Q. Is it illegal for members on the HOA board to also hold a position on the board of directors of the property management company that the HOA hires and oversees?
—Worried About Impropriety
A. “No, but both the board and the management company must take certain action to validate the relationship,” says Jessica Ryan, a principal attorney at the law firm of Kovitz Shifrin Nesbit, which has offices in Mundelein, Chicago, Naperville and Racine. “First, the Illinois Common Interest Community Association Act (CICA) provides that the association board cannot enter into a contract with a corporation in which any board member holds 25 percent or more interest, unless the board issues a notice of intent to enter into the contract to all owners within 20 days after the decision on the contract is made. The owners may then submit a petition, signed by at least 20 percent of the membership, which gives the owners an opportunity for an election to approve or disapprove the contract. Therefore, if the board member in question holds 25 percent or more interest in the management company on which he serves as a director, then the HOA board will need to follow this process to approve the management contract. Keep in mind, however, that not all HOAs are subject to CICA. Community associations with 10 units or less, or with annual budgeted assessments of $100,000 or less, are exempt from the Act and this approval process would not be required.
“In addition, the board member who serves as a director for the management company may have a duty to make conflict of interest disclosures under the Community Association Manager Licensing and Disciplinary Act. This statute outlines certain unprofessional conduct for managers, including a failure to promptly disclose any actual or potential conflict of interest. Legally, a conflict of interest is defined as the situation in which a board member exploits their position for personal benefit, contrary to their obligations and duties to the association. In simplest terms, a conflict of interest means that a board member’s loyalty cannot be divided and used for personal gain. In the scenario in question, such conflicts may arise when the association board discusses and votes on the terms and acceptance of the management contract or any renewal of the contract. However, these conflicts, once disclosed by the board member who sits on the management company board, may be simply avoided by allowing the board member to remove him or herself from all matters concerning the management company contract.”