If you own a condominium unit, a townhome or a house in a closed subdivision, chances are you are a member of a condo association or homeowners association. Recently, property rental networking services like Air B and B and Home Away have become more and more popular with property owners. Increased interest in the short-term rental industry has forced many condominium or homeowners associations to reexamine and create policies to restrict short-term rentals by unit owners.
Homeowners and condominium associations are made up of the individual property owners who own real estate and share ownership and responsibilities of the common areas such as parking lots, roadways, garages, hallways, pipes, pools and landscaping. The members elect a board, which administers the association’s responsibilities in accordance the condominium or homeowner’s association’s declaration and bylaws and with state law governing condominium/homeowner associations. See Illinois Condominium Property Act, 765 ILCS 605/1; Common Interest Community Association Act, 765 ILCS 160/1-1.
In addition to state law, the declarations and bylaws of the association describe the powers and procedures of the board and the rules and responsibilities for unit and common area ownership. The declaration is the instrument that establishes the association as a legal entity and sets forth the rules for what the board and unit owners can, cannot and must do with respect to the property. The declaration must be recorded with the county recorder of deeds and is a binding legal document that runs with the property. The association’s bylaws, in contrast, are the rules for how the association is run, including rules on the election of board members, how meetings are conducted and how owners can bring matters to the attention of the board. Associations are operated similar to corporations. If you are considering purchasing a condominium unit, be sure to review the declarations and bylaws first, as they can significantly affect your property rights.
Lately, short-term property rental networking services like Air B and B and Home Away have become popular with some property owners to earn a supplemental or, in some cases, primary income. Property owners sometimes use the income earned from short-term property rentals to pay monthly or special assessments.
However, recently association boards and unit owners have become concerned about how the behavior of short-term tenants may affect their property ownership rights and quality of life. Many owners fear that transient residents who are not invested in the property will have little respect for the rules, property rights and safety of the other property owners in the association. Further, short-term tenants may invite non-registered guests to the property who have even less financial incentive to respect the rules and rights of the association members. High turnover of residents creates the need for additional keys to common areas, which can lead to non-residents having access to the common areas. Neighboring property owners can also feel a greater sense of overall security when they are familiar with their neighbors.
Some condominium or homeowners association declarations and bylaws do not adequately address short-term leasing, forcing association boards across the country to examine the issue and come up with a policy. The concerns of local permanent residents have motivated local politicians to propose regulations on short-term rentals. Association boards and property owners are wise to consider the current status of municipal regulation of short-term rentals before deciding how to regulate short-term rentals. Most condominium or homeowner associations do choose to regulate their members’ short-term rentals in one manner or another. One method of regulating short-term rentals is amending the association’s declaration, following the procedures for doing so set forth in the declaration and bylaws. There are many conditions that can be added to short-term rentals in the declaration. For example:
• Allow for daily fines to be assessed if association members are found to rent on a short-term basis. The threat of a $300 a day fine, for example, motivates many renegade unit owners to conform to the association’s rules.
• Require that any rentals must be for at least 30 days.
• Require that a special assessment is imposed on each rental, with the proceeds to go to a property beautification fund for the common areas.
• Require that association members who wish to lease on a short-term basis must provide a copy of the property rules to their short-term tenants.
• Require that association members must verify the identity of their tenants (which most short-term rental networks like Air B and B do anyway, so this is often not a burden on short-term lessor-owners).
• Require that association members who lease on a short-term basis must be present at the condominium or subdivision property for the duration of their tenants’ stay. This increases the likelihood that the member-lessor will supervise their tenants but can effectively limit short-term rentals to association members with investment properties that are also part of the association.
• Implement a chip-based and instead of a key-based security system in order to access common areas. Key fobs or key cards that contain microchips are much more difficult for a short-term resident or their guest to copy than traditional metal keys. However, when property owners or tenants inevitably lose their common area key fobs or key cards, they are typically more expensive and time-consuming for the association to replace.
Care should be taken to follow the procedures for amendments set forth in state statute and in the declaration. For example, the amendment must be recorded. See 765 ILCS 160/1-20. If the procedure for amending the declaration is not followed, the amendment may be ruled by a court to be invalid. Unit owners may have a cause of action against the board if the board fails to follow protocol for calling meetings, keep minutes, or produce copies of minutes upon members’ request. In Illinois, a condo or homeowners association may be held liable for a unit owner’s legal fees associated with the unit owner’s efforts to obtain the association’s copy of the recorded declaration, record and receipts of expenditures, and minutes of meetings for the last seven years. See 765 ILCS 160/1-30; 765 ILCS 605/18.5.
Legal claims by a unit owner are generally against the association, meaning usually legal fees and payment of a settlement or judgment would come from the association’s insurance or its own funds. However, many board members are troubled to find out that they may be held personally liable to unit owners if they breach their fiduciary duty to the unit owners. This fiduciary duty means that they must act in the best interest of all the property owners who are members of the association and must not be motivated by self-interest. Board member actions that are motivated by a conflict of interest and that do not adhere to the procedures set forth in the declaration and bylaws often draw allegations of breach of fiduciary duty, among other claims. Board members can help protect themselves and the association by following the procedures spelled out in the declaration and bylaws. Board members or the association may wish to purchase insurance to protect the board members, such as a directors and officers policy, an errors and omissions policy or an umbrella policy.
One drawback of choosing to restrict short-term leasing is that the association or its management company must enforce the restrictions, which ends up being a drain on the association’s or the management company’s time and funds. Therefore, association boards and property owners should consider how easily a short-term lease restriction can be enforced before amending the declaration or bylaws. If authorized by the declaration and bylaws, there are several enforcement tactics that a condominium or homeowner association board can do to enforce rules on short-term rentals:
• Monitor for short-term rentals by searching online for Air B and B or Home Away accounts, reviewing security camera footage and instructing on-site personnel to watch for indications of short-term residents such as unknown people entering or leaving with luggage.
• Request written assurances from the association member-lessors that their short-term tenants will abide by all rules and highlight the rules that have a high incidence of violations such as parking and noise rules. This can be a valuable tool in deterring rules violations because it puts the member-lessor on notice that his short-term tenants are being monitored for violations and reminds them of rules that they may have simply forgotten.
• If a violation is suspected, send an attorney-drafted letter or email to owners suspected of violating the short-term rental rules or prohibition. The communication should remind the owners of their obligations under the declaration or bylaws and of the daily fine if the violation continues, if provided for by the declaration or bylaws.
• If an association member is believed to have violated the association’s rules, the Board can suspend the member’s use of amenities, suspend their voting privileges or even have them evicted for nonpayment of assessments.
Another difficulty with enforcing minimum-stay requirements is that association member-lessors can require short-term lessees to sign a lease for a minimum amount of time, but they cannot force the short-term lessees to be physically present at the property for the entire duration. A short-term lessee is free to come and go as she pleases. However, if the rental is legitimately priced for a 30 plus-day rental, there is at least a financial disincentive for short-term tenants to vacate the property. Associations should also be cautious about refusing to compromise with association members who want to rent on a short-term basis. Refusing to compromise, or at least negotiate, with unit owners on the issue may encourage member-lessors to try and skirt the rules. No matter what approach is taken by the association board or members, a thoughtful analysis and well-drafted documentation are key to successfully creating and enforcing a policy on short-term rentals.
© Schaeve Law Office. This material is intended for educational use only.