HOA Rental Caps – The Need For 90% Owner Approval & The Risks Of Not Getting It

SUMMARY: Due to a September 2, 2014 court decision, condominium and homeowner associations need to consult with their attorney to determine the enforceability of their rental cap restriction, or face the risk of a lawsuit for violating the Washington Condominium Act and the association’s declaration.  See, Filmore LLLP v. Unit Owners Association of Centre Pointe Condominium (Wash. Ct. App. Div. 1, Sept. 2, 2014).

BACKGROUND: The Court invalidated the association’s amended declaration–which contained its rental cap restrictions–because the amendment was not approved by 90% of the unit owners.  In May 2011 Filmore LLLP, an investor, purchased Unit D-3.  In October 2011 the association adopted (with a 67% approval vote based on RCW 64.34.264(1)) and recorded an amended declaration that restricted leasing to 30% of the condo units.  In September 2012 documents were recorded to divide Unit D-3 into 35 separate units.  Filmore LLLP obtained a $3.6 million commercial loan to finance the construction project.  In October 2012 Filmore sued the association, alleging the association violated the Condominium Act and the association’s own declaration by enforcing the rental restriction without obtaining the 90% approval vote required by RCW 64.34.264(4) (“no amendment may … change … the uses to which any unit is restricted, in the absence of the vote or agreement of the owner of each unit particularly affected and the owners of units to which at least ninety percent of the votes in the association are allocated …”).

THE PARTIES’ ARGUMENTS: The Association argued only 67% approval was required, not 90%, because the word “uses” in the phrase “the uses to which any unit is restricted” in RCW 64.34.264(4) only applies when the association tries to change use from a residential to a nonresidential use; and the rental cap did not change the use to a nonresidential use.  Filmore LLLP, on the other hand, argued “use” is defined broadly to include restrictions on leasing.

THE COURTS’ DECISIONS: The trial court, on summary judgment, sided with Flmore LLLP and concluded “uses” in “uses to which any unit is restricted” includes leasing, not just changes from residential to nonresidential use.  Accordingly, the trial court invalidated the rental cap amendment because the association did not get the required 90% approval.  The association appealed, but lost again before the Court of Appeals.

PLAN OF ACTION: Condominium and homeowner associations should call their attorney to determine if their rental caps are enforceable.  This is especially true considering the potential for a lawsuit and the chance that an association is ordered to pay a unit owner’s costs and attorneys’ fees (based on attorney fee provisions in associations’ governing documents) for enforcing an invalid rental cap restriction.