 Richard Emory, you're a host for today's Kondo Insider. Kondo Insider is an educational program provided by Hawaii Community Associations, Hawaii Council Community Association. It's a nonprofit that does seminars and does what they can to help the industry through lobbying. Today, I've been on a kind of a campaign that boards seem to be more and more not following the requirements of the law and following the basic maximum of good governance. And I talked once before about the basic issues with good governance. And it's basically, it gets down to what your authority, duty, equity, and protection of minority, how you conduct those things within your project. So let me just kind of back this up. When you look at good governance, I'm going to go into more detail. Your declaration, which is the document that founded the condominium, establishes what the purpose of the condominium is, what the scope of the condominium is, and what the authority of the board of directors is. So the fact you have a board of directors doesn't mean you can do anything you want to do. It has to be within the authority vested in your declaration or by state law on what you can do as a condominium. I gave an example once before that if you decided, hey, it'd be a good business opportunity for us to open a restaurant, you make more money and reduce the maintenance fees. You don't have the authority to do that. It's a crazy idea, first of all, but you don't have the authority or decoration. Your obligations are to maintain the condominium project. Now, declarations establish bylaws. The bylaws of the document underneath the declaration. And it defines governance and how you're going to be governance. Elect a board of five, seven, nine people, whatever it may be. And they have a fiduciary duty to the association. And they have a duty to comply with the declaration of state law. And they have an obligatory duty to make business judgment that protects everybody. So if you happen to be, and this is one of the most common problems I see today, and I will just give you a couple of examples in a minute. So if your duty is to maintain the association, and your association is a mixed use association, consisting of residential and commercial, whether or not you live in a residential or commercial unit you own, you have an overall duty to the whole project, which means you have a duty to, if you're residential to also the commercial and vice versa, if you're commercial also to the residential. It doesn't mean everybody equally pays for things, but they might, depending on what the declaration says, because the declaration defines, as I would say, what you own and what you owe. And it tells you what your obligations are. And this is owned by the apartment owner. And this is the obligation of the apartment owner to pay for only residential swimming pool, whatever it may be. But some of the very, very old condominiums, when condominiums began in Hawaii, let's say in the 70s, there's actually earlier than that, but it became more prevalent in the 70s. Some of the very old condominiums, they never thought about residential versus commercial versus whatever. And basically the documents say you take all the costs and divide them. And so when you take all the costs and divide them, that means everybody pays for everybody else's. So if, for example, that old project, this is to explain your duty, says that everybody pays for everything. And so you want to replace the residential air conditioning. Well, then the commercial has to contribute it vice versa. It's all within the documents themselves defining what the authority is, what the obligations are. And the board has a duty to implement that, which is the third element of governance, which is equity. And equity is basically fairness. You exercise those duties in a fair manner to everybody, based on the rules, which is the bylaws, the declaration, in some cases house rules, to do that. And finally, the law leans towards the protection of the minority, just because you have a board of a majority of residential owners. And you might think you could do whatever you want. You shouldn't be picking on the commercial owners. I actually have a case right now I'm engaged in a homeowner association, where documents are very old. And they're about 30 years old. And what happens is that one element, the founding element of this association, it was written weirdly, so they could take advantage of the other phases that were added later on, because it was worded weirdly. But it's worded really for them and against them. So they simply cannot ignore the documents, what they said, and pick and choose the sentences they want. And because they control the voting power of the board, pass things based on probably not a legal opinion of attorney, because in this case, they didn't get a legal opinion from an attorney. Actually, I take that back. They got a legal opinion from a friend of the president who's an attorney in Arkansas, I think it was. Of course, he's not licensed in Hawaii, has no condo experience in Hawaii, but that's what they did when they made their decision. And came back weirdly to affect them with regard to how that case ended up. Let's kind of go through some of the issues. As I said, that the declaration defines the scope and the authority of the condominium, what you're to focus on, and who has certain responsibilities. And if it says that everybody has the responsibility, the board later can't say, I'm going to only have the residential, their commercial pay for it, because that's not what the documents say. So if you have a board that's majority residential, so they want to replace things for the residential, when it comes time to do the commercial, they take their voting power and say, well, we're not going to do that. That's commercial, you're a business, they'd be in violation of their duty. Because when they're elected, when you have a duty as a board member, your duty is to the entity, meaning the association. And it has to be done equitably, impartially, protecting the minority in accordance with the documents. And you may not like it. Someone said to me once that you look at a maintenance fee, and they're basically a percentage of common interest. Well, someone said, why don't think that's fair, that that unit is actually a little larger, and it pays a lower percentage of common interest, because that's what the developer said when he set it up. So I don't, I want to, as a board go say, you got to pay more. Well, first of all, you can see the problem, the declaration to find the percentage of common interest, the developer made the decision. When you bought in there, you've got to copy the declaration. So it's a contract, it's in your deed. And you're saying you want to change it. Well, you know, tremendous declaration takes 67% plus affected owners. So you couldn't just say, well, we'll go get all the residential to change the declarations that the commercial pays all, or whatever it may be, because you have to also have the approval, the effect of owners. But boards sometimes file lawsuits over this ridiculous notion that well, I don't think it's fair that unit's a little larger, they should be paying more as a percentage of common interest. Well, there's no provision for that. And when you bought in there, you got a contract and you have to pay what the the declaration says, and that's the end of the story. And if you didn't like it, you shouldn't have bought in there. And you can't amend it, because it would take 100% of the owners to approve a changing the percentage of the common interest. I've seen that done. I've had actually a project that got 100% owner and some very unique circumstances that got 100% owner and changed the declaration and what the percentage of common interest were. It's hard to do, particularly if you're trying to beat on one person. Why not pick one person you don't like and just make a declaration that that one person pays all the maintenance fees? Well, amend the declaration that, you know, 101 pays 100% of the maintenance fees. Well, that ignores the fact that you have to have the affected owners approval with respect to that. So when you look at your job with the board, you have an obligation towards ethics, judiciary duty, and you have to avoid any conflicts of interest. Now, here's an interesting thing about conflicts of interest. Who gets to decide you have a conflict of interest? Well, it's the person themselves that makes that decision. The board can't vote. I'm going to say you have a conflict of interest, and I'm going to keep you from voting on this matter because I think you have a conflict of interest. You can't do that. It's the person's obligation to say I have a conflict. If you truly had a conflict and he affected the outcome in the vote, then in fact, you would have potentially legal liability. But to simply say the board, I'm going to tell you you have a conflict, you can't vote on that, is not appropriate. The individual has to have, has the right to say, whether you have, he or she has a conflict, and then recuse themselves from voting, which brings up one more thing on that matter before we take a break. So all of a sudden, imagine a vote as follows. A motion to do something. Nine member board. Four board members vote yes. Of the remaining five board members, one is absent. Leaving four board members in attendance, of which one board member votes no, and three abstain. Do you have four yes, one no, and three abstentions, total of eight, one person's absent. Does the motion pass or fail? It fails. The bylaws and Robert's rules require a majority of the nine and for a majority of those present in some cases at the meeting. So if you have a meeting of eight, you need five. You have a meeting of a board of nine, you need five. And abstentions, although they're not recorded in favor or against, in essence, are not a vote in favor. So in that case, the board votes and says, okay, I'm going to pass, but the other people objected to kind of work this way out. But you need to understand, these have very significant implications, particularly when they involve legal matters. On that note, I want to come back to this, but we're going to take a break right now for a minute. We'll be back in one minute. I was talking before in the conflict of interest that it's up to the individual to make the statement, I have a conflict I can't vote. It's not up for the board to say they have a conflict. Interesting enough, I had a case on a neighbor island where if you can imagine, there was a contentious board not divided or not in agreement on things. And so as they continue to argue over a resolution at some point in time, got later and later, the board members said, well, you know, we're too late, I suggest we have a meeting later, we're leaving, you no longer have a quorum. So imagine you have a nine-member board and five people leave because you had all nine present, there's four left. Well, the member of the board who was there who was actually a former attorney in the sense that he had retired says, you know, my understanding of Robert's rules, that if you had a quorum at the beginning of the meeting and you lose the quorum halfway through the meeting, you still have a quorum for the meeting and those remaining can vote. They went ahead and the vote unanimously four to zero to do what the other five didn't like and were debating. Well, you can imagine what happened. The other five learned of that. They got an attorney and they fought a motion in court and they had it overturned because there's no truth to the fact that if you had a quorum in the beginning of the meeting and you lose the quorum, that you can continue to conduct business. Interesting enough, I had an annual meeting of a large project in Waikiki and it was very contentious with a new major owner who had a commercial hotel component to it. So they owned a lot of voting interest and so as we got the meeting going, a bunch of people stood up and said, we don't like this, we're all leaving, you no longer have a quorum. What that forced us to do was to temporarily recess the meeting, have everybody checked back in again who wanted to stay. We determined when everybody checked back in again, we had a quorum, so we continued the business. So you can't use the ends to justify the means. You have a fiduciary duty and you've got to make sure you run your association in good governance. And one of the things I said to you in this discussion where you began is the number one thing is what's the declaration. What authority do you have? You don't have all the authority you think you have. Frankly, the board has very little true independent authority on major issues. So for example, if you wanted to make a major improvement in your declaration said, you may need to get the owner's approval. It's argumentative whether you want to change the paint color of your building, whether you have to have the owner's approval, but the declaration would give you guidance on whether you need to go to the owner's or you don't need to go to the owner's. Well, certainly too, the board has to follow state law and federal laws as well. So the fact that you have the, you're running your association doesn't give you the authority to avoid your legal obligations as an organization within the state of Hawaii. So you got to be very careful of what your authority is because you only end up getting into legal litigation and spending tons of money with respect to that. So when you look at the authority to do something, you got to know whether you have the authority as a board, whether you need the owner's authority. Maybe you might need the Department of Land and Natural Resources or some other entity's authority. If you had a sea wall and you wanted to be prepared to sea wall, you couldn't do that without approval of the, either a deal on an R or one of the state agencies that deals with sea walls. You just couldn't do that. But the big mistakes the board makes in my opinion, I got to pull my notes here first, I don't have to get a hang, is when they have a board meetings, first of all, telling an owner who's been a president or thinking that the owner of a president who gives you something you're not happy with, that they represent all of the owners. Just because someone shares an opinion with you, you have to be cognizant of the fact that person's opinion, just because they're the only person at the board meeting, doesn't mean they represent all the owners, nor does it mean they represent a good idea. They're just expressing to you what they have to say. So I would say to you at any board meeting, treat them with respect, listen to what they have to say, thank them for sharing their comments, and make a business decision when you have to on that particular issue. Second big mistake I see boards make is I call it the traffic cop mentality. And that is a set of house rules, a set of policies. And as soon as something goes wrong, they find somebody $100 or $500, whatever it may be, and don't have a real program to talk to the owners as adults, maybe some of them aren't adults, but talk to the owners as adults to tell them that, look, we need your help, we don't want to find you, but we need your cooperation of not parking in the fire parking area anymore, or we need your help to not let your dog run free in the neighborhood. We need your help to clean up after the dog. So you're always better off not treating the owners as traffic cops and lecturing them, but trying to gain their cooperation and explain to them why you have them also rules. So the other thing I would tell you this day, you need to give at your board meetings by statute, owners have a right to participate in board meetings. And so most boards will call the meeting to order and say, when agenda item comes up, you know, we're going to have the board discuss the first before we take a vote, we'll welcome you to tell us your opinion. They might say you have a limit of two or three minutes, they might say you only can speak twice. This is not a time for owners to get an argument with the board, you have a business to run there, business meeting to run. So but the law allows the owners to participate, you can't say you only can speak at the forum at the beginning of the meeting, they have a right to deliberate all the deliberations of the board when they when they come about, they have a right to share their opinion without being disruptive to the to the meeting. The other thing I find that boards don't do well, they don't maintain accurate minutes. You know, actually, you know, people think minutes are a newsletter, you know, John said this, Sue said that, Fred said this, you know, and and so they're not a newsletter, it should be limited to motions that are adopted. And it should be limited to the specific things on the agenda where you voted to do something. It's actually a legal liability if in fact, you try to make your minutes into a newsletter and he said she says probably very hard to put in a he said she said exactly what he said is what she said. So it opens yourself up to all sorts of problems. It's important you keep accurate minute on the things you approve, because it may come back someday. Where did you approve this? So boards are meeting outside the board meeting or doing by email and doesn't get in the minutes. You've got liability, you have a problem, you haven't followed the law, you're supposed to make business decisions in a regular meeting. And so you want to make sure that you hold an accurate minutes to find all the things you agreed to do, or the things you disapprove, whatever it may be, because it's going to come back and haunt you if later on something goes wrong. I think boards do that actually I'm working with a client right now that I just got involved with them in the last 48 hours. And it's a consulting assignment. But in that case, the board president, they have deferred maintenance and they have issues regarding how to fix the project up. And he's gone forward. And basically said, well, I want to just assess the owners, we have a war chest to deal with this. And I think it's going to cost a million dollars. And no discussion is about how much money is in reserves? How does this affect our reserve study? How are we going to pay for this? And how do you know it's going to cost a million dollars? Because you have no expert saying, this is how we should fix the various parts of the project. You have no budget bids to fix it. But in this case, this particular member of the board thinks we should just assess the owners to get a war chest that we know we're going to have to do it. But you know, owners appreciate boards that act on factual data. And what has to happen in a case like that, is the board needs to retain experts and tell them how to make the repairs, what the costs are, and what the options are, and not believe that they know the answer when they don't have that experience. Even if they had an engineering architectural license, even if it's in Hawaii, indirectly they have a conflict of interest, unless they've been retained as a professional, and their business insurance is going to be covering the project if in fact something goes wrong. So the most important thing to do is when you have a problem and an expert would be a lawyer, if you have a problem on what the declaration means, what you can do or not do, and he may say this is the choices, and then they ask the question should be, well what are the risks if I choose A, B, or C? What are the potential problems you need to investigate? So the other thing I would say on that line that if it's dispute resolution with owners, remember you have under Act 187 the ability to have this new facilitated mediation where it's paid for by the real estate commission, except for the first hour that's by retired judges who can help in those types of cases involving owner disputes, that you have a way to get that before an independent person. So it's not the board or a fellow owner versus another owner fighting over the issue, you have the ability to very easily address these issues and to make it worthwhile. And so another problem I would say before we wrap this up is I find the boards don't put it any time in their reserves. They get a study, they have concept of how do we heat the maintenance fees low and all these different things, and they never really look at and ask themselves the questions does the reserve study and their components they've listed and their plan comply with Hawaii's state law and the administrative rules and so forth the law. And I wrote an article for CAI on this this month of you get the CAI magazine with all the changes, particularly with Act 62 this past year, you need to put more time in your reserve study and analyzing it making sure that you have it covered and you have enough money in your account because it's back to good governance that matches the good governments. What's your authority? What is your duty? And so all your duty is to do a reserve study and collect sufficient money to pay for these future repairs. You know are you doing it in an equitable manner or are you trying to say no I don't think that I think only the fourth floor is responsible for that because the roof leaks and only the fourth floor is affected so only the fourth force you have to pay for it and believe me that's happened before. And so you've got to look at it equally and then you're going to protect the minority so if in fact you happen to have a greater voting power and you disagree with the minority but the declaration gives minority rights you can't just take your power and shove it down their throat or cram it down their throat. You know good governance is listening, making intelligent decisions and following your documents and listening to experts. And on that note I'm getting tired of all my articles I'm writing and all these things I'm going around or I'm on this campaign of the maximums of good governance. Know your authority, know your duty, implement equity and protect the minority which is a simple answer to all that. So on that note I'm going to say aloha and thank you for watching Condo Insider. You have another show by another host next week and we wish you warmest aloha. Thank you. Thank you so much for watching Think Tech Hawaii. If you like what we do please like us and click the subscribe button on YouTube and the follow button on Vimeo. You can also follow us on Facebook, Instagram, Twitter and LinkedIn and donate to us at ThinkTechHawaii.com Mahalo.