Rental Restrictions

Why are rental restrictions becoming popular?
Over the past couple of years, there have been an increasing number of requests for amendments to the documents placing restrictions on the rental of units. The main focus has been to put a cap on the number of permitted rentals. Many owners ask why this is important. The #1 reason seems to be that a high number of rentals in a community can cripple an owner's ability to secure financing. Secondary mortgage agencies, including Freddie Mac, Fannie Mae and VA, impose restrictions on the percentage of rental units in a homeowner's association or condominium. If rentals exceed those limits, owners who want to refinance can find it difficult to secure a normal rate or even obtain a loan. While the allowable percentage can vary by agency, the typical threshold is around 30%, but it can go as high as 50%.

The second driving force behind rental caps is the widespread perception that renters do not respect and maintain property to the same degree as owners and are not as involved in the community. A high percentage of renters results in a smaller pool of resident owners to serve on the Board of Directors, and otherwise help with committee work.

A third concern is the impact of a high percentage of rentals on property values. Most real estate agents are aware of the rental percentages and are likely to steer their buyers away from those communities with significant rental percentage, because they know it is typically not as desirable a community to live in for the reasons stated above.

Is It Legal To Put A Cap On Rentals?

This is a question that is frequently asked because it seems, to many people, that it should be an "inalienable right" of ownership that you can rent your property, but that is not true in a community association. When you "sign on" to participate in a community association by accepting a deed subject to the restrictions of record, you give up certain rights and submit to the will of the majority on most aspects of community living. Consequently, if the majority are willing to sign off on an amendment, the minority must comply.


What Steps Should Be Taken To Tailor A Rental Restriction Program For A Particular Community?

1.The first critical step is to engage in a dialogue with your members to determine the level of interest and willingness to impose the restrictions. Naturally, if many unit owners are renting or have more than one unit which they are renting, they are unlikely to be willing to sign off on an amendment or, at least, will insist on a generous grandfathering clause whereby current owners are exempt from the restrictions for a set period of time into the future.

2.Determine a percentage which will serve your purposes in terms of lender requirements, community atmosphere and so forth.

3.Do you need a hardship provision? Most rental restrictions which I have written contain a hardship provision which allows the Board to permit a rental under certain circumstances where the cap has been met. When a unit is subjected to an unusually difficult estate situation or an owner incurs a disability or health condition which prevents him from living in the unit either temporarily or permanently, the hardship provision allows for the board to tailor a "special deal" for that owner or estate.

Other Rental Requirements

Some documents or rules require approval of tenants or approval of leases - most do not define what they mean by "approval". Since the tenant is not financially responsible to the association a credit check is irrelevant. Perhaps checking with a prior landlord about conduct is the only legitimate need, or you may wish to do a criminal records check which requires permission of the prospective tenant.

Additionally, some associations charge their owners move-in and move-out fees for their tenants based on the extra wear and tear on the facilities and extra administrative time involved in that process. In addition, owners who rent are often charged an additional security deposit for potential damages to the common elements by the tenant or their guests. This is usually passed along to the tenant.

Another Issue - Who is a Tenant?

Do your documents or rules adequately define a tenant? Consider the New York case where…

"A community association threatened to evict a member who hadn't sought the board's permission before allowing his daughter and her fiancé to live in the unit he owned. The association said that because the member was living elsewhere, it considered the arrangement a sublet, and that all sublets required the board's permission. The association said it was also seeking to have the member evicted from the community because the daughter and her fiancé kept a dog in excess of 35 pounds, in violation of house rules. The member sued the association, asking the court to rule that he hadn't violated any rules. The association asked the court to dismiss the member's lawsuit without a trial.

A New York appeals court refused to dismiss the case and ruled that a trial had to be held. The court said that the association's governing documents were unclear on the question of whether the member needed the board's permission before letting his daughter and her fiancé live in his unit without him. As to the dog, there were two different versions of the association's house rules, and one version didn't include any weight restrictions on dogs [Wilson v. Valley Park Estates Owners Corp.]."

Community Association Management Insider - April 2003

Clearly, this association needed some legal review of its documents and rules regarding leasing and pets.

Conclusion

Before launching this process of leasing restrictions and rules, be aware that this will create a significant administrative burden for both the manager and the board of directors to keep track of rentals and administer a system fairly. I have found that these amendments regarding placing caps on rentals have met with little resistance in most communities, but great resistance in a few. Therefore "testing the water" by the board is an important first step and if you seem to be getting the "green light" - you should still do a good "marketing program".

Written By:Betty Prudner On September 5, 2005 7:32 PM

We voted to have no more rental property in our condo units. There were 40% rental at the time of the vote and we hope to phase these out when and if these units were to sell. A new buyer has put one on the rental market because his realtor said it was illigal for our condo association to prevent this. My question is what is our recourse?

RESPONSE: First, I would need to see your rental restriction document. It should be an amendment to your Declaration or Bylaws and properly recorded. If it is properly written and recorded, then it is perfectly legal. We have written a number of these for associations. If all is in good order, a letter should be written by legal counsel to the unit owner and the realtor letting them know that you will seek an injunction from the proper court if they do not cease and desist from the rental activity. There may be further action warranted which we can discuss if you wish to retain us. Thank you for inquiring.