Q: I am a licensed real estate broker and I have been asked to join my co-op board. Is there any law or regulation which would prohibit me from serving as a co-op board member?
A: No, there is no law or regulation that prohibits a real estate broker (for purposes of this question, the term real estate broker covers licensed real estate brokers, associate brokers and salespersons) from serving on a co-op board. However, it is not advisable for a real estate broker to serve on a co-op board and act as a real estate broker in real estate transactions in the co-op building. This is due to the inherent conflicts of interest that may arise by virtue of acting in the capacity of co-op board member and real estate broker at the same time.
A co-op board member has specific fiduciary duties to the co-op corporation, which include a duty to perform his or her role as a board member in good faith and with due care. In addition, a co-op board member has an implicit duty of confidentiality.
A real estate broker has specific obligations and duties to the parties involved in a real estate transaction. The real estate broker has the following obligations to its principal: a duty of loyalty, a duty of confidentiality, and a duty to deal honestly, fairly and in good faith. In addition, a real estate broker has obligations to the party that he or she is not representing in a transaction. For example, a real estate broker that is representing a seller has an obligation to disclose to a purchaser all facts known to the real estate broker that materially affect the value or desirability of a property.
With these obligations in mind, consider the following actual scenario. A real estate broker is serving on her co-op board. The co-op board is considering a major renovation of the building’s elevators, which is to be financed by a large assessment to the shareholders. The co-op board has decided that it is too early in the process to disclose the potential elevator renovations to the co-op’s shareholders or to the public. Concurrently with the co-op board’s consideration of the elevator renovation, the real estate broker is also representing a seller in the building and a contract has been sent out to a potential purchaser, who is ready to sign it. The real estate broker believes that she has an obligation to disclose the elevator renovation to the potential purchaser as such renovation is a fact that materially affects the value or desirability of the property. However, the real estate broker has been instructed by the president of the co-op board not to disclose the capital improvement project to anyone, including the potential purchaser.
The real estate broker is in an untenable position. She has a duty of confidentiality to the co-op board that directly conflicts with her duty of disclosure to the prospective purchaser. There is no solution to this situation.
A real estate broker should choose to either serve on a co-op board or participate in transactions in the co-op building. The real estate broker should not act in both capacities.
Many real estate brokers join a co-op board with the plan of recusing themselves from certain matters to avoid conflicts of interest. However, there is no appropriate way to filter the information that that the real estate broker receives in the ordinary course of serving as a member of the co-op board. Once the information is received, the real estate broker may have an obligation to disclose such information to the parties to the real estate transaction
The Legal Line Question by:
Neil B. Garfinkel
REBNY Broker Counsel
Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP