HOA Board Adopting Questionable Rental Restriction

Background:
I am a Board member for a condo association of 279 units in Illinois. Ours is over 83% investors. The board members who voted for the motion are those with personal agenda and is doing all kinds of unhealthy activities for a community. Even one of them is the PM. Many homeowners own multiple properties and I am one among them. Because of the high investor presence the bank won't approve convectional mortgage loans. Also, the association is a party in few lawsuits and that also won't help anyone seeking mortgage loans on properties in our community.

Issue:
Our HOA board adopted a lease restriction policy today without going through a homeowner vote. The regulation is written by the association's attorney who happened to be one of the principal of the office who wrote a pretty good article on this subject (http://www.ksnlaw.com/blog/no-lease-restrictions-condominium-owners/). The adopted policy is below.

I am particularly interested to know if they can adopt a policy with the item (K) which is discriminatory (they wanted to limit the purchases of units investors who own more than 5 units). The argument for the rental policy is that the rental restrictions will eventually help the community to attract buyers using conventional mortgages and there fore prices may go up in future. In my opinion, its a long way ahead. As I said we have over 83% of the homes as rentals; which is 232 units. To bring it down to 49% (137 units) we have to wait for the sale of 95 units and it will definitely take more than 10 years at the current pace of sale transactions.

We know that the motive of the current board members who voted for is just personal gains. By introducing clauses like item (K), they are discriminating the active investors and wanted to accumulate as many units they could (they have done it in the past by preventing other investors from buying these properties by spreading false info (in the MLS listing as "Not Rent-able", not issuing the paid assessment letters (PM is one of the board member) and even by calling the buyers attorney and threatening them that they cannot rent).

Also the clause (l) is also fishy to me.
(l) If any part of this document is found to be unlawful, the balance of the restrictions shall remain in full force and effect.

XXXXX LEASING RULES AND REGULATIONS

1. Limits on Lease Terms. (a) Notwithstanding any foregoing provisions of this Declaration to the contrary, the rental or leasing of greater than 49% of the residential Units, by number, is expressly prohibited, except as hereinafter provided:

(b) The term “Leasing of Units” includes a transaction where the title holder of a Unit, who does not reside therein, permits its occupancy by persons not on title regardless of whether a formal written lease exists or if consideration is paid therefor. Additionally, the term “leasing of units” shall include any transaction wherein possession of a Unit is provided prior to transfer of title. Notwithstanding any other provision contained herein to the contrary, in no event, shall a Unit Owner: (i) lease less than the entire Unit; (ii) lease a Unit for less than one (1) year, except as provided otherwise in sub-section (c) below; or (iii) lease a Unit for hotel or transient purposes.

(c) Hardship: If a hardship, as determined by the Board of Directors, exists, the Unit Owner may apply for a hardship waiver of the leasing restrictions set forth herein in the following manner:

(i) The Unit Owner must submit a request in writing to the Board of Directors requesting a six (6) month hardship waiver of this Section, setting forth the reasons why they are entitled to same.

(ii) If, based on the data supplied to the Board of Directors by the Unit Owner, the Board finds that a reasonable hardship exists, the Board may grant a waiver in six (6) month increments. Any lease entered into shall be in writing and for a period of six (6) months and no longer. The lease must also contain a provision that failure by the tenant or the Unit Owner to abide by the Declaration, By-Laws, other condominium instruments, if any, and Rules and Regulations (hereafter the “governing documents”) of the Association may, in the discretion of the Board of Directors, result in termination of the lease by the Board of Directors. All decisions of the Board shall be final.

(iii) Copies of all leases must be submitted to the Board within ten (10) days after execution and prior to occupancy, whichever occurs first.

(iv) All tenants shall acknowledge in writing that they have received copies of the governing documents of the Association and a copy of the written receipt shall be submitted to the Board of Directors.

(v) In the event an Owner has been granted hardship status, they must re-apply within thirty (30) days of the expiration of each hardship period if they wish to request an extension.

(d) The provisions of the Illinois Condominium Property Act (“Act”) and the governing documents shall be applicable to any person leasing a Unit and shall be deemed to be incorporated in any lease. In the event an Owner or tenant shall violate any provision set forth herein, in the governing documents or in the Act, said Owner or tenant may be subject to a flat or daily fine to be determined by the Board of Directors upon notice and an opportunity to be heard.

(e) In addition to the authority to levy fines against the Owner for violation of these rules or any other provision of the Condominium Property Act or governing documents, the Board shall have all rights and remedies, including but not limited to the right to maintain an action for possession against the Owner and/or their tenant, under 735 ILCS 5/9-111, an action for injunctive and other equitable relief, or an action at law for damages.

(f) Any action brought on behalf of the Association and/or the Board of Directors to enforce this Amendment shall subject the Owner to the payment of all costs and attorneys’ fees at the time they are incurred by the Association.

(g) All unpaid charges including legal fees as a result of the foregoing shall be deemed to be a lien against the Unit and collectible as any other unpaid regular or special assessment, including late fees and interest on the unpaid balance.

(h) These rules shall not prohibit the Board from leasing any Unit owned by the Association or any Unit which the Association has been issued an Order of Possession by the Circuit Court of DuPage County.

(I) The Board of managers is granted the authority to promulgate reasonable rules and regulations relative to the administration of a “waiting list” in the event The allocated 49% of the units are leased and additional individuals are desirous of leasing units. The administrative procedures pertaining to the waiting list may include, if desired by the Board, the use of a lottery.

(j) These leasing prohibition provisions shall not be applicable with respect to any unit owner of record on the effective date of the adoption of these rules. Upon the sale or other transfer of such unit, the provisions of this amendment shall be fully applicable including, without limitation, the requirement that the unit may must be occupied, if at all, by a title holder.

(k) For a period of one year, current owners are allowed to purchase additional units of up to five total rentable properties wherein this leasing prohibition shall not be applicable. Multiple owners of one unit, including but not limited to: spouses, tenants by the entirety and all other joint tenants; are considered one owner, are limited to five rentable units total and may not split their interests.
(l) If any part of this document is found to be unlawful, the balance of the restrictions shall remain in full force and effect.

First of all, you may be inclined to take the following with a grain of salt because I’m an owner-occupant in a townhouse community. We also have a high percentage of investor-owners, but thank goodness it’s not at 83% (yet):

Regarding the lease restrictions, I agree with NpS – these look reasonable and section K looks like a type of grandfather clause for current owners. You’re on the board, but apparently were outvoted on this, so if you’re that upset, you can sue or rally other owners to vote out the board members who approved it and reverse the deal.

That being said, some of your comments is precisely why I’ve gotten more and more irked with investor-owners in my own community, although most are decent and we currently have three on our own board.

If my math is correct, about 231 of these 279 units are investor-owned, so it would appear those homeowners (like you) get their way most of the time already. But have you or anyone else stopped to consider the remaining 48 or so owner-occupants? Do you not care that THEIR property values are being harmed because banks aren’t approving conventional mortgages because of the high percentage of investors? Or are you simply more interested in buying up more units at a super cheap price (perhaps from the owner-occupants who are still there and have no choice but to sell to you because no one else can get financing or wants to live in what’s basically become an apartment complex?)

Communities with a large percentage of investor-owners also have more issues with getting people to serve on the board because investor owners usually don’t get involved, higher maintenance costs because these units are rented out and so there’s more wear and tear from people moving out, more time and trouble addressing problems because you have to deal with both the tenant AND the investor-owner, etc. etc. And then there’s the matter of reserve funding – some investors really don’t care about funding them properly because that will eat into their profits.

If you’re so hell bent on buying up a bunch of units to rent out, why not just buy an apartment complex instead of having to deal with a HOMEOWNER association and its rules, board of directors, CCRs and stuff like that there?

You may not be happy with the board adopting this rule, but I think they’re being responsible in looking to the future. Perhaps they’ll want to sell in the future and don’t want the same problems the owner-occupants are facing with losing potential buyers. Maybe they want to reduce costs - because you have so many investor-owners, the entire community might be seen as a rental property, thus increasing insurance costs. They may even be more interested in eliminating competition from other investor-owners like themselves. Or they’ve considered the problems lots and lots of tenants can cause and are trying to turn things around. Yes, it’ll take time to increase the owner-occupant percentage, but one has to start somewhere.

Great post Sheila.

If your 83% won't get off their duffs, and the other 17% is non participatory, then you all deserve what you get.

Vela,

As others have said, you will likely have to go to court to get a ruling if all or part of the restrictions can be considered valid or not.

The best argument I can think of to use in court (if the restrictions were adopted by the board and not be the members) is that the restriction conflicts with the deed restrictions currently on file.

When one document conflicts with another, the higher precedent document is the one that controls (needs to be complied) with unless that higher document defers authority (control) to the lower document.

Do an internet search for HOA rental restriction court cases and you will find a lot of info.

Bryan,

Retired Navy here.

Orders, or other circumstances outside of your control, should count as a hardship.

Of course, you don't want to fight the issue after you received orders.
Contact your Association and ask what their hardship policy is regarding rentals.
If they don't have one, encourage them to make one.
If they have one, obtain a copy and have the JAG (oops, Navy term) your military legal rep review it for you.

Are your rental restrictions within the CC&Rs or some other document?

Tim