Is it a conflict for a shareholder to be the manager of our five-unit co-op?
- Review the co-op's governing documents and ensure compliance
- The arrangement needs to be approved by a vote from the board
- If the shareholder is also a board member, they will need to abstain
A shareholder can be the managing agent for a building but if they are also a board member, their involvement will be affected.
Can an individual shareholder also serve as the managing agent for our five-unit co-op? And if so, what kind of contract should be drawn up?
A co-op shareholder can act as the building’s managing agent, our experts say. However, if the shareholder is also on the board and expects payment for their management role, they will need to disclose a conflict of interest and recuse themselves or abstain from votes taken by the board.
“An individual shareholder cannot wear the hat of a board member and the hat of a managing agent," says attorney Christoper M. Tarnok, a partner at DL Partners (a Brick Underground sponsor).
In a building with five units, where all shareholders may already hold board positions, Tarnok says, “it could present an issue for a shareholder to move him or herself from a board position to fill the role of a managing agent.”
Your first step will be to review the governing documents to ensure compliance.
Handling compliance and conflicts of interest
In order to operate a property management company in New York, at least one person in the company needs a New York state broker's license in order to collect money, says Mark B. Levine, principal at the property management firm EBMG.
“If this shareholder doesn’t have a broker's license, they will need to work with someone who does and attach themselves to the company for protection,” he says.
Each year, board members are required to sign disclosures identifying conflicts of interest. If a member’s personal business interests conflict with a decision before the board, it is deemed a conflict of interest. So if the shareholder proposing to become the managing agent is also a board member, this is a conflict of interest because they are receiving money from the co-op outside their duties as a board member, Levine says.
“If the shareholder is paid, they should not be on the board, or at least not be able to vote,” says Tina Larsson, co-founder of the co-op and condo consultancy firm, The Folson Group.
Levine says co-op bylaws typically say there is no compensation for members. “In reality this shareholder will have to recuse themselves from most conversations and all votes moving forward as they pertain to their operational capacity as a property manager if they are on the board,” he says.
Most bylaws underscore how self-dealing is a breach of a board member’s fiduciary duty to the co-op.
Larsson points out, like any other property manager, the shareholder needs to attend board meetings to report to the board about what's happening in the building and take instructions from the board about the decisions made.
Drafting a contract and getting board approval
Levine recommends speaking with an attorney for a standard agreement for this arrangement. You also need to talk with your insurance company to ensure you have proper coverage. Other priorities include establishing financial oversight and compliance with the co-op’s governing documents.
A basic contract would be required noting the parties, the duration of the contract, the services to be provided, and the cost.
“The managing agent should maintain proper insurance coverage for their company and also insurance to protect the cooperative from theft or possible mismanagement,” Levine says.
In a small five-unit co-op, it’s possible the vote to install the shareholder as managing agent—and establish their compensation—will be split equally between those in favor and those who are not, in which case there can be no decision and approval of this arrangement cannot be completed.
Some small co-ops are self-managed with all board members pitching in on a voluntary basis to take responsibility for various tasks. Another option is to pay an established property management company to take on management tasks.
Requirements for emissions, gas, mold, and facade inspections have changed in recent years. Levine says it's important to take building management seriously. “If you have someone who hasn’t operated a management company before, there are so many issues that, if not handled properly, could cost the building more than this contract is worth,” he says.
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