A law pending in the New Jersey State Assembly would, if adopted, regulate condominium and homeowner association's hiring of vendors and would also address how to deal with potential conflicts of interest.
Assemblyman Peter Biondi introduced a bill in January 2010 in which he stated that with the quasi governmental powers provided to associations should come standards of "fairness and due process." The bill provides that associations should be held to similar standards of transparency and fairness.
As to the bidding requirements, Assemblyman Biondi is proposing to enact rules which would force associations to:
- Obtain three quotes for any contract for services or materials whenever the amount payable by the association is over $10,000 in any 12 month period.
- Use sealed bids with required specifications , to be opened only a publicly announced meeting for any contract that exceeds $25,000.
- Award all contracts to the vendor that provided the lowest quote or bid, unless the board determines, for good cause, that accepting the bid would be detrimental to the best interests of the residents.
Interestingly, any association with fewer than 30 units can, by resolution, waive any of these provisions.
Although community associations are similar in many ways to government, the last thing any association wants to do is model itself after any level of government. Government agencies are often marred by corruption, red tape, cost overruns and unnecessary levels of bureaucracy; things that most associations in New Jersey try to avoid. On its face, obtaining three bids sounds like a reasonable and prudent business practice. However, Board members are entirely capable of determining how many bids to obtain for a particular project or service, and obtaining three is hardly a panacea for problems that result from hiring the wrong contractor. Moreover, obtaining three quotes may be impossible, for example, for an association that pursuant to the master deed must hire a property management company within 5 miles of the association, and only 2 fit that description.
However, when you get to section 3, the real problem is revealed. Forcing associations to hire the cheapest vendor guarantees problems. The old axiom, "you get what you pay for" has proven true over and over again. Think about how well this formula has worked for the government. The least expensive contractor has given us shoddily built schools, bridges and government buildings. Why should associations model this behavior? In fact, some governments have completely scrapped this program. New York City and Camden both ended their lowest bidder programs (allowing for consideration of experience, completeness of the quotation, references, etc.) with shocking results: construction quality got better.
If an individual association wants to enact such a rule, it is obviously free to do so, but the mechanism to prevent problems is already in place. First, the governing documents of many associations require the approval of 2/3 of the homeowners to approve assessments related to work in a certain dollar amount. Second, the system of goverenence itself ensures that if the Board makes a habit of hiring the first contractor to provide a bid, or is hiring friends and relatives who do shoddy work, then the unit owners have the right to vote them out of office during the next election. Like most legislation, this proposed law is likely a reaction to one or two troublesome boards who made poor decisions, prompting an Assemblyman to react in such a way that will saddle all associations with unnecessary requirements which are likely to cause more problems than they cure.
As for dealing with conflicts of interest, Assemblyman Biondi is proposing that:
- No member of the board or management can have an interest in any business which is in conflict with the proper discharge of their duties, including having a direct interest in any contracts for work or materials used by the association or any fees paid to a broker, architect, etc.;
- No board members or managers can use their position to obtain any unwarranted privileges for any person;
- No board members or managers can act in his or her capacity in any matter in which he or she, a related person, or any other person residing in his or her household or the household of a related person, or any business organization in which any of such persons has an interest, has a direct or indirect financial or personal involvement that might reasonably be expected to impair the objectivity or independence of judgment of the board member, employee or property manager.
Like most legislation, these may be obvious and proper rules to have.... until they are applied to the real world. As with any law or rule, there are always unintended consequences. If a Board Member's brother owns a painting business and can do a quality job for 15% less than the competition, shouldn't the Association be permitted to hire that person, provided the Board Member in question discloses this fact to his fellow board members? Arguably, under section 3 of the proposed legislation, the board wouldn't even be permitted to consider hiring this contractor. But under the existing Nonprofit Corporations Act, which applies to associations, such a contract would not be void solely due to the fact that a trustee has an interest in the contract or transaction, as long as the interest is fully disclosed to the entire board before they vote on the issue. N.J.S.A. 15A:6-7. The proposed legislation would obviously conflict with the Nonprofit Corporations Act, causing further confusion for board members and homeowners.
The legislature is trying to get boards and associations to act in a proper and more efficient manner, but the real way to accomplish this is to become active in your association. Vote, attend meetings, provide feedback and be involved. If the majority of unit owners are involved in the process, then the Board will be responsible for their decisions, they will consider multiple points of view and incompetent or untrustworthy board members will be voted out of office. That way, each Association can make decisions that best fit their particular situation and are less likely to have unnecessary rules forced upon them.
