By: Howard S. Goldman, Esq. and Rebecca A. Erlichman, Esq.
The issue of how to handle condominium unit rentals is one that remains relevant to all condominium associations. It is up to the condominium association to protect the interests of all of the unit owners – both those who want to avoid an undue concentration of tenants to protect the character of the community and those who wish to rent out their units.
There are pros and cons to allowing rentals. Tenants are more likely to abuse common areas and amenities, violate condominium association rules, and be less conscientious caretakers of the units they occupy as compared to homeowners. A large concentration of tenants will significantly change the nature of a condominium community and could potentially lower the market price and affect the ability of owners to refinance. On the other hand, however, certain condominium unit owners value the ability to rent out units as a financial investment and want the flexibility of being able to rent out the unit during a short term geographical relocation.
Whether the condominium association chooses to ban rentals altogether, or allows them, it is clear that the bylaws should containing language pertaining to rentals to clarify the rules and avoid conflict. This article will discuss a number of factors condominium associations should consider with respect to updating its bylaws to address the issue of tenants.
Condominium Associations Have Authority to Implement New Rules on Rentals
In general, condominium associations have broad latitude to create rules and regulations intended to better the community. These broad powers emerge from the basic notion of condominium ownership: in exchange for the benefits of association with one’s neighbors, an owner “must give up a certain degree of freedom of choice which he might otherwise enjoy in separate, privately owned property.” Where use restrictions are placed on unit owners, such measures of control must be contained within the condominium’s master deed or by-laws and not its rules and regulations. Johnson v. Keith, 368 Mass. 316, 320 (1975); M.G.L. 183A § 8(g) (requiring that restrictions on the use of condominium buildings be contained within the master deed); M.G.L. 183A § 11(e) (requiring that use restrictions not detailed in the master deed be contained in the by-laws). See Granby Heights Association, Inc. v. Dean, 38 Mass. App. Ct. 266 (1995) (where a condominium rule against pets was ruled invalid because it was not contained within the by-laws or master deed).
Courts in Massachusetts have long recognized that condominium associations have the power to change their rules. If a certain percentage of unit owners (generally a supermajority) vote to amend the bylaws to prohibit rentals, then the condominium can impose rules on rentals or even prohibit them altogether regardless of the adverse impact on owners who purchased their units with the intent to rent them out. Once enacted, these rules are applicable to existing unit owners, but landlord/tenant rules prohibit the condominium association from immediately requiring existing tenants to be evicted.
Reasons to Restrict Rentals
Most Condominiums allow for units to be rented but associations should be wary of rules allowing unrestricted rentals. Conventional wisdom suggests that tenants are less considerate neighbors than unit owners because they are not financially invested in the property. Tenants, especially tenants who are only living in the unit for a short period of time, are far more likely to disrespect the Condominium rules and regulations than unit owners who are subject to fines. Our firm frequently is called upon by condominium boards to contact unit owner/landlords to require their tenants to observe regulations such as noise, illegal pets, or allowing unit access for necessary repair work. While not all tenants are poorly behaved, there are enough instances of “bad tenants” to warrant condominium associations wanting to ban entirely or set reasonable limits on the ability of its unit owners to rent out units in order to protect the character of its community.
Condominiums should be wary of having too many unit owners who view the condominium unit solely as a money making asset. Absentee unit owners will not be as invested in the building and are more likely to reject increases in maintenance expenditures or common area fees need for large capital projects in favor of maximizing their own profits. Too many absentee unit owners could influence the board to put off necessary improvements to the building which would decrease the home values for all of the unit owners.
Another reason a condominium association should consider banning or placing restrictions on rentals is to ensure that the building is able to be covered under its master insurance policy without being subject to an increase in the policy premium. Many insurers state that only a small percentage (commonly less than 10%) of units may be rented out at a time before additional (and more costly) coverage is required. In addition, many lenders will not approve a mortgage on a unit located in a building with a large percentage of renters. This will impact both prospective buyers and current owners who are trying to refinance.
Common Sense Rental Restrictions
Small condominiums with mostly unit owner occupied units should carefully consider the above ramifications of allowing tenants and consider amending their bylaws to restrict rentals or ban them altogether. Our firm has drafted a ban on rentals with a “hardship exception” based on the condominium association’s primary interest in protecting the character, insurability and marketability of the condominium.
While certain condominium associations may be convinced that restricting unit owners from renting out units altogether is the right answer, other condominium associations may desire for only a small percentage of units to be rented, and to have control over the length and content of the lease. Even in condominium associations that allow rentals, it is important to implement bylaws that regulate the process. For example, condominium associations should require that all unit owners provide a copy of the lease and names of the tenants to the condominium association. They should also consider implementing a move-in and move-out fee.
Condominium associations should also consider amending the bylaws to include reasonable limits on renting out units, including limiting the number or percentage of units that can be rented, establishing a minimum lease term – such as one year – to prevent unit owners from renting out their units through Airbnb.com or other popular home sharing websites, and requiring that each lease should incorporate the terms and conditions of the condominium bylaws and rules and regulations.
Condominium associations should also consider amending the bylaws to require all unit owners renting out his/her unit to obtain and maintain a so-called “HO6 policy,” a condominium unit owner insurance policy – or equivalent, as well as a so-called “HO1733,” a unit owner’s rental to others endorsement. Some condominium associations are event requiring that tenants must obtain a so-called “HO4,” a tenant home owners policy. The bylaw should require evidence of all insurance coverage to be provided to the association. These insurance modifications should permit the condominium to have a large deductible and to file fewer insurance claims.
Grandfather, Lotteries and Hardship Provisions
Although there are many important reasons to restrict or limit the practice of condominium rentals, there will also be a number of compelling exceptions. For that reason, condominium associations should consider adding grandfather clause and hardship provision to any rules prohibiting unit owner rentals or rental restrictions.
A grandfather clause would exempt some or all current units from the new rental rules. All units not currently being rented under a valid lease could be immediately subject to the new bylaws but any units currently being rented out under a valid lease will need to be treated differently as Massachusetts landlord/tenant laws will prohibit the condominium from terminating a valid lease mid rental term. A grandfather clause would allow these units to continue their rentals but provide rules that unit owners must follow. For example, condominium associations could consider including language in the bylaw stating that all current leases may not be renewed without written permission of the trustee, and require all unit owners to provide a copy of the current lease, including move-out date, immediately.
If associations determine that they want to allow a small number or percentage of units to be rented out, they could consider amending the rules to implement a rental lottery. The number of units allowed to be rented would depend on the character of the community. For example, a condominium with a large population of older residents may allow a higher rental cap due to the likelihood that many owners may need to vacate their homes for extended period because of illness or estate planning A rental lottery would provide a way for the trust to ensure that all unit owners have a fair opportunity to rent out their unit but restrict the overall number of units being rented at one time. The lottery would need to take place at a special meeting of the trust, and the winner would be allowed to rent out his unit for a one year period. The drawback of a lottery is that it requires the trust to keep track of the rental units, maintain a list of current tenants and lease expiration dates and run a fair lottery. It will also potentially cause a unit owner to be in the strange position of renting out their unit for one year but not being allowed to rent it the following year. Our law firm is experienced in drafting lottery provisions and is available to discuss the pros and cons of a lottery system and ways to make it fair for all residents.
Even if the association bans rentals altogether, or implements a limited number of units that are allowed to be rented, the association should consider allowing unit owners to rent their units on a case by case basis. There are some situations that rental is necessary for a unit owner who would otherwise be severely disadvantaged by the rental restrictions. Examples of hardships that would trigger the association to grant the exception would be a unit owners need to relocate due to a new job, illness, or relocation to the need for unit owner to enter a nursing home. The hardship exception should require that unit owners provide written documentation substantiating the reason they require to rent their unit due to hardship. All hardship exceptions must be specific and contain a narrow definition of hardsiop so that unit owners do not take advantage.
Associations should also consider estate planning needs of its unit owners. If an elderly unit owner wants to put their unit in their child’s name but remain living there, the association could consider making an exception and allowing this “rental” to continue without being subject to the lottery or other restrictions.
The association must have the power to enforce all of the above discussed restrictions on rentals or unit owners will not have an incentive to follow them. The condominium should consider an amendment that requires unit owners renting their units to incorporate into their leases the terms and conditions of the association’s declaration of trust and master deed. The lease terms should also specify that the trust may evict problem tenants who fail to follow the rules and regulations of the community, may assess eviction costs, inclusive of reasonable attorney fees, to the uni towner, if after notice the Unit Owner fails to timely evict the noncompliant tenant. In addition, associations should consider enacting language assessing a daily fine on unit owners who have rented out units in violation of the condominium rental restrictions. Such fine should constitute a lien on the Unit which shall be enforceable as a common area charge in accordance with MGL Ch. 183A. By including these provisions and the association’s authority to fine unit owners if their tenants are not complying with the rules is usually enough to ensure unit owners comply with the rules.
Community living means learning to live in close proximity with others and relying on neighbors to act appropriately and in the best interest of others. Enacting rental restrictions is another way of monitoring which people are living in your condominium and ensuring that their presence will not devalue your property. Our law firm is experienced in drafting rental restriction clauses and will work with your community to tailor them to your specific needs and address you specific concerns.
About the Authors
Goldman & Pease LLC provides experienced, professional legal counsel in corporate and business law, real estate and civil litigation. The firm provides legal planning and counseling to help clients avoid problems by addressing changing circumstances and by anticipating future opportunities.
Attorney Howard S. Goldman is the founding partner of the law firm of Goldman & Pease LLC, 160 Gould Street, Needham, Massachusetts 02494 (781) 292-1080. Mr. Goldman concentrates his practice in the areas of real estate, finance, and civil litigation, where he represents property managers, lending institutions, developers, and contractors for more than thirty years. He is an active member of the Massachusetts, Norfolk, and Rhode Island Bar Associations in his field and is also an active member of CAI and IREM, where he frequently lectures and writes columns affecting the real estate and finance industries. Mr. Goldman serves as a member of the Zoning Board of Appeals for the Town of Needham and as a court appointed mediator at the Boston Municipal Court and as a pro bono advocate at Federal District Court mediations.
Senior Associate Rebecca Erlichman assisted in drafting this article and focuses her practice on civil litigation matters, including condominium disputes, transactional real estate matters, real estate litigation and estate planning. She is an associate member of the Zoning Board of Appeals for the Town of Medfield.