October 30, 2023 - Blog Post
Condominium Boards and Due Diligence
After we published the blog on the qualities and attributes of an effective board director, a question was raised about due diligence. It’s a good question and worthy of an answer, so here is a blog on due diligence.
First off, what is due diligence? Merriam-Webster defines it thus:
Doing Your Due Diligence
Due diligence has been used since at least the mid-fifteenth century in the literal sense “requisite effort.” Centuries later, the phrase developed a legal meaning, namely, “the care that a reasonable person takes to avoid harm to other persons or their property” … More recently, due diligence has extended its reach into business contexts, signifying the research a company performs before engaging in a financial transaction. This meaning can also apply to individuals: people are often advised to perform their due diligence before buying a house, signing a loan, or making any important purchase. (see here)
A condo board is responsible for overall governance of a condominium or community of homeowners. Due diligence in the context of a condo board refers to the proper level of investigation and analysis to be conducted by board members to make informed decisions and fulfill their responsibilities effectively.
Here are some aspects of due diligence that condo boards commonly engage in:
- Financial Due Diligence:
- Reviewing the corporation's financial statements, budget, and reserves.
- Ensuring the proper collection of dues and fees.
- Having financial audits or assessments conducted when necessary.
- Monitoring expenses and seeking cost-saving opportunities.
- Legal Due Diligence:
- Understanding and enforcing the association's governing documents, such as the declaration, bylaws, common element rules, and any covenants, conditions, and restrictions affecting the property.
- Ensuring the proper handling of legal matters, such as disputes, contract negotiations, or litigation.
- Ensuring compliance with local, provincial, and federal laws and regulations.
- Property Management Due Diligence:
- Overseeing property maintenance and repairs.
- Evaluating vendor contracts and services for proper safety compliance and effective work.
- Keeping track of insurance coverage and ensuring it's adequate.
- Governance and Decision-Making Due Diligence:
- Ensuring fair and transparent decision-making processes within the board.
- Conducting proper meetings of owners.
- Communicating effectively with homeowners and stakeholders (if applicable).
- Planning and Reserve Study Due Diligence:
- Developing long-term plans and setting goals for the condo community.
- Having reserve fund studies conducted at least every five years to estimate future repair and replacement costs.
- Implementing preventive maintenance to protect property values.
- Environmental and Safety Due Diligence:
- Ensuring environmental regulations and safety standards are regularly monitored.
- Ensuring the community is prepared for emergencies.
- Community Engagement Due Diligence:
- Encouraging homeowner involvement and participation.
- Seeking feedback and addressing concerns from residents.
- Investment and Capital Improvement Due Diligence:
- Assessing the need for capital improvements, such as roof replacements or common area upgrades.
- Evaluating the financial feasibility of such projects.
Condo boards are fiduciaries for the community they serve, and they have a duty to act in the best interests of the homeowners. While the board may engage a property manager to do most of the actual management work, the Board must still maintain oversight and ensure the property manager is doing the work in a proper manner. Due diligence is crucial to making informed decisions and maintaining the financial and structural health of the community. It helps prevent mismanagement, legal issues, and conflicts within the corporation, ultimately preserving property values and the quality of life for residents.
As a Board, you must take an active role and not just leave everything to the property manager. In a future blog we’ll dig deeper into creating an effective relationship between a Board and its property manager.
Section 15D of the Condominium Act sets out the duty and standard of care of a director of a condominium corporation. This addresses the possibility of liability of the directors to the corporation itself. In the case of mismanagement, members of the corporation might bring a claim against the directors in the name of the corporation.
15D (1) Every director and officer of the corporation shall, in exercising the powers and discharging the duties of office,
(a) act honestly and in good faith;
(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances; and
(c) act in the best interest of the corporation when discharging the duties of the director or officer’s office.
(2) A director is not liable under subsection (1) if the director relies in good faith upon
(a) financial statements of the corporation that the auditor, in a written report, an officer of the corporation or a manager under an agreement for the management of the property represents to the director as presenting fairly the financial position of the corporation in accordance with generally accepted accounting principles; or
(b) the report or opinion of a person whose profession lends credibility to the report or opinion.
Note that the duty is not unreasonably high: to act honestly and in good faith, and to be reasonably prudent. The legislators knew that directors of a condominium corporation will not all be experienced managers and did not want to set an unreasonably high standard. Nevertheless, “reasonably prudent” is a broad standard, and is approximately the same as the standard of negligence in general law. The test is the reasonable prudence of a person of average experience – not an expert manager. In addition, Directors are fully protected if they rely on the advice of a qualified professional advisor.
Directors must act in the interest of the corporation, and not in their personal interest as owners. Indeed, directors should not take part in decisions that affect them differently from other owners. This is sometimes not understood by directors. Encouraging directors and potential directors to participate in learning opportunities, such as those offered by CCI, can assist in rectifying this situation. Using an ethical framework as described in the blog post on Qualities and Attributes of an Effective Board Director and having Board Directors sign it can also help ensure that directors are operating in an ethical manner.
Closely related to this issue is section 15E, which permits the corporation in its bylaws to agree to indemnify directors for any claim against them for anything done in the course of their duties of office. Most condominium corporations have such a provision in their bylaws.
Indemnification of directors and officers
15E The by-laws of the corporation may provide that every director and officer of the corporation and that person’s heirs, executors, administrators and other legal personal representatives may from time to time be indemnified and saved harmless by the corporation from and against
(a) any liability and all costs, charges and expenses that the director or officer sustains or incurs in respect of any action, suit or proceeding that is proposed or commenced against that person for or in respect of anything done or permitted by that person in respect of the execution of the duties of office; and
(b) all other costs, charges and expenses that person sustains or incurs in respect of the affairs of the corporation.
Even reasonably prudent people make mistakes from time to time and if those mistakes are negligent and cause loss to a third party, that may give rise to a claim. That is why the corporation carries liability insurance and Directors and Officers Liability (D&O) insurance. In assessing your insurance coverage, ensure that the D&O has no retroactive date with coverage back to when your corporation was first registered.
It is important that directors and potential directors not be intimidated by fear of potential liability. As a director, know your responsibilities, understand your governing documents, practice due diligence, have proper D&O liability insurance and do your best.
At CCI NS we provide you with knowledge, guidance and learning opportunities to assist you in becoming the best director possible. Take advantage of what we have to offer because every condominium corporation wants to have the best people on its board.
Stay tuned for more aspects/perspectives of running an effective condominium corporation.
“Learning is a lifelong Process” - Peter Drucker.Jun 6, 2020
Michael Kennedy and Dan Campbell
CCI Nova Scotia
Tag(s): Board DynamicsBoard of Directors CCI Nova Scotia Communication Condo Act Condo Budget Components Condo Community Condo Corporation Budget Condo Education Conflict Diverse Interests Financial Management Get involved Legal Compliance Reserve Fund Planning Rule enforcement