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Condo Board Disallows Rentals

Ask the Real Estate Lawyer: Real Estate Law Q&A

REM #LAW 719

By Ilyce R. Glink and Samuel J. Tamkin

Summary: A reader owns and rents out a townhouse in Virginia. The board has proposed to completely disallow rentals, therefore disrupting her retirement income. Sam and Ilyce suggest looking for other successful litigation regarding changes in home assoication by-laws in Virginia.

Q: My wife owns a duplex townhouse unit in Virginia. At one time, she lived in one of the units. After we married, we rented it out.
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She is a retired teacher, and this income is part of her retirement plan. When she bought the property in 1998, and later rented it, there were no homeowner association restrictions pertaining to rentals. The homeowner’s association has since restricted rentals to 15 percent of the total units in the development. Right now, less than 10 percent of the units are rented.

But now the homeowner association is proposing to eliminate rentals without grandfathering any of the current owners who have been renting their units all along. I feel the amendment will probably pass because most of the residents just vote for whatever the board says.

The board argues that property values are negatively affected by rentals doesn't work because the property values rose more than 50 percent over the past two years. The argument that the neighborhood will be more attractive doesn't hold water either because the community just won a “neighborhood of the year” award.

Current tenants will be allowed to stay until their lease expires. Then they must move out. The board will have the sole discretion to grant any hardship exceptions, but does not seem inclined to allow any rentals at all.

A letter sent to all of the owners states that when the current renter moves out, the homeowner must move in themselves, or sell their house or let it sit empty. This seems to go too far.

I believe the Virginia Property Owner's Association Act does allow an association to amend its declarations and add more rules and regulations, but how can they take away part of someone's retirement income and force a property owner to sell out? I believe that a citizen's right to own property also should include the right to sell or rent it as he sees fit. The Virginia Property Owner's Association Act gives too much power to these organizations and may need an amendment to prevent one group from taking away rights from others.

Can you help?

A: You seem to have become quite knowledgeable about the issue that is affecting you. You need to make sure that the document that regulates the homeowner association allows the board to change the rules regarding leases in your building.

If the declaration currently allows rentals, then the board will have to satisfy the requirements of the declaration and the condominium act in your state to eliminate rentals. The board may need a two-thirds majority to implement the new rule. In some states, however, the board may only need a simple majority to change the declaration.

The most important issue for you to find out is whether there are any other cases in Virginia that have litigated this issue – it’s likely that this issue has already been litigated. If you find that you either want to fight this issue or need some additional information, you should sit down with an attorney who can research the recent case law history in Virginia to determine if the board can eliminate the right to lease units outright or whether they must grandfather in the units until they are sold.

The board does have one valid point that you did not mention: in most homeowner associations, lenders tend to prefer to lend (and in some cases will only to lend) to associations that have at least 70 percent owner occupancy. With only 10 percent of the units leased, this isn’t a problem for your development

There are many homeowner associations that feel that rentals may not help the values of the association. In some cases the associations may be right, but in others they are probably wrong. In some cases, eliminating rentals may depress the market for the homes. If the owners who rent are forced to sell their units, it can cause the values of all units in the development to fall.

Likewise, if homeowners don’t have some flexibility to lease their units from time-to-time, they will have to sell. When the market is strong and sales are good, the association won’t care, but if the market turns soft and the units aren’t selling, even well intentioned owners will want to lease rather than sell the units at any price.

Leasing can provide time for home values to stabilize, allowing owners to sell as they need to without being penalized financially.

If the rules change, and leasing is prohibited, you’ll have to decide whether to stay. If you decide to sell, you can purchase another rental property in a development that specifically allows rentals. If you use a 1031 tax-free exchange, your wife can sell her property and use the proceeds to purchase a new property, while deferring the payment of taxes until the sale of the replacement property.

If the values of the property has risen as much as you say, she may even be able to buy two properties to replace this one, possibly increasing her retirement income.

Finally, if the building is intent on changing the rules and you want to fight it, you should sit down with an attorney to determine what your chances of success will be in your state. If this issue has been litigated and people like you have previously lost, you should sell now, while prices are high in your neighborhood and move on.

The real issue is why the association didn’t allow those homes that are currently rented to remain rentals until they are sold. It could have imposed a time limit of five years or so to give you time to keep it as a rental and then sell it when you believe market conditions are right for you.

Perhaps you can get more involved with the board and propose this as a middle step – and buy your wife some time to get her home sold.

Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For More Money In Any Market. If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s website www.thinkglink.com