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Can Condo Rentals Be Banned?

Written by on Sunday, 16 December 2001 6:00 pm
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Question: I have been appointed by the Board of Directors of our Condominium Association to investigate whether our association can impose restrictions on renters in our building. Having reviewed some material -- and talked to a lot of people -- I am totally confused. The number of non-resident owners within our complex is currently over 40 percent. I have heard that this high ratio of investor-owned units will cause problems with our ability to obtain mortgage loans, whether we want to sell or refinance.

Can the Board legally impose restrictions on leasing? Our Bylaws allow leasing of units, so long as the lease is for one year or more.

Answer: The simple answer to the complex problem is no. Your Board does not have the legal authority to restrict leasing. But your Association can adopt such a restriction, although it "ain't" easy.

In any condominium association, there is what we call the "hierarchy of the power source". In order to determine what a Board can -- and cannot do -- we must first look to the operating statute in the jurisdiction where your condominium is located.

For instance, in Maryland, Virginia and the District of Columbia there is a specific condominium statute. This law is the highest power source. Generally speaking, these laws do not address the issue of rental restrictions. Check with legal counsel for the law in your jurisdiction.

The next level power source in a condominium is the Declaration. This is a document which the developer of the condominium (called the "declarant") records among the land records. The Declaration spells out certain basic concepts of the condominium, such as a definition of common and limited common elements, rights of mortgage lenders who have outstanding loans to unit owners, and the percentage interest which each unit has in the entire project.

The third level power source are the Bylaws of the Association. The Bylaws are usually an exhibit to the Declaration and recorded among the land records. The Bylaws cover such matters as the composition of the Board of Directors, the obligations of the owners to pay assessments, voting rights and responsibilities, and insurance issues.

Finally, the lowest power source -- but nevertheless very important þ are the rules and regulations of the Association. The Board of Directors has the authority to prepare and adopt Rules, which can include such areas as pet restrictions, assessment collection policies, swimming pool procedures, and garbage and trash collection requirements. According to all experts in condominium law, the Board can adopt any rule or regulation so long as it is not in conflict with a higher power source, such as the Bylaws. Since your Bylaws allow leasing of units, the Board could not enact a resolution contrary to that position.

Leasing of condominium units is a major problem facing many condominium associations today. The "secondary mortgage market" -- where organizations such as Fannie Mae and Freddie Mac buy loans originated locally -- is a primary source of mortgage money for condominium loans, both for purchases as well as refinances. These secondary mortgage lenders impose restrictions on the number of investor units in a condominium association; in general, no more than 40 or 50 percent of the units can be investor owned (i.e., rented). If an association exceeds these limitations, it becomes difficult for potential purchasers and/or unit owners wishing to refinance to obtain mortgage financing.

Condominium Associations throughout the country have wrestled with this issue, and have come up with a number of potential solutions, including:

  • An absolute leasing prohibition.

  • Prohibiting existing owners (whether they be investors or not) from selling their unit to investors.

  • Establishing a percentage of units within the Association which can be rented at any particular time -- i.e., 40 percent.

  • Permitting leasing for a fixed period of time (i.e., two years), after which the unit must be owner-occupied for at least another two years.

There are, of course, variations on these proposals; perhaps one of the most common is to include a "grandfather" clause in the Bylaw amendment, which would either (1) completely exempt current owners from these restrictions or (2) establish a grace period, after which time the restrictions would then be applicable to all owners.

But, in my opinion, this is a matter which cannot be accomplished by a Resolution adopted by the Board. It requires at least a Bylaw amendment, and to be on the safe side, it should really be an amendment to the Declaration.

In order to amend the Bylaws or the Declaration of a condominium association, it generally takes a two-third vote of all the owners. If your association already has more than 40 percent investor owners in your complex, you are urged to start the amendment process now -- and grandfather in those owners who are currently renting. Grandfathering is not a legal concept, but a political reality. If you want to muster sufficient votes to amend your legal documents, you have to make concessions to those owners who currently rent their apartments, and will be directly impacted by any such amendment.

Keep in mind that many owners will claim that any such amendment is a restriction on property rights. Those owners will state -- and often with merit -- that when they purchased the unit, there were no restrictions, and they want the unit to be kept for investment purposes.

However, most courts which have dealt with restrictions on leasing have taken the position that when you live in a condominium, you are subject to the rules, regulations and legal documents of that condominium. If those documents are properly amended -- and serve a useful, reasonable purpose -- the amendments are applicable to everyone living in the complex.

In effect, when you live in a condominium, your home is not always your castle. The District of Columbia Court of Appeals addressed this very issue. In Burgess v Pelkey (decided September 30, 1999), the Court held that an amendment to the cooperative or condominium instruments (i.e. the Bylaws or the Declaration) which "restricts the occupancy or leasing of units in the cooperative or condominium complex" is valid and binding on all existing owners in the complex.

According to the Court:

To hold otherwise would negate uniformity, a principal purpose of cooperative and condominium living arrangements, by creating disparity among units subjected to differing regulatory regimes.

The Court further affirmed the concept that "potential purchasers of condominium units should thus 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."

The issue of investor-owned units is -- or should be -- taken seriously by all condominium unit owners -- and especially Boards of Directors.

From my own personal experience, I have seen unit owners turned down for refinance loans (or potential purchasers denied favorable mortgage loans) because of the high number of investor owners within a condominium association.

However, since this is a highly emotional issue, you and your Board should begin to educate the owners as to the problems of having too many renters within your complex. Perhaps your committee should hold an informational meeting first, to discuss the various issues and to listen -- and learn -- what the owners want.

All owners, including investors, should realize that if there are too many renters, the condominium may take on the appearance of an apartment complex, which may cause all units to depreciate in value.

There will be strong opposition to any restrictions, and factions will develop within your association. To the extent possible, you should try to avoid creating internal dissent, and an educational campaign will go a long way toward keeping the peace. The worst way to approach this subject is for the Board of Directors to suddenly announce that there will be a vote to amend the Bylaws (or the Declaration) without giving everyone ample opportunity to express their views.

After all, since your Association is supposed to be a democracy, your Board should heed the will of the majority.

For more articles by Benny Kass, please press here .


Copyright 2001 Benny Kass. Posted by Realty Times with permission.

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