“We’re concerned that a rental restriction will force people into foreclosure in this economy,” says Retz. “But if we have too many rentals, it affects whether banks are willing to lend money to buy in our community.”
Originally the board discussed capping rentals at 10%, but the building currently has five units being rented. So the board decided to push the proposed cap to 20%.
“It wasn’t until the economy died that suddenly we started discussing raising the rental cap,” says Retz. “Now we’re talking about tabling it until the economy changes.”
Across the country, community association boards are debating whether to establish restrictions limiting the number of owners permitted to lease their homes. The typical rental restriction starts as a proposed amendment to the community’s declaration and then usually must be approved by a high percentage of the community, such as two-thirds or three-fourths of the homeowners.
The details of rental restrictions vary depending on the community, and laws differ from state to state. However, many of the issues are the same no matter where you live.
Board members often argue in favor of rental restrictions because they are concerned that a community with a large number of rentals can have difficulty attracting home buyers. Federal Housing Administration (FHA) financing is now available only to condominium buyers in communities that are at least 50 percent owner occupied.
Just a few years ago, the debate over rental restrictions focused on the number of investors buying units intending to rent them out. However, in the current economic climate and housing slump, many communities are equally or more concerned about the increasing number of owners forced to rent their units to avoid foreclosure.
While some community associations have opted to table rental restrictions until the recession passes, others are pursuing restrictions in an effort to control the number of long-term leases.
“Our experience tells us that communities that decide to restrict leasing in some fashion experience an improved quality of life,” says Douglas Sury an Attorney. “But it’s important to do it with the advice of a lawyer and knowing the risks. It’s not a magic bullet that will make all your community’s problems go away.”
To Restrict or Not
For some homeowners, rental restrictions seem a natural step to protecting the community from the twin problems of deterioration and apathy. Supporters say that owners who live in their units are more likely than renters or off-site owners to maintain their properties.
“I’ve heard some people say, ‘Unless we have a problem, why do we need to do anything?” But the number of rentals is growing, and before it becomes a bigger issue, we need to be proactive if its something that concerns us.
Bill Bittner, a former board member at Lakeside at Town Centre, advises communities to put rental restrictions in their CCR’s long before there’s any sort of rental problem. His community was too late. “We had more rentals and investors that we ever, ever dreamed of,” says Bittner of the 48-unit condominium complex. “We discussed rental restrictions but we knew there would be an uproar from the investors. They would fight it. There would be legal costs. We were stuck, not to mention we didn’t have enough owners left to pass the amendment.”
Boards may also examine alternatives to rental bans, such as charging a fee to owners each time a tenant moves in or out, according to lawyers.
Before you adopt a rental restriction, start a committee. Do some investigation. Lay your groundwork for a plan that really meets your needs. Perhaps discuss the issue at an open meeting. That way you can find out if you can even get your community on board and whether some changes to the proposal will be necessary to get them on board.
In addition, an open discussion allows homeowners to provide their input and to buy into the proposal. For the Board, the meeting is also an opportunity to educate the community on its proposal and what compliance would entail.
Most lawyers suggest rental restrictions contain “hardship” exceptions for owners who are struggling to sell their units or pay their mortgages. A hardship exception allows owners to rent units for a limited period of time. They say it also permits a board to show flexibility in difficult economic times.
While sometimes rental restrictions leave it up to the board to determine whether someone is going through a hardship, some lawyers suggest allowing an owner to determine when a hardship exists. But each owner only gets to use the exception one time. If you let the owner decide when they have a hardship, you avoid the board deciding whose story is sad enough and whose isn’t.
In other cases, lawyers have written in examples of hardship, such as inability to sell or for service in armed forces.
If some homes are already being leased, a board may choose to include a grandfather clause that ensures current owners can continue leasing their homes until they sell or the homes are vacant for a period of time.
A grandfather clause won’t bring about an immediate change. But it can be an important negotiating tool, enabling the board to win support from more homeowners. A grandfather clause is often the key to getting a rental restriction passed.
A complete ban is seldom accepted by homeowners. Boards are more apt to win approval if they propose capping rentals at 10 or 20 percent of the homes in the community.
Once a rental restriction has passed, the next step is enforcement, a process that can be difficult and time-consuming for the board, the association manager and lawyer. Generally, it is up to the association’s manager, if there is one, to keep a list of renters and a wait list of owners who want to lease their homes.
Associations also should require tenants to agree, as part of their leases, to be subject to the enforcement powers of the association, lawyers advise. That way if the tenant violates the associations rules or overstays the association’s lease term limits, there is recourse. Under those circumstances, the association often has the power to fine and even evict the tenants.
The biggest problem, lawyers say, is monitoring the rental landscape of a community. It can be difficult to detect owners who choose to ignore rental restrictions, especially in a larger community. Often, a frustrated neighbor or particularly observant board member flags a potential violation. The key, lawyers say, is to ensure that the association enforces all potential violations brought to the boards attention.
The association’s main recourse is to fine the unit owner who ignored the associations rental restrictions, but only after proper notice and opportunity for hearing. If the fines accumulate, then the last recourse is to use the collections process to your advantage, filing a lien and possibly foreclosing against the owner.
Generally, courts have found that community associations have the right to restrict renting. But that doesn’t mean that every leasing restriction will pass court inspection and certainly doesn’t stop aggrieved owners and investors from going to court to fight it out.
For communities that decide to go forward despite the risk of litigation, there are some provisions they can put in their rental restriction to help with compliance enforcement. Association lawyers suggest including language giving boards the power to evict tenants if problems arise. Included in that power should be specific procedures, such as properly notifying tenants.
Don’t take any shortcuts in any of the administrative aspects of enforcement, warn association lawyers. A rental restriction limits a common property right – and must be done with great attention to legal requirements, procedures and judicious enforcement.
When drafting rental restrictions Community Association Institute’s policy suggests that associations establish a policy “that tenants will be treated as equals within the community and afforded every opportunity to function as productive, contributing members of the community, including receiving newsletters and meeting invitations and opportunities to serve on committees.
Treating renters with the same respect afforded to owners can go a long way in encouraging them to behave like owners.
This is a serious undertaking that can prove to be beneficial to a community. A community that is considering restricting leasing must use great care and consult with council.
Before amending your Declaration (CCR’s), know your state laws. Talk to your management company and associations attorney to avoid costly mistakes.
by Anna Stolley Persky