Who Controls The Board of Directors?

By Michael J. Gelfand Esq. / Published February 2016

Traditions falling: new buyers control the board of directors and how election provisions are interpreted

Critical to every community is who controls the board of directors. Traditionally, Florida laws mandating transition from developer control to unit owner control of an association’s board of directors, and relatively swift and broad sales of units, resulted in no one person or entity retaining legal authority to control the board. The interpretation of an association’s bylaws plays an important role when

considering this tradition.

But, tradition and bylaws have a way of failing to keep up with changing times. That is no different in Florida community associations where the recent economic downturn led to significant changes in community dynamics, particularly when one owner, usually a corporation or other entity, buys up many units.

Of course, one natural person can be nominated to be on a particular directors’ election ballot only once, and if elected, that person cannot serve multiple director terms simultaneously. What happens if the “person” owning many units is a corporation or limited liability company? Can one company nominate many persons to serve on the same board of directors?

The questions of how many directors’ terms an entity owner, not a human being owner, could nominate for election, and how association bylaw election provisions are interpreted, were recently addressed by a Florida appellate court. In The Retreat at Port of the Islands, LLC v. Port of the Islands Resort Hotel Condominium Association, Inc., 40 Fla. L. Weekly D 2512 (Fla. 2nd DCA, November 6, 2015), the court explained that the condominium consisted of 94 units. Retreat, a limited liability company, owned 38 units. Retreat LLC’s corporate structure had at least three managing members.

On the issue of control, the key language upon which the condominium association and the court focused were the bylaws, which stated, “Each Director must be a unit owner or the spouse of the owner…. If a unit is owned by a limited liability company, only a managing member may be a Director.”

The situation involved an election for three director terms. Three managing members of Retreat LLC received the top three vote totals. The association determined that only one of Retreat’s three members could serve as directors.

As frequently occurs when a nominee is barred from taking office, especially one that receives the highest number of votes, Retreat sued the association. The trial court granted judgment for the association, finding that because Retreat was the sole owner of all of the LLC’s units, Retreat was not entitled to any more representation than an individual person who owns more than one unit, that being one person to serve as a director, not three. But this was only a temporary result because Retreat appealed.

The Florida appellate court disagreed with the trial court. The bylaws were held to specify only the class of who may be a director, not the number of people qualified to serve as a director. Applying an analysis reminiscent of a school grammar class, including a dictionary reference, the court stated, “The restrictive modifier is ‘of the limited liability company,’ because it restricts the class of managing directors to only those of the LLC….We thus construe ‘a’ to indicate a restriction on the class of individuals from an LLC qualified to serve on the board of directors not the number of those otherwise qualified individuals to serve on the board.” The court noted that reading Section 4.2 of the bylaws as a whole, it clearly addresses the class of individuals qualified to serve on the board and declined to read numerical restrictions into Section 4.2.

Because Retreat owned close to 40 percent of the units, the court found that it was not “absurd” that Retreat received more than one seat on a five-person board of directors. Similarly, if co-owners own more than one unit, they may occupy multiple seats on the board as well.

How will a court interpret provisions of an association’s documents? The court took a broad view, not just taking a word or phrase out of context, but frequently analyzed an entire paragraph and perhaps more with reference to common dictionary definitions and grammar rules. If questions are raised about your documents, contact your association’s counsel, noting that as times change, it may be time to amend your bylaws.

Recovering money paid when work has not been completed

How can you help protect your community from an unscrupulous contractor? Using a properly licensed contractor frequently helps ensure competency. Using a properly licensed contractor also may help if the contractor does not complete a job. Proper licensing may provide an alternative avenue to recover your money, up to $25,000!

Recently, in a decision that should also apply to Florida community associations, a Florida appellate court ruled that a homeowner was entitled to recover from a state of Florida fund a portion of the money the homeowner paid a contractor. In Dorelas v. Florida Department of Business and Professional Regulation, 40 Fla. L. Weekly D 2397 (Fla. 1st  DCA, October 22, 2015), a homeowner paid Infinity Construction for construction on his home. When the work was not completed, the homeowner filed a claim in the amount of $33,673.75 for restitution with the Florida Homeowners Construction Recovery Fund.

The Florida Construction Licensing Board, which administers claims from the Recovery Fund, approved the claim, but only for $2,359.33. Previously, the Licensing Board had ordered Infinity Construction to pay the homeowner that amount for failing to satisfy mechanics liens Infinity’s subcontractors had filed against the property.

The appellate court affirmed the award. The court explained that the Recovery Fund was created to compensate consumers who suffer monetary damages as a result of violations by licensed contractors. However, one condition that must be met before restitution is granted from the Recovery Fund is that the claimant must first obtain a final judgment in court, an arbitration award, or a final order from the board directing the licensee to pay restitution. Section 489.141(1)(a), Fla. Stat. (2010) provides that a claimant can recover “an amount equal to the judgment, award, or restitution order or $25,000, whichever is less.”

This decision reinforces the importance of hiring a licensed contractor. As part of your due diligence, the qualifications of a licensed contractor may reduce the potential of a dispute. In addition, if the contractor is paid but the work is not performed, there may be an alternative avenue for recovery through the Florida Homeowners Construction Recovery Fund.ⁿ