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Minnesota Community Living 2013-07-08 Considering Rental Restrictions Part One: What and Why?
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Considering Rental Restrictions Part One: What and Why?

By Matt Drewes, Thomsen & Nybeck, P.A. Attorneys

Matt DrewesThis is the first in a two-part series discussing rental restrictions. I will begin by discussing the reasons that community associations may want to pass or to amend rental restrictions, and some considerations that affect that analysis. Part 2, which will appear in the next issue of Community Living Magazine, will review the common processes that apply to most community associations when they may decide they want to try to pass an amendment.

What Are Rental Restrictions?

The term "rental restriction” describes one or more provisions of an association’s governing documents that limit or prohibit an owner’s ability to rent her lot or unit to someone else. A rental restriction is a limitation on the owners’ use of their units in the sense that it states that some or all of the units may not be rented, or that units may not be rented except subject to certain conditions.

This is different from certain regulations or procedures an association may adopt to help ensure rentals are performed in an orderly and safe fashion, such as requiring unit owners to perform credit or criminal background checks. As a restriction on an owner’s use of the unit, the restriction must appear in the association’s declaration, which is recorded against the units and other property that make up the association. In contrast, a procedural requirement often can be implemented by the passage of a rule.

Some owners may argue that the restriction of their right to rent their units improperly restricts their use and enjoyment of their property. There is caselaw underscoring the ability for associations to make such restrictions, however, which is strongly based on the fact that an association’s declaration may be amended to include those restrictions. As long as the proper procedures required by the declaration and any applicable statutes are followed (which will be covered in Part 2 of this series), an owner could not claim that he or she was not aware that a restriction like lease prohibition might occur.

On the other hand, if a rental restriction was not performed by a properly-passed amendment to the declaration, its enforcement is subject to challenge.

Why Have Rental Restrictions?

Several years ago, while the real estate market was surging, associations began to move toward rental restrictions. There were a number of reasons that associations did so, including:

  1. Whether deserved or not, the belief that renter occupants tend to take less care of units and are less invested in the neighborhood or community;
  2. The belief that absentee owners are less inclined to keep their units in order, keeping the property clean, and enforcing the rules;
  3. The fact that enforcement against absentee owners can be difficult due to inability to locate or communicate with them; and
  4. The real or perceived notion that there is a decrease in property values where the units in an association are heavily rented, rather than owner occupied. 
    There are more reasons than these; this is not an exhaustive list. And, while each of these reasons may not apply universally, and there certainly are precautions an association may take to limit these risks, I have seen examples of each of these concerns occur.

Are Rental Restrictions Still a Good Idea?

Some associations have begun to question the side-effects of their rental restrictions. Many who previously banned or even just limited rentals have revisited their restrictions to ensure their members still want to keep the restrictions. The economy, particularly the real estate market, has put many unit owners in a bind. Some have had to leave their homes for extended periods or permanently (due to military deployment or reassignment; job change or transfer – or layoff; the owner’s death has placed the unit in an estate; and many other reasons which often are unplanned and unpleasant). And even though we are starting to see signs of improvement, now may still be a difficult time to sell, forcing people to face selling below market, or for less than what they owe on the property, or otherwise requiring them to hold the unit for a long time, causing them to suffer significant hardships.

To the extent that one concern in developing lease restrictions was to avoid absentee owner issues, the rental restriction can run contrary to that purpose. In the event an association does not allow occupancy by anyone other than the owner or his family, an owner forced to move for other circumstances will not be present and the unit will sit vacant.Another way in which some overly-broad rental restrictions "backfire” is they chase out the good landlords along with the bad, and units wind up vacant because the owner has lost the unit through foreclosure. Subsequently, the prices paid at foreclosure sales and upon the sale of bank-owned units further depress unit values.

On the other hand, landlords who exercise good judgment and carefully select tenants (whether of their own volition or due to reasonable leasing rules and procedures) can keep the community thriving. They may keep their units occupied with conscientious renters and pay their assessments on time.

Don’t Eliminate; Regulate.

To address the economic realities facing both the association and its members, while avoiding the negative consequences typically associated with leasing, an association may wish to consider amending the declaration to ease the pressure on those involved. For example, an association may restrict rentals under terms that allow for prudent exceptions or in the case of hardship such as the above examples. Keep in mind, however, that the more open-ended the rules or exceptions become, and the more discretion given to the Board, the greater the potential that there might be inconsistent decisions, leading to allegations of discrimination or disparate treatment. Alternatively, an association may wish to reverse an existing restriction to permit rentals entirely. But an association that opens (or reopens) the door to rentals won’t want to bring back the problems so many have tried to avoid by prohibiting rentals in the first place. This can be done through regulations, rather than restrictions.

Associations should consider implementing helpful guidelines and conditions that encourage owners to take care in deciding to whom they rent a unit, and to remain engaged and responsible for paying assessments or handling problems that may arise. If done properly, it’s even possible to give the association the authority to go directly after a tenant who violates the terms of the association’s governing documents or rules and regulations. Any of these restrictions, or others, should include a provision allowing the association to recover attorneys’ fees and costs incurred pursuing enforcement or collection activities.

Obviously, there are a substantial number of considerations and matters for associations to attend to when considering (or re-considering) lease restrictions and the exceptions that may apply. Be sure to avoid future problems by carefully implementing lease restrictions or exceptions that are in the best interests of the association, now and in the future. To do that, the association should consider and address each of the competing factors when deciding what restrictions are appropriate.

Note: The information in this article is provided solely as general information and not as legal advice. Your receipt, and even your use of this information, does not establish an attorney-client relationship. Readers are urged to speak with a qualified attorney focusing on community association law when making decisions regarding a specific legal issue.

Published by Community Associations Institute — Minnesota Chapter, copyright 2013. All articles and paid advertising represent the opinions of authors and advertisers and not necessarily the opinion of either Minnesota Community Living or CAI–Minnesota Chapter. The information contained within should not be construed as a recommendation for any course of action regarding financial, legal, accounting, or other professional services by the CAI–Minnesota Chapter, or by Minnesota Community Living, or its authors. Articles, letters to the editor, and advertising may be sent to Chapter Staff Editor Joanne Penn at joannep@cai-mn.com, or at CAI–Minnesota Chapter, 1000 Westgate Dr., Suite 252, St. Paul, MN 55114. 

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