February 6, 2019
Teachers often compare property rights to a “bundle of sticks.” Each stick represents a discernable owner’s right such as the right to occupy, the right to use the community swimming pool, the right to live free of water intrusion, the right of access, and so on. One powerful right is the ability to rent out possession of the property. A property that cannot be conveniently rented is less useful, and therefore, less valuable.
Neighbors often view renters in a negative light. They view a community predominantly composed of owner-occupants as more vibrant than that of a community full of renters. Many view owner-occupants as wealthier, more committed to maintaining their property and more engaged in the community. Individual owners may desire the privilege of renting their own property while at the same time wanting their neighbors to be owner-occupants.
This conundrum readily manifests itself in condominium developments. High-rise condominium complexes often look and feel like rental buildings. Some investors shop for condominium units because they make great rental units during a housing shortage. However, condominium developers and managers frequently insert rental restrictions into covenants, bylaws or board-adopted regulations. While buyers and owners want the sale of their units to qualify for FHA-sponsored financing, current mortgage market conditions place pressure on the resale values for condominium units and the FHA imposes owner–occupant ratio threshold requirements for certain types of desirable financing options. For example, if the current applicable threshold is 51% owner-occupants, the current owners, as a group, will want to suppress rentals in the building to protect the resale value of their units. At the same time, those owners will individually have a personal interest in the option to rent their units if so desired. Therefore, rental restrictions in condominium governing documents are breeding grounds for conflict.
Many perceive short-term rentals as a threat to condominium communities since most condominiums are not set up to be operated as hotels or resorts. For example, a condominium concierge is not the same as a hotel receptionist, the amenities in a residential condominium differ from those found at a resort, and parking passes are often in short supply. In addition, short-term renters have a reputation for treating condominium units like hotel rooms, adding noise and traffic. To that end, it’s common for covenants or regulations of a condominium to contain provisions forbidding, discouraging or restricting the rights of owners to list and operate their units using Airbnb, HomeAway or other short-term rental websites.
Here we will discuss rental restrictions in Virginia condominiums. Every condominium association has different rental restrictions. In addition, the city or county may have separate rules (ordinances) of its own regulating short term rentals, which a short-term rental landlord must be aware of. This article focuses on where to look to find the applicable association rules and how to determine their enforceability. Frequently, rental restrictions cannot be enforced as clearly and certainly as management argues. For that reason, condominium unit owners owe it to themselves to fully understand the meaning and possible enforceability of the rental restriction rules they are bound by.
In condominium matters, one starts with the careful review of the declaration of covenants and bylaws. The condominium association is charged with administering the declaration of covenants. The Supreme Court of Virginia held that a condominium declaration is in the nature of a contract between the condominium association and the unit owners (including the unit owners among each other). One must look to Virginia law to determine how to interpret the declaration and what remedies may be available. The declaration and plats define the shape of the property rights that the owner can pass on to the tenant in a lease. The owner cannot convey rights to a tenant that the owner does not enjoy under the governing documents. Owners commonly incorporate the condominium instruments into the lease by reference to avoid situations where the tenant insists that they have a right to do something which the covenants do not allow.
The principal authority for interpreting covenants is the Virginia Condominium Act. Between 2015 and 2016, the General Assembly added provisions limiting the authority of a condominium association to restrict the rental of units. Va. Code § 55-79.87:1(A) provides a broad list of restrictions that a condominium board cannot impose unless provided for in the declaration or bylaws. Even if the amendments weren’t adopted, the Supreme Court of Virginia has held that a condominium association cannot do anything that isn’t explicitly or implicitly authorized in the governing documents. The legislature adopted this legislation during the emergence of short-term rentals. Let’s take a look at these restrictions that are permitted only if expressed in the governing documents or other parts of the Condominium Act:
- Condition or prohibit the rental of a unit to a tenant by a unit owner or make an assessment or impose a charge (except as otherwise provided by the statute). This seems helpfully broad to a unit owner challenging a board-adopted restriction.
- Charge a rental fee, application fee or other processing fee in excess of $50.00.
- Charge an annual or monthly rental fee.
- Require the unit owner to use a lease or addendum form prepared by the association.
- Charge any deposit from the unit owner or the tenant.
- Have the authority to evict the tenant or require the owner to delegate eviction power to the association. Buyers ought to be disturbed by provisions in condominium documents giving condominiums such authority.
Va. Code § 55-79.87:1(B) authorizes the association to require the unit owners to provide the names and contact information of tenants. Without such information, the association’s practical ability to enforce any rental restrictions in the covenants is limited. The authority to mandate registration is necessary to effectively regulate. This amendment made it easier to sort out what restrictions may be enforced without a deep dive into the case law.
Where the terms of restrictive covenants are clear and unambiguous, the duty of the court is to interpret them in accordance with their plain meaning. The association’s board or committee may not act in contravention of its governing documents. Unfortunately, many association governing documents are unclear, ambiguous or uncertain in meaning or effect, such that experienced judges, lawyers or professors may favor conflicting interpretations.
Attempts to use recorded covenants to restrict rental rights predates the rise of short-term rental websites. In Scott v. Walker, the Supreme Court of Virginia considered case precedents in deciding whether an HOA covenant requiring real property be used only for “residential purposes” would prohibit short term rental of a single-family dwelling. The Supreme Court of Virginia found the covenant ambiguous and for that reason construed it in favor of free use of land.
William Scott and Suzanna Scott owned a lot in the Harbor Village HOA on Smith Mountain Lake. Their lot was located near Roanoke. After purchase, the Scotts began to use their property as a short-term rental. Donald and Charlotte Walker, their neighbors, were unhappy about the Scotts’ short-term renting. They sued the Scotts. The Circuit Court of Bedford County found that rental on a nightly or weekly basis is not “residential” because the property is not being used as a domicile. Understanding the Circuit Court’s view is not difficult. A hotel or bed and breakfast is a business, not a collection of homes. If a hotel guest doesn’t pay, then the hotel probably won’t need to file an eviction lawsuit.
The Supreme Court of Virginia construed the covenant according to the plain meaning rule and the rule that errs on the side of free use when there is doubt or ambiguity.
It is . . . the general rule that while courts of equity will enforce restrictive covenants where the intention of the parties is clear, and the restrictions are reasonable, they are not favored, and the burden is on him who would enforce such covenants to establish that the activity objected to is within their terms. They are to be construed most strictly against the grantor and persons seeking to enforce them, and substantial doubt or ambiguity is to be resolved in favor of the free use of property and against restrictions.Scott v. Walker, 274 Va. 209 (2007).
Given the limitations imposed by the Condominium Act and the series of decisions by the Supreme Court of Virginia, condominium unit owners owe it to themselves to not take their board or manager’s word for it when they waive a board-enacted “Policy Resolution” regarding the rental of units. The rules may not be enforceable or may not be enforceable in the manner that the board of directors wants. The right to rent out a condominium unit may determine whether the owner can keep the property. The Supreme Court of Virginia’s method of interpreting ambiguous covenants in favor of free use is something that any attorney dealing with rental restrictions in Virginia condominiums must fully understand.