Homeowner association (HOA) management companies retained by developers often must balance the competing interests of the developer and the homeowners. They just as often find the developer pulls one way while the homeowners pulls the other way with the manager in the middle.
It is common for an HOA developer to hire a manager to assist with the transition to homeowner control. It is often assumed that the manager will manage the new HOA. However, after transition takes place, the manager must consider the interests of the homeowners and, if the manager was originally hired by the developer, he may find it difficult to ignore the developer's interests. This dual master relationship creates a difficult challenge. What follows are real life scenarios that point to the conflict issue:
Post-Transition Construction Defects. It is always in the best interest of an HOA developer to minimize warranty and construction defect repairs since they diminish profitability. However, after transition, an HOA may become aware of potential construction defect problems. The HOA manager is placed squarely between the competing interests. If the manager sides with the developer, he is compromising the interests of the homeowners. If the manager recommends that an independent investigation be conducted, he will likely aggravate the developer.
Pre-Transition Construction Defects. Sometimes, construction defects are discovered before transition. In one such case, the homeowners hired an attorney to work with the developer's attorney to resolve the problems short of litigation. The developer met with the manager and tried to arrange a meeting with the homeowners so he could pitch a repair plan "without the need to get the attorneys involved." If the manager cooperated in this scheme, both the developer and homeowner would lose the benefit of legal counsel in a long term negotiated settlement.
Turnover Accounting. Frequently at transition, there are accounting questions. While state laws vary on audit requirements, questions arise like:
- Did the developer pay all HOA fees owed?
- Were expenses paid by the HOA that should have been paid by the developer?
- Were expenses reimbursed by the HOA to the developer that should not have been?
These and other financial questions need to be answered. The manager is the logical one to obtain these answer, however, the answers may implicate both the developer and manager in wrongdoing. Can the manager really remain neutral?
How to Avoid the Conflict Conundrum. The cleanest way to avoid the conflict-of-interest quagmire is simply to avoid acting as manager for both the developer and homeowners. An HOA management company could either specialize in pre-transition properties on behalf of the developer or post-transition on behalf of the HOA, but not both.
The next best alternative is for the HOA management company to disclose up front when hired by the developer that the manager will work for the developer up through time of transition, but once the control of the HOA shifted to the homeowners, the manager will act solely on behalf of the interests of the homeowners. This arrangement should be clearly defined and articulated in the management agreement with the developer.
The least recommended option would be for the HOA management company to try to balance the interests of both clients simultaneously throughout the period of management. It is imperative for the manager to inform both parties in writing of such dual representation and the potential for conflict of interest.
The HOA manager should rely on independent consultants rather than try to resolve a conflict internally. This custom would minimize the likelihood of perceived or actual wrong doing or unintentionally favoring one client over the other. Examples include recommending independent legal advice, an independent inspection or using a CPA for financial questions.
HOA management companies are placed in difficult situations every time they serve two clients with conflicting interests. When faced with this dilemma, they should minimize the potential for conflict through written disclosure to the parties and to refer controversial issues to independent, qualified consultants.
Thanks to Daniel Zimberoff of Barker Martin, P.S. for article input. For more innovative homeowner association management strategies, subscribe to www.Regenesis.net.