A law pending in the New Jersey State Assembly would, if adopted, regulate affordable housing common interest community 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 stating 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 standards of transparency and fairness similar to those of the government. Although common interest community associations are similar in many ways to government, there are many governmental characteristics which associations should avoid, such as corruption, red tape, cost overruns and unnecessary levels of bureaucracy.
Assemblyman Biondi is proposing to enact bidding 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 at 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.
Any common interest community association with fewer than 30 units can, by resolution, waive any of these provisions.
Obtaining three bids may seem like a reasonable and prudent business practice, but Board members are capable of determining how many bids are needed for a particular project or service. Obtaining a set amount of bids would not solve the problems that result from hiring the wrong contractor. Moreover, obtaining three quotes may be impossible for associations with limitations in their master deeds that could impede on the associations ability to obtain the required number of property management companies.
Forcing associations to hire the cheapest vendor almost guarantees future problems, increasing the likelihood of construction defects. Many government programs have disregarded this practice of hiring the cheapest vendor to avoid poorly build schools, bridges and government buildings. New York City and Camden both ended their lowest bidder programs (allowing for consideration of experience, completeness of the quotation, references, etc.) resulting in obvious improvements in construction quality.
While associations are able to decide individually whether they wish to enact these rules, the mechanisms to prevent problems are already in place. First, the governing documents of many associations require 2/3 of the homeowners to approve assessments related to work costing a certain dollar amount. Second, the system of governance itself ensures that if the Board does not put the best interest of the association in mind when hiring a contractor, then the unit owners have the right to vote them out of office during the next election.
Like most legislation, this proposed law was likely initiated after one or two troublesome boards made poor decisions, prompting an Assemblyman set precedents for all associations which are likely to cause more problems than they cure.
Assemblyman Biondi is proposing that:
- No board members or managers can have an interest in any business which is in conflict with the proper discharge of their duties, including 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.
As with any law or rule, there are always unintended consequences. Under section 3 of the proposed legislation, if a Board Member has a personal relationship with a vendor who provides quality services for less cost than the competition, the Association would not be permitted to hire the contractor, even if the Board Member in question discloses the personal relationship to his fellow board members. However, 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, this could be accomplished by increased board activity and participation, including voting, attending meetings, and providing feedback. If the majority of unit owners are involved in the process, then the Board will be held responsible for their decisions and will consider multiple points of view with the threat of being voted out of the office if they are found to be incompetent or untrustworthy. Each Association can make decisions that best fit their particular situation and are less likely to have unnecessary rules forced upon them.