THE RETURN OF LEASING AND RESTRICTIONS AT ASOCIATIONS
As Illinois and the rest of the nation recovers from the crash of the residential real estate market, the issue of leasing restrictions has, again, arisen. Many associations having survived the onslaught of foreclosures are awaking to realize that the formerly owner occupied properties are quickly being bought up by groups of investors. Sometimes this has occurred over a number of years, but for some associations it seems like it happened overnight. Associations may quickly see the number of rental properties in their communities go from a comfortable five to ten percent, to a painful or problematic thirty percent.
The increase in rental units can be concerning to community associations for a myriad of reasons. When such concerns arise, boards and the owners have choices when it comes to who may occupy individual living units. The first choice to be made is whether leasing of units should be restricted in any fashion. If the answer to that question is yes, there are several leasing restriction options available for consideration. Whether an association chooses to allow leasing or not, it is important for boards and the owners to know their rights with respect to enacting leasing restrictions.
When an association decides to enact a leasing prohibition, either outright, with a grandfather clause or a cap, the association must determine whether to include such prohibition or restriction as a rule or by an amendment to the declaration containing a restrictive covenant. The difference between a rule and a covenant could determine the enforceability of the prohibition/restriction. In Illinois the seminal case on leasing restrictions is Apple II Condominium Association v. Worth Bank and Trust Co., 277 Ill.App.3d 345 (1st Dist. 1995).
The unit owners in Apple II were investment owners who purchased their property at a time when the association had no leasing restrictions. However, the appellate court stated that “neither the fact that there were no restrictions on the property when the [complaining unit owners] purchased their unit nor the fact that the [complaining unit owners] purchased the property for investment purposes is relevant.” Additionally, the court in Apple II acknowledged that while leasing restrictions put in place by rule are legal, courts will employ a greater level of scrutiny since the rule was adopted solely by a board and not the owners.
Once an association determines that a leasing amendment restriction would be beneficial to their community, a decision must be made as to the nature and extent of such a restriction. Does the association want to completely ban leasing of all units? Does the association want to limit leasing only to those units that are leased as of the time the amendment is passed? Does the association want to allow all current owners the opportunity to lease their units but prevent any subsequent purchasers from being able to enter into leases? Does the association want to impose a percentage cap? Each of these decisions need to be carefully considered and properly documented in the language of any proposed amendment.
If a board and the owners at an association decide that restricting leasing of units would be beneficial to the association, the board should take several steps. First, the board should consult the association’s governing documents and review what they say about leasing. The next step the board and the owners must determine is the nature and extent of leasing restriction to be enacted. Finally, the best approach is for the board to propose an amendment to the governing documents and then have the proposed amendment voted on by the owners. While there are several options available to the board and the owners, it is up to the board and the owners to decide which leasing restriction best suits their community before it’s too late.