Don’t Want Your Association to Be the Next Rental Community? by KBRLegal

Don’t Want Your Association to Be the Next Rental Community?

Many community associations throughout Florida struggle to deal with the increase in overnight and short-term rentals caused by the proliferation of online websites such as VRBO and Airbnb. As such, many communities fear being turned into “rental communities,” especially with so many large corporations buying homes in the South Florida area for the express purpose of renting them. These transient rentals can present nuisance and safety issues and can easily change the composition of your community. The good news, however, is that there are steps your association can take to help protect the community from becoming the next transient rental community by having the necessary language in the declaration of restrictions, as further discussed below.

There are two types of restrictions which work together to help achieve this goal. First, corporate (or business entity) ownership must be fully addressed. Second, specific criteria for approval of purchasers, tenants, and occupants residing in the community for longer than 30 days (or such other time period) must be adopted. Finally, a brief discussion regarding the applicability of the statutory provisions set out in Chapter 718 of the Florida Statutes, more commonly referred to as the Condominium Act, and Chapter 720 of the Florida Statutes, more commonly referred to as the Homeowners Association Act, is in order.

To avoid ownership for purely investment purposes, an amendment to the declaration that prohibits ownership by a corporation, limited liability company, partnership, trust, or other entity or company should be considered. However, certain carve-outs are recommended to ensure that the owners can use these types of entities for their estate planning purposes, to ensure that the rights of mortgagees are not adversely affected, and to ensure the association still has the authority to purchase units as a result of foreclosure or in other appropriate circumstances. In addition to restrictions on ownership, the association can consider adopting an amendment restricting the number of units that can be owned by a person or entity.

The association must ensure that its authority to approve transfers of title to lots and units is not an “unreasonable restraint on alienation.” In other words, the association must have the express authority to deny transfers of title, and the restrictions on such sales must be reasonable.

In Aquarian Foundation v. Sholom House, 448 So.2d 1166 (Fla. 3d DCA 1984), Florida’s Third District Court of Appeal considered the validity of a condominium association’s transfer restrictions. In its analysis, the court noted that “restrictions on a unit owner’s right to transfer his property are recognized as a valid means of insuring [sic] the association’s ability to control the composition of the condominium as a whole.” The court explained that while an association can adopt restrictions on transfers, that right must be balanced with the individual owner’s right to transfer his property. In Aquarian Foundation, the association had the right to deny a sale “arbitrarily, capriciously, and unreasonably” with no obligation to provide an alternate purchaser in the event of such denial. The court held that the association’s authority to deny for any reason whatsoever without the obligation to provide an alternate purchaser was an unreasonable restraint on alienation. However, the court explained that while a condominium association has “considerable latitude in withholding its consent to a unit owner’s transfer, the resulting restraint on alienation must be reasonable.” Therefore, we can glean from this case that a provision authorizing the association to approve or disapprove transfers is acceptable where the restraint is reasonable.

In 1993 Florida’s Fourth District Court of Appeal considered another challenge to an association’s approval authority. In Camino Gardens Association, Inc., v. McKim, 312 So.2d 636 (Fla. 4th DCA 1993), the declaration prohibited the sale, lease, or occupancy of any lot in the subdivision to anyone other than a duly admitted member in good standing of the association. The court held that because the restriction prohibited transfer to anyone except existing owners, the restriction was an unreasonable restraint on alienation and was invalid.

In Coquina Club v. Mantz, 342 So.2d 112 (Fla. 2d DCA 1977), Florida’s Second District Court of Appeal considered an age restriction contained in the declaration (which was lawful at the time). The applicant did not meet the age requirement and was therefore “facially disqualified.” The court held that, in light of the facial disqualification, the association did not have an obligation to provide the otherwise required substitute purchaser.

In light of the foregoing case law, any provision which grants the association limitless power of denial is likely invalid. If the association has the right to deny a purchaser, but the declaration is void of any standards by which such decisions should be made, the restriction can still be easily found to be invalid. However, if the declaration requires the association provide a substitute purchaser or allows for denial based on “good cause,” the provision is likely valid and enforceable. If an association has the right to deny “for good cause,” then to withstand judicial scrutiny, the governing documents, preferably the declaration, should provide standards as to what “for good cause” means.

As discussed above, the first step is to ensure that the declaration provides authority for the screening and approval process. The second step is to ensure there is meaningful written criteria by which to evaluate prospective purchasers, tenants, and even occupants residing for longer than 30 days (or other time period). If the declaration contains general language for purchaser and tenant approval but does not provide the standards and procedures necessary to make such a decision, then the association’s approval authority is vulnerable to judicial challenge and likely faces an uphill and expensive court battle. The association may be interested in adopting criteria, allowing rejection based on “good cause,” such as the following:

• A record of financial irresponsibility
• A guilty plea or conviction of a crime of moral turpitude
• A history of being a “bad tenant”
• A false statement on the application
• Failure to comply with the request of the board of directors for a personal interview

(Please note this abbreviated list was provided for example purposes only and should not be utilized by any association without consultation with the association’s lawyer as additional language is necessary.)

Providing specific written criteria on which the association can base its denial of a proposed sale, lease, or other transfer helps protect the association from claims that it is not acting reasonably in denying a transfer. However, before disapproving a proposed sale or lease, the association should be sure that the disapproval does not run afoul of the provisions of the Fair Housing Act at the federal, state, and county levels. The federal Fair Housing Act prohibits discrimination in the sale, rental, and financing of dwellings, and in other housing-related transactions, based on race, color, national origin, religion, sex, familial status, and disability. State law and, sometimes, local ordinances provide additional protected classes.

While the authority to approve lessees is an important step, adopting additional leasing restrictions addressing the frequency and type of leases permitted in the community should also be included in the declaration if these issues are a concern for the community. Associations that would like to minimize the number of short-term leases might consider amendments to the declaration limiting leasing as follows:

• No lot or unit may be rented or leased for a 12-month period (o longer) following the closing date (or date of recorded deed) of a sale of that lot or unit.
• Owners are restricted to one rental or lease per calendar year.
• After approval by the association, only entire lots or units can be rented, provided occupancy is only by the lessee and those individuals listed as occupants in the lease agreement.
• No rooms may be rented, and no transient tenants may be accommodated.
• No owner may list the owner’s lot or unit on any website (e.g., and without limitation, Airbnb, VRBO), print or online publication advertising the owner’s lot or unit for short-term rental
• No lot or unit may be subleased.

Statutory provisions must be considered as well regarding whether a new lease restriction amendment will apply to all owners or only those who vote in favor of the amendment or who acquire title to their unit or home after the effective date of the amendment (these issues will need to be reviewed with association counsel). For instance, we note the following:

• As to condominium associations, effective on October 1, 2004, the Florida legislature first adopted §718.110(13), which has since been amended, and this section provides that “[a]n amendment prohibiting unit owners from renting their units or altering the duration of the rental term or specifying or limiting the number of times unit owners are entitled to rent their units during a specified period applies only to unit owners who consent to the amendment and unit owners who acquire title to their units after the effective date of that amendment.”

• As to homeowners associations, effective on July 1, 2021, the Florida legislature adopted §720.306 (1)(h) which provides that, “[e]xcept as otherwise provided in this paragraph, any governing document, or amendment to a governing document, that is enacted after July 1, 2021, and that prohibits or regulates rental agreements applies only to a parcel owner who acquires title to the parcel after the effective date of the governing document or amendment, or to a parcel owner who consents, individually or through a representative, to the governing document or amendment. …Notwithstanding… an association may amend its governing documents to prohibit or regulate rental agreements for a term of less than 6 months and may prohibit the rental of a parcel for more than three times in a calendar year, and such amendments shall apply to all parcel owners.”

As you have likely discerned, the leasing restrictions of the Homeowners Association Act are broader than those set out in the Condominium Association Act. However, the real issue is whether these provisions apply to all associations that are already in existence or only to those that have adopted “Kaufman language” into their declaration and those declarations that are recorded after the effective date of the statute.

Kaufman language refers to having a provision in the declaration that it is subject to the relevant Chapter “as it is amended from time to time.” If the declaration contains such language, then there is no question that the statutory leasing provisions do apply. On the other hand, if there is no Kaufman language set out in the declaration, then what? There are those who take the position that these statutory leasing provisions are “procedural;” if so, then they would apply to an existing declaration. But, if the statutory leasing provisions are changing existing “substantive rights,” then, absent Kaufman language, the statutory provisions likely do not apply to the declaration at issue. By way of an oversimplified explanation, this is because the declaration is a contract, and the legislation in effect at the time a contract is executed is the law to which the contract is subjected.

Thus, we must ask the question, are the statutory leasing provisions disturbing existing substantive rights? Likely so, though it may take an appellate court decision to bring needed clarity. Clearly, this is an issue which must be discussed with the association’s legal counsel.

To ensure your association is properly protected against unwanted transient rentals, you should consult with association’s legal counsel who can review the governing documents to ensure necessary language is included and make recommendations to better protect the association from the likes of VRBO, Airbnb, and other short-term rentals, and at the same time shore up the association’s approval powers over owners, tenants, and occupants.