue rather than a firm that may only occasionally handle that type of litigation. You will also want a firm that has the resources to continue a protracted fight. When considering any professional advisor, you will want to ensure the individual or company has a good reputation in the industry, a proven track record and verifiable credentials.  Naturally, it is better to hear great things about your candidate from others as opposed to hearing them only from the candidate.  Check out your candidate online. Does the firm or individual have a presence? Can you see what resources they possess? Beware though as not every professional writes his or her own material; sometimes those blogs, papers and summaries are ghostwritten by PR firms. Be blunt and ask your candidate whether or not their written materials are their own. While there is nothing wrong with a targeted marketing campaign, if a professional creates a misleading image that his or her company is larger or more successful than it is, beware. Ask how many employees actually work there and see if their website backs up their claims. Ask to see documentation to verify any success stories. Google can also be a useful tool to see what others are saying about this individual or company.
3.      When hiring a contractor to perform any type of work in the community, be sure to confirm that the contractor's commercial license is active, that the license is the type you need for the work you are requesting and investigate any complaint history and resolution of those complaints with both the State and the Better Business Bureau.  Checking references with associations who previously used your contractor candidate for the type of project you are considering is also essential to your due diligence.
While there are no guarantees that a properly vetted candidate will go on to perform good things for your community, an improperly vetted candidate can spell disaster. Boards who understand the need to perform due diligence tend to avoid costly problems down the road.

Tuesday, September 2, 2014

Five things a community association Board of Directors should never do!

I have represented association boards for more than two decades and served on my own HOA board at one time so understanding the mechanics of a volunteer board comes easy at this point. Part of that understanding, however, is also an acknowledgement that boards often want to undertake certain actions on their own either as a means of cost-savings or because they simply don't understand the repercussions.

While the following is certainly  not an all-inclusive list when it comes to ill-advised actions , these five do come with significant and sometimes costly results if a board goes it alone. So what are the five things your board should never do?

1.      Negotiate the Legal Terms of a Contract.  Yes, we all know that you and your fellow board members previously signed legal contracts in your business careers and sign them personally now and again but doing so on behalf of your membership without having those contracts properly reviewed and negotiated by your association attorney is just bad business, period.

Boards can and should discuss with potential vendors what they want the business terms of a contract to look like: how long the project should take, what materials will be used, what it will cost, etc. However, ensuring that the contract language used actually garners you the results you negotiated is your association attorney's job and not yours.

2.      Fire an employee or vendor without seeking prior legal advice.  I am often asked at social gatherings by family and friends whether or not someone can be sued for this thing or that thing. My answer is always the same "Yes, if an attorney can be found who is willing to file suit (and let's be honest there is usually that attorney out there) then you can and likely will be sued."

Firing employees and terminating contracts with vendors are two areas fraught with the potential for retaliatory lawsuits. Tell people you no longer want them and many do not go quietly into the good night. There are legal issues involved with firing employees, particularly older employees so this is yet another area where expert guidance is absolutely crucial prior to taking action.

3.      Amend the governing documents. Far too many boards get this one wrong. They either use the retired personal injury attorney from out of state to draft changes to their documents or they task their reluctant manager with doing so.

Granted, if you are looking at an amendment as simple as changing the date of the annual meeting, it can seem like overkill to have your attorney draft a one-sentence change. However, some boards attempt to draft amendments with significant changes such as implementing age and occupancy restrictions which can subject the community to liability if they get it wrong. It is also important to remember that amendments should not be drafted in a vacuum-they must be crafted with an eye towards eliminating any conflict amongst similar provisions in each of the association's governing documents as well as written to ensure statutory compliance.

4.      Threaten Legal Action before doing your due diligence.  If you are going to threaten legal action, it would be prudent to determine beforehand if you actually have the legal authority to do what you wish to do. Threatening and losing often does more harm than not pursuing an action at all. Not only will you lose face, you will also likely wind up paying your opponent's attorney's fees and costs. Check with your attorney first to ensure that your contract, your governing documents or the law allows you to safely take the stance you wish to take.

5.      File an insurance claim for property damage without assistance. The process of becoming whole after a covered loss seems simple enough,doesn't it? Your association paid a (likely hefty) insurance premium and when you are damaged, you would think filing a claim is the only action needed. You would, of course, be wrong and perhaps a tad naive. In order to level the playing field, boards must acknowledge that the playing field isn't level to begin with and must enlist the assistance of experienced professionals (namely, your association attorney) to file and shepherd  their claim through an often artificially complicated process.