Ask a Co-op & Condo Lawyer

Is it a conflict of interest for a real estate broker to be on a co-op's board?

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Question:

A broker is on the board of my co-op building and regularly represents buyers and sellers of apartments in the building. Is this technically a conflict of interest? And if so, what should be done about it?

Answer:

The mere presence of a broker on your co-op board is not a conflict, says real estate lawyer Steve Wagner, founding partner of the firm Wagner Berkow and a member of his own Manhattan co-op board. That doesn't keep people from making it into an issue.

"I’ve seen this come up on at least two occasions where a board member was running for office [on the board], and people who were opposing that board member would accuse that board member of breach of fiduciary duty because they were a broker and did business in the building," he says. "However that is not a valid argument. They go, 'Oh, conflict of interest! Conflict of interest!' Being a broker alone is not in itself a conflict of interest."

There are situations that arise, most obviously when the broker/board member is both working on a sale in the building and in the position to vote on approving the sale, where the person's job could pose a conflict. However, "There are easy ways of resolving those," Wagner says.

In this common example, where a broker is involved in the sale of an apartment, she should recuse herself from consideration of the sale, "and certainly not vote on the matter," Wagner says.

In practice, this means when the sale comes up on the agenda, the conflicted board member should state clearly how she stands to benefit from the sale, then leave the room. A slightly less obvious but similar conflict can be if a broker is working for the brokerage that is involved in a sale, but the agent is not personally representing the buyer or seller. Since the brokerage gets a percentage of the broker fee if the sale goes through, and the board member broker gets paid by the brokerage, that's also a conflict, and the same approach should apply. 

If the broker recuses herself, and enough of the remaining board members vote yes on the sale to reach a quorum, that should be the end of it. Things get a little trickier if multiple board members have conflicts or are absent and there aren't enough remaining members for a quorum. In that case, "you need to have a unanimous vote of the disinterested board members," Wagner says, disinterested in this case meaning non-conflicted. Anything less than a unanimous vote could scuttle the sale.

If a broker fails to disclose his involvement in a sale and a fellow board member finds out and tries to void the sale, the dispute could end up in court, and "then the question of whether the sale was fair and reasonable comes into play," Wagner says. The fair and reasonable standard is essentially, all else being equal, and if the broker wasn't involved, would the board have looked at the facts and approved the sale? If yes, the broker's failure to disclose the conflict doesn't matter enough to reverse the sale.

Still, this sort of conflict could give banks and title insurance companies pause. It's also exceedingly rare, according to Wagner. 

"It is more of a political football than it is a real problem," he says. "The overwhelming majority of brokers understand to recuse themselves, and understand their responsibilities."