Rental restrictions: An enforceable tool to prevent absentee ownership
Condominium associations and homeowners associations have adopted rental restrictions to completely ban or limit the number of rentals in their communities for quite some time.
The associations preface the adoption of the restrictions on the notion that tenants are more likely to violate the covenants, and the absentee owners are more difficult to find and hold accountable. As a result, associations find it more desirable to prevent leasing altogether or severely restrict leasing, so rental restrictions are incorporated into the covenants. Such restrictions are not without controversy, however.
Many homeowners support the idea of limiting rentals in a community, especially when they have no intention of becoming landlords themselves. Nevertheless, as the foreclosure crisis spread across the country and the real estate market tanked, more and more owners looked to leasing their unit or home as a way to avoid taking a loss on an underwater property. If those owners lived in a community with a leasing restriction, however, more often than not, those owners either left the home to the foreclosure process or challenged the leasing restriction in court.
Typically, courts will uphold properly adopted leasing restrictions as restrictive covenants that run with the land. If the owners in a community voted on the restrictions and adopted them pursuant to the adoption process in the covenants, courts have rarely found such leasing restrictions to be invalid, unless there is state law to the contrary. In fact, appellate courts in states such as Florida, Illinois, Indiana, and Ohio have all addressed rental restrictions and upheld them as enforceable restrictive covenants.
Now, as the real estate market starts to improve and home prices are rising, a new phenomenon is facing associations: the large-scale investor. Over the past couple of years, large-scale investors have been swooping up foreclosed and underpriced homes throughout the country, mostly in single-family home neighborhoods. These investors are renovating the normally vacant homes and then using these homes as rental properties. So much of this activity has been occurring over the past few years that Fannie Mae noted in March 2012 that single family homes are now the fastest growing component of the rental market. Indeed, Fannie Mae also noted that the U.S. home ownership rate fell to 66.3% in late 2011, and some experts insist that the housing market recovery will be aided in large part by investors buying distressed single family homes.
Thus, the real estate data trend leads to this question – what can or should an association do to prevent a flood of rentals in a community? If an association is considering the adoption of a rental restriction, it should begin by evaluating its current rental situation. First, it should find out how many rentals are presently in the community. If there are a large number of rentals 2 already in the community, this may prevent the association from adopting a rental restriction for a number of reasons, the most important of which is that the association would likely need those landlord owners to vote in favor of the restriction for it to pass. Moreover, if there are many rentals already in the community, the association will need to determine how to treat those landlord owners if a rental restriction is ultimately adopted.
Next, once an association has a good handle on how many rentals are currently in the community, it should then gauge the interest of the owners about adopting a rental restriction. Because a rental restriction serves as a restrictive covenant telling an owner what can or cannot be done with the property, the restriction should only be adopted as an amendment to the covenants and should be recorded with the county recorder. Many sets of covenants require between 66% and 75% of all owners to approve any amendment, so achieving that number of support will be quite difficult unless many owners are interested in the change. The association could address the idea of rental restrictions at its annual meeting, open a discussion forum about it on the association’s website, or place the topic in the newsletter to seek feedback from owners. Before embarking on an amendment process, the association should be confident that the amendment will pass and be supported by the owners.
If the number of rentals in the community is not likely to prevent the adoption of a rental restriction and the owners are supportive, the association’s Board of Directors should then consult with an attorney about drafting a rental restriction amendment to the covenants. There are many forms a rental restriction can take. The restriction can completely ban all rentals in the community, set a cap on the number or percentage of rentals, or it can merely provide an approval process by which an owner informs the Board of Directors when he or she desires to rent the home. Whatever type of restriction is chosen, two provisions are important to include. One provision deals with how current rentals are grandfathered in to the process, as it is best to allow current rentals to continue through the expiration of the current lease or until the unit is sold, as to prevent legal challenges. The other provision is a hardship exception, which gives the Board of Directors the discretion to allow an owner to lease his or her home in certain instances, such as divorce, illness, or job relocation. Including the grandfather and hardship provisions will go a long way to protect the association from challenges and issues once the rental restriction is adopted.
Once the association has decided on what rental restrictions to pursue, the most important process is the formal adoption process. Each set of covenants will include a different amendment process, but that process must be strictly followed and documented in order to ensure that the restrictions are valid. Upon receiving the approval of the owners, the amendment is then recorded with the county recorder to put the public on notice of the new restrictions, and the restrictions become effective as of that date. Once the restrictions are effective, the association should publicize the restrictions to make current and future owners, as well as local realtors, aware of its existence.
Adopting a rental restriction into the covenants is a very important step on paper, but the real challenge that arises is its enforcement. Even if an association goes through the entire process mentioned above and does everything it should have to adopt a rental restriction, there may still be an owner who will rent his or her unit despite of the restrictions. In this sort of instance, the Board of Directors for the association should treat the leasing of a unit or home as a covenant violation and should handle the violation according to the association’s procedure. If the violation cannot be amicably resolved, the association may need to contact an attorney and seek an injunction to prevent the owner from renting the unit or home. Legal challenges are less likely to arise when the association has taken every precaution to adopt the restriction properly and inform all owners of its existence, but the association should be prepared to seek a legal remedy when an owner continues to rent his or her unit in violation of the rental restriction.
Although there is a debate over whether having rentals within an association-governed community is detrimental or is valuable, associations can proactively establish a rental policy to define how it wishes to handle rentals as the trend toward rentals increases. Once the community is more than 50% rentals, it is too late to effectively adopt and enforce a rental restriction policy. Associations should raise this issue with the owners and emphasize the point that rental restrictions are an enforceable tool to prevent absentee ownership.
Note: This article was first printed in “Indiana Association Help Now”, Issue 3 2013. www.AssociationHelpNow.com
