Renters in an HOA, The Good and The Bad

Renters in an HOA, The Good and The Bad

By Bruce C. Jenkins

Community associations across the country are increasingly faced with tensions between investor-owners and their renters, and full-time residents trying to establish a sense of place and community.   Condominium and townhome units have become popular for investors to utilize as rental properties.  For an investor, community associations enhance rental opportunities by providing recreational amenities and maintenance services.  According to the 2001 U.S. Census, there were at total of 5,934,000 Condominium Units in the United States.  Of the total units, 71.8% were inhabited by the owner of the unit, while 28.2% were leased by the owner to others.  (U.S. Census American Housing Survey for the United States: 2001 Table 1A-1.)

For many owner occupants, the planned development form of ownership provides benefits beyond their means when compared to single family homes.  Owners in community associations often enjoy recreational amenities such as a pool and clubhouse that they could not afford on their own.  These amenities also foster neighborly relations, build a sense of community, and enhance property values.  Because the owner occupants have a vested interest in the community’s assets and the community lifestyle, they are motivated to be more active in the community association.  For most owner occupants, the association provides a sense of place, a sense of community, a sense of belonging.

Unit owners who do not live in the community, but simply invest for the economic return, desire many of the benefits afforded by the community association, including maintenance services and recreational facilities.  However, investor-owners may not be as interested in how the community lives and breathes, its sense of place, purpose or belonging.  Therefore, the investor-owner may not participate in association matters, unless the issue directly effects his or her return on investment.

In some ways, the renter is in the unenviable position of having no association voting rights and in most situations, no ability to serve on the association board or its committees.  Thus, they often view living in a community as being no different than living in an apartment complex.  Many owner occupants are concerned that renters behave differently and are less respecting of the rules and property values because they do not have a vested ownership interest in the community.  Some owner occupants may even view renters as “lower class citizens.”  On the other hand, renters may feel picked on or treated unfairly.  While the association for the community seeks to promote harmony among its residents, both permanent and temporary, it is often difficult to solve the tensions between owner occupants, investor-owners, and renters.

These tension have led many communities to adopt regulations which restrict or prohibit the renting of units within the project.  Generally, such restrictions and prohibitions have been upheld by the courts.  One court in trying to describe the unique values of community association living stated:

Given the unique problems of [community association] living in general…[the] objective – – to inhibit transiency and impart a degree of continuity of residence and residential character to [the] community – – is, we believe, a reasonable one, achieved in a not unreasonable manner by means of the restrictive provision [on rental of units].  The attainment of this community goal outweighs the social value of retaining for the individual unit owner the absolutely unqualified right to dispose of his property in any way and for such duration or purpose as he alone so desires. (Seagate v. Duffy, 330 So.2d 484 (Fl. App. 1976.)

Nevertheless, investor-owners have challenged restrictions and prohibitions on rental units under constitutional grounds and restraints on alienation.  For example, investor-owners have asserted that restrictions on rentals violates their rights under the Equal Protection Clauses of the Fifth and Fourteenth Amendments of the United States Constitution.  However, the Federal Constitution is established to protect individuals from the acts of State or Federal Governments.  Because the community associations are private entities and because there is no element of State or Federal action in relation to restrictions or prohibitions on rental units, community associations have been able to defeat such challenges by investor-owners.  In short, Constitutional claims do not apply to rental restrictions approved by members of private communities.

Another challenge investor-owners have made is that the units were purchased under an assumption which allowed the units to be leased.  Courts have generally struck down such a challenge on the basis that when the investor-owner purchased, he knew or should have known that the community association governing documents could be amended, added to, changed and even made more restrictive.  The situation is not unlike municipal governments changing zoning regulations.  Often residential owners complain that when they purchased their property they had no idea that a commercial development would be allowed next door.  However, property owners are deemed to know that zoning regulations may be changed and the changes may effect their property rights and values.  Thus, courts typically have not given much weight to an owner’s claim that when the unit was purchased, it was under the assumption that units could be leased.  As one court put it, “potential purchasers of [community association units] should…realize that the regime in existence at the time of purchase may not continue indefinitely and that changes in the declaration may take the form of restrictions on the unit owner’s use of his property.”  (Worthinglen Condominium Owners Association v. Brown 57 Ohio App. 3d 73, 566 N.E.2d 1275 (1989)).

Restrictions on rental units typically take one of four forms: (1) limiting the term of the lease, (2) limiting the number of units any one party may own, (3) limiting the total number of units which may be rented, or (4) prohibiting leasing of any units.  In Utah, restrictions on rentals must be contained in the Declaration of Covenants, Conditions, and Restrictions for the project (CC&Rs). See Utah Code 57-8-10.1 and 57-8a-209. Utah also requires exemptions from rental restrictions in the following circumstances:

(i) a lot owner in the military for the period of the lot owner’s deployment;

(ii) a lot occupied by a lot owner’s parent, child, or sibling;

(iii) a lot owner whose employer has relocated the lot owner for two years or less;

(iv) a lot owned by an entity that is occupied by an individual who:

-has voting rights under the entity’s organizing documents; and

-has a 25% or greater share of ownership, control, and right to profits and losses of the entity; or

(v) A lot owned by a trust or other entity created for estate planning purposes if the trust or other estate planning entity was created for:

-the estate of a current resident of the lot; or

-the parent, child, or sibling of the current resident of the lot

Other concerns faced by community associations in relation to renters are obtaining loans on a secondary market and increased insurance costs.  Many lenders will refuse to provide a secondary loan to an owner if too many rental units exist in a community in the opinion of the lender.  Additionally, some community associations are finding it increasingly difficult to obtain affordable insurance because rates increase with an increased number of rental units.

If a community association seeks to deal with tensions between investor-owners and their renters and owner occupants, it should proceed with caution and care.  Courts will not hesitate to strike restrictions on rentals that were not passed with the proper procedure or which are unreasonable in their application.  Further, because limitations on an owner’s property rights raises emotions and legal concerns, they should be dealt with carefully, thoroughly, and only after adequate notice is provided to the association members and the appropriate approvals obtained.  Grandfathering existing rental units makes passage of such restrictions more likely and also shows reasonableness in the application of the restrictions.  In any event, an association should seek the assistance of local legal counsel familiar with the community and who understands the complexities of community association law.

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