In some homeowner associations, the number of owners who rent their units is extraordinarily high, sometimes even outnumbering resident owners. With absentee owners and just a few irresponsible renters, there may be a move by the board to limit or eliminate rentals altogether. What things should be considered?
When it comes to sorting out rental restrictions, there is a hierarchy of “legal authority.”
1. The highest legal authority is the state’s corporation, condominium and homeowner association statutes. Statutes vary from state to state.
2. The second highest legal authority is the association Declaration which is recorded in the county where the association is located. This document “declares” that there is a homeowner association and outlines the framework and a legal description of the property. The Declaration defines the three components of HOA property ownership: common elements (property owned and used by all owners), limited common elements (property owned by all but used by one owner) and individual homes (owned and used by one owner).
3. The third legal authority is the association Bylaws. The bylaws spell out the operating guidelines of the association.
4. Resolutions are the fourth level of authority. Resolutions generally deal with multifaceted issues like parking and architectural control that require clear definition and enforcement provisions.
5. Rules and Regulations are the fifth legal authority. They may be written in the Bylaws or enacted by the board. They are more of the “thou shalt not …” directives and may or may not elaborate on what that means or what the consequences for violating it are.
The board cannot enact a Resolution, Rule or Regulation that conflicts with one of the higher legal authorities. If the Bylaws permit rentals, the board cannot reduce or eliminate them. The change requires an amendment to the bylaws by whatever vote indicated in the governing documents which may be a “super majority” vote of the owners (67 to 100%).
The mortgage loan market may impose restrictions on the number of rental units in a homeowner association. If rentals exceed those limits, purchasers or owners who want to refinance their units may find it difficult to get financing at normal rates, if at all. Fannie Mae, Freddie Mac, FHA and VA all have restrictions on the percent of units which can be rented.
Homeowner associations may try to balance the right to rent versus restrictions imposed by lenders. The three most common ways are:
Prohibition on Renting. To ensure that such a bylaw amendment would pass, existing landlords would insist on their units being “grandfathered” (exempted from the prohibition). Such a concession would be unfair to some owners since these owners will have greater rights than other owners. The amendment should allow renting in hardship cases like job transfer or job loss.
Limit Number of Rentals. Adopting this kind of rental control requires that the board to actively monitor the number of renters and establish a “waiting list” so that all owners have access to the rental right.
Sunseting Rentals. This is a variation of the “prohibition with grandfather” provision. By setting a deadline of, say, one year away, current landlords can continue to rent for a reasonable time and have time to market the property to an owner occupant. At the end of a year, all homes are expected to be owner occupied which levels the rental restriction playing field.
When owners purchase into a homeowner association, they are bound by the existing governing documents and all validly enacted amendments. However, the board should keep in mind when amending and resolving that judges often side with property owners and their rights. If challenged, the HOA must defend a “greater good” theory such as: If the level of rentals is too great, mortgage loan options will be limited and negatively impact market values. If all owners buy into it, your job is easy. If not, you’ll need to convince the judge.
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