Question: I am the president of a large (more than 150 units) condominium complex. There are many investor owners in our complex who rent their units, and the percentage of these investors is approaching 50 percent. We have been told that there are potential financial complications when the owner-investor ratio gets too high, so our board is considering a rule which would limit leasing in our building. Is this a good idea? Our bylaws allow owners to rent their units for periods of not less than 6 months.

Answer: No, absolutely not. Your board does not have the legal authority to change the bylaws; only the owners can change -- amend -- your legal documents, in accordance with the formula and the procedures spelled out in those documents.

And, as will be discussed below, one court has even suggested that certain rights -- such as the right to lease one's property -- cannot be taken away even if the legal documents are properly amended.

Any legal question involving condominiums requires an evaluation of the "power source." The highest authority in any jurisdiction is the applicable state condominium law. The condominium laws throughout the country are different, and everyone (especially you and the other members of your board) has to understand the law under which your condominium is organized.

The second level of authority is the declaration, which is recorded among the land records in the city or the county where your property is located. This, in effect, is a document that declares that there is a condominium created, and outlines certain important aspects, including a legal description of the complex. In any condominium, there are three components: general common elements, limited common elements, and individual units. The Declaration attempts to define each of these components.

The third power source are the bylaws of the condominium. In some jurisdictions, these bylaws are recorded among the land records, and in others they are not. But whether or not they are recorded, the bylaws spell out the basic operating guidelines under which the association is to function.

The rules and regulations of your association -- properly promulgated by the board of directors -- is the fourth power source.

The law is very clear: a board of directors cannot enact a rule which conflicts with one of the higher power sources.

In your situation, your bylaws permit leasing for periods of more than six months. Thus, your board of directors cannot -- by rule or regulation -- modify what is authorized in your bylaws. The only way to make such a change is to get your bylaws amended, and this usually requires a supermajority vote of all the owners, usually either a 66 2/3 or 75 percent.

The secondary mortgage market imposes restrictions on the number of investor units in a condominium association. If an association exceeds those restrictions, potential purchasers (or owners who want to refinance their units) may find it difficult to obtain mortgage financing at normal and customary rates.

For example, both the secondary mortgage market (i.e., Fannie Mae and Freddie Mac), as well as the FHA and the VA have restrictions on the percent of units which can be rented, generally 40 to 60 percent of all units.

Accordingly, condominium associations throughout the country have been struggling with the difficult -- and very complex -- issues of balancing one's right to use his/her unit as he/she sees fit, compared to imposing restrictions on these rights so as to make sure that secondary mortgage financing is freely available.

There are many ways of addressing this issue, but the three most common avenues are as follows:

A blanket prohibition on leasing.

Obviously, in order to ensure that any such bylaw amendment is passed by a supermajority of owners, you will have to grandfather those unit owners who currently rent their units. This may be the only way to get your current investor owners to support the amendment.

While such an amendment will assure complete compliance with the secondary mortgage guidelines, it may have the effect of being unfair to all unit owners. Some people purchased a unit specifically with the purpose, or at least the option, of renting (either permanently or on a temporary basis).

Furthermore -- although most courts have upheld leasing restrictions which have been properly imposed by a valid bylaw amendment -- real estate ownership is strongly favored by the courts, which do not appreciate "restraints on alienation" -- i.e., limits on the ability to use one's property as one sees fit.

Finally -- and something especially visible in areas where there are a lot of temporary overseas assignments from private and government agencies -- a blanket prohibition clearly puts someone who is temporarily transferred a significant financial disadvantage.

Thus, if your board decides to go this route, it's recommended that the amendment include a provision which would allow leasing in hardship cases, as determined by the board of directors on a case-by-case basis.

Limit on the percentage of investor-owners in the building, so as to comply with the secondary mortgage guidelines: i.e., no more than 40 percent of the units can be rented at any one time.

While some associations have adopted this approach, it is difficult to enforce. It would require that the board -- and management -- actively monitor the number of renters on a monthly basis. It would also require a "waiting list" to be established, which can become a nightmare.

For example, if you established a 40 percent limitation, and you currently were at that mark, how would you handle a situation where another unit owner suddenly learned that he/she was being temporarily transferred out of the Washington area? Would that owner have to be placed on a waiting list, and if so, for how long? How would you know when the percentage dropped below 40 percent?

Impose a maximum period for rental of any unit: i.e., two or three years.

Under this approach, all unit owners are treated equally. Unit owners can rent, but not for more than two years (or whatever number is ultimately decided upon). While this approach may create situations in which the secondary mortgage market guidelines are exceeded, it will at least demonstrate a good faith effort on the part of the board -- and the association -- to curtail investor owners.

Accordingly, if your board really wants to restrict on investor-owners, this is perhaps the best and fairest approach to consider.

However, even under this approach, there are still some problems, as highlighted by a recent case from the Second District in Florida. In Woodside Village Condominium Association v Jahren, the court invalidated an amendment to the declaration which had been properly enacted by the requisite number of owners in that Woodside Village Association.

The amendment was quite simple. It limited the right to lease units to a term of no more than nine months in any twelve-month period. Two owners -- who had purchased their units (prior to the amendment) exclusively for the purpose of renting them out -- filed suit to declare the amendment invalid.

The Second Circuit invalidated the declaration amendment, stating:

General classifications of restrictions contained within declarations of condominium which apply to all owners equally and are not arbitrarily and discriminately applied need not pass a strict scrutiny test. We conclude, however, that amendments to declarations of condominiums that are adopted subsequent to a unit owner's purchase and that significantly alter substantial rights that existed in unit owners at the time of their purchase do require a strict scrutiny as to whether they have unreasonably altered existing rights.

In the Woodside case, the court found that the amendment deprived the plaintiffs of a valuable property right that existed at the time they purchased their units.

It has been long been considered by community association scholars that when owners purchase into an association, they are bound by the existing legal documents as well as any future amendments to those documents -- so long as the amendments were validly enacted. The Second Circuit Court has thrown a serious monkey-wrench into this theory.

Woodside Association has appealed the decision to the Florida Supreme Court, and perhaps one day the case will be finally determined. For now, at least, caution must be exercised if your Board intends to proceed with your amendment plans.

For more articles by Benny Kass, please press here.

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

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Published: June 4, 2001

Use of this article without permission is a violation of federal copyright laws.