Our board would like members to sign a confidentiality agreement. What’s the best way to approach this?
- Confidentiality agreements can create ethical conflicts for board members
- A code of ethics may be a better alternative to a confidentiality agreement
Asking co-op or condo board members to sign confidentiality agreements can be problematic.
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Our board would like members to sign a confidentiality agreement. What’s the best way to move forward with this?
“Board members have a duty not to disclose the proceedings of the board when they are intended to be confidential,” says New York City real estate attorney Steven Wagner, a partner at Adam Leitman Bailey, P.C. who represents tenants, apartment owners, co-op and condo boards, and owners.
Situations where confidentiality is required might involve negotiations around contracts with a third party—for construction or facade work—or if the board was hoping to sell development rights.
“You don’t want the party you are in negotiations with to have inside information on your strategy or where you might be willing to go on pricing,” Wagner says. This would not serve the financial interests of the building.
Sensitive employment issues might be another area where confidentiality is required. In addition, the consideration of an applicant to buy or sublet should also be treated as confidential.
What is a confidentiality agreement?
A confidentiality agreement binds board members with a legal contract to treat information discussed by the board as a secret. You are making a promise not to share information discussed at board meetings or between members with anyone outside the board. However, asking co-op or condo board members to sign confidentiality agreements is problematic, Wagner says.
Many of the board confidentiality agreements Wagner has seen in the decades he’s been representing co-ops and condos have been drawn up in reaction to a breach of fiduciary duty by a board member and the language goes over the top and makes everything confidential.
Board members have a fiduciary responsibility to the building but not everything discussed by the board must be confidential. “If the garden committee secures $1,500 for spring planting, that’s not confidential and is something that would typically be announced to the shareholders by the board,” Wagner says.
Equally, there may be situations where matters discussed by the board absolutely should be disclosed.
“If a board member is buying an apartment that was foreclosed for a quarter of the fair market price, that’s self-dealing and you would have a duty to disclose this misconduct,” he says.
What to know about signing a confidentiality agreement
If you’ve signed a confidentiality agreement, you may find yourself in a complicated situation where to disclose the information would be to breach the contract, but to keep quiet would be to place your loyalty somewhere other than to the co-op.
An alternative to a confidentiality agreement is a code of ethics or code of conduct, the receipt of which can be acknowledged by current and incoming board members. A code of ethics is not legally binding but it can highlight areas where clarity is essential—around discrimination laws, conflicts of interest, and best practices when negotiating.
“Unless the confidentiality agreement is balanced and allows board members to speak out when they should, a code of ethics can stand as a basis for bringing a lawsuit against a board member or to seek their removal if they have breached their responsibilities of fiduciary duty, good faith, fair dealing, and loyalty to the co-op or condo,” Wagner says.
What are the ethical responsibilities of board members?
As a co-op or condo board member, your loyalty must be to the building and the community at large. Any attempt to put your own interests above the building’s is a breach of duty.
There should be a degree of understanding by individual board members that when they are dealing with sensitive topics they must treat the matter confidentially. For anyone who is new to the board or who doesn’t fully grasp the importance of this, a code of ethics can be helpful.
Board members need to know that it can hurt the corporation if one of them shares information on contracts, employment, or other shareholders, to a wider circle. In some cases, board members may be motivated politically to undermine others but this does not serve the co-op or condo.
For example, Wagner recently dealt with a case where a board member resigned after disclosing confidential information that resulted in the loss of bargaining power in a contract negotiation. Another member then published that letter of resignation, which itself was a breach of confidentiality, for political benefit.
“If you are serving someone other than the co-op or condo, you risk removal from the board, or worse, a lawsuit against you seeking damages for a breach of your responsibilities,” Wagner says.
New York City real estate attorney Steven Wagner, a partner at Adam Leitman Bailey P.C., has more than 30 years of experience representing co-ops, and condos, as well as individual owners and shareholders. You can submit a question for this column via email or if you’d like to arrange a free 15-minute telephone consultation with Steve, send an email or call (212) 584-1973.
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