Can an HOA Enforce a Short Term Rental Prohibition Retroactively? (Part II)

In Part I of our article on this topic, we examined how Tennessee law prohibits the retroactive application of a restrictive covenant banning short term rentals. This is particularly applicable to Mendelson v. Bornblum 2005 WL 1606068 (Tenn. Ct. App. July 8, 2005). However, Four Seasons relied upon a single condo case, Preserve at Forrest Crossing Townhome Association, Inc. v. DeVaughn, 2013 WL 369000 (Tenn. Ct. App. Jan. 20, 2013), to justify an extraordinary effort to amend its existing restrictive covenants, which ironically were drafted in 1984 but not recorded until 2000, in order to ban short term rentals.

In DeVaughn, a townhome owner of a unit in the development known as “The Preserve” located in Williamson County – rather than a resort chalet in DeKalb County – and her tenant challenged an amendment adopted by The Preserve’s homeowners’ association prohibiting the owner from leasing her unit to a third party. DeVaughn, 2013 WL 396000, at *1. There, the owner had purchased her unit in 2004 before there were any restrictions on leasing individual units. Id. However, the applicable restrictive covenants at the time defined the individual units as “Private Elements” and contained the following amendment procedure:

The terms, provisions, covenants and restrictions of this Declaration may be amended upon the approval of such amendment by: (a) those members of the Association who own, in the aggregate, no fewer than sixty-seven percent (67%) of the Private Elements not owned by the Declarant1, and (b) the Declarant, if the Declarant shall then own any Private Element or any other portion of the Overall Property. . . .

* * *

Each person who shall own any Private Element, by acceptance of a deed or other conveyance thereto, and by acceptance of a deed or other conveyance thereto, and by acceptance of such ownership, and by taking record title thereto, and each holder of a Mortgage upon any portion of any Private Element, by acceptance of such Mortgage, thereby agrees that the terms, provisions, covenants and restrictions of this Declaration may be amended as provided in this Article X.

Id.

In 2006, two years after the owner purchased her unit, The Preserve’s homeowners’ association amended the restrictive covenants pursuant to the Horizontal Property Act, Tenn. Code Ann. §§ 66-27-101, et seq. to include the following restriction on leasing individual units:

The purchase of property for the purpose of offering it for residential lease is strictly prohibited. Selling property under a lease/purchase agreement or installment deed is prohibited. It is the intent of the homeowners that property in The Preserve be owner occupied. The owner of a Private Element may not lease the property to tenants unless he or she has first secured the written authorization of the Board of Directors. Property currently being leased at the time of recordation of this Amendment shall be grandfathered in such that the current owner may continue to lease the premises. But no future owner of the property may lease-out the premises.

Id.

Two years later, in 2008, the restrictive covenants were amended again with the following restriction:

Effective upon recordation of this Amendment with the Register’s Office for Williamson County, Tennessee, rental or leasing of Private Elements is prohibited; provided however, that all leases in effect on the date of recordation of this Amendment shall be unaffected hereby until the expiration of the current term of each such lease (or in the case of periodic tenancies, the expiration of the next period). Any inconsistency between this Amendment, on one hand, and any other provisions of the Declaration not amended hereby, any previous amendment to the Declaration or the Bylaws of the Association, on the other (including without limitation references to “tenants,” “leases,” or other terms related to leasing) shall be resolved in favor of this Amendment.

Id. at *2.

After the homeowners’ association learned that the owner was leasing her unit, it filed a lawsuit against the owner and her tenant seeking an injunction prohibiting the leasing arrangement pursuant to the amended restrictive covenants. Id. Thereafter, it appears from the text of the Court of Appeals’ decision that the case was not substantively litigated in any serious form or fashion. In any event, the homeowners’ association eventually filed a motion for summary judgment, and the trial court granted the motion and entered an injunction prohibiting the lease. Id. at *2-3. The unit owner appealed, arguing that the 2006 and 2008 amendments to the restrictive covenants could not be applied retroactively (since they were not in the deed at the time she purchased her unit) and, regardless, the amendments were unreasonable.

The Tennessee Court of Appeals affirmed, but its decision was based nearly exclusively on the fact that The Preserve was a condominium complex and the Horizontal Property Act applied to The Preserve’s administration. Id. at *4. In our case, Four Seasons is not a condominium and is not covered by the Horizontal Property Act. The Court in DeVaughn recognized that the administration of The Preserve “is governed by bylaws, which are recorded along with the master deed.” Id. (citing Tenn. Code Ann. § 66-27-111). Further, the Court stated “[w]hen there are multiple owners of the private elements, as here, the owners of two thirds of the private elements may modify the bylaws. No modification is operative until it is recorded in the same office and in the same manner as was the master deed or lease or plat and original bylaws for the planned unit development.” Id. (citing Tenn. Code Ann. § 66-27-112).

Additionally, the Court emphasized that its analysis must consider that The Preserve was a condominium complex because “‘[w]hen a person purchases a condominium unit they consent to having restrictions placed upon the use and improvement of their property for the benefit of the condominium as a whole.’” Id. at *5 (quoting Ass’n of Owners of Regency Park Condominiums v. Thomasson, 878 S.W.2d 560, 563 (Tenn. Ct. App. 1994)). Indeed, “[t]he [condominium] unit owner gives up a certain amount of freedom she would otherwise enjoy if living in a house located on a piece of separate, privately owned property.” Id. (citing Regency Park Condominiums, 878 S.W.2d at 563). 

Such restrictions, moreover, “must not be arbitrary or capricious.” Id. Rather, “[t]hey must bear a relationship to the health, happiness, and enjoyment of life of the unit owners as a whole.” Id. (citing Regency Park Condominiums, 878 S.W.2d at 563; Hidden Harbour Estates, Inc. v. Basso, 393 So.2d 637, 640 (Fla. Dist. Ct. App. 1981). In addition, the Court referenced a treatise on condominiums, which provides:

Use restrictions are an inherent part of any common interest development and are crucial to the stable, planned environment of any shared arrangement. The purchaser of a condominium unit consents to restrictions placed on the use and improvement of the property for the benefit of the condominium as a whole, although no owner is assumed to consent to arbitrary and capricious restrictions which achieve no positive benefits. . . .

Id. (quoting 15B Am.Jur.2d Condominiums, Etc. § 37 (2012)).

However, the Court also reflected that no Tennessee court had faced the same question posed in DeVaughn. Id. This directly contradicts Four Seasons’ position that there is nothing to see here with this dispute and condos in suburban Nashville are the same as chalets along the banks of Center Hill Lake. In any event, this is why that Court did not consider the cases we cited in Part I of our article, all of which support of our position that the property at issue is a piece of separate, privately owned property. Instead, the DeVaughn Court looked to condo cases from Florida, Illinois, North Carolina, Georgia, and California, which have held that amendments restricting leasing is binding on condominium unit owners, who purchased their units before the amendment became effective. See Woodside Village Condominium Ass’n, Inc. v. Jahren, 806 So.2d 452 (Fla. 2002); Flagler Federal Savings & Loan Ass’n v. Crestview Towers Condominium Ass’n, 595 So.2d 198 (Fla. Dist. Ct. App. 1992); Apple II Condominium Ass’n v. Worth Bank and Trust Co., 659 N.W.2d 93 (Ill. Ct. App. 1995); McElven-Hunter v. Fountain Manor Ass’n, Inc., 386 S.E.2d 435 (N.C. Ct. App. 1989); Hill v. Fontaine Condominium Ass’n, Inc., 334 S.E.2d 690 (Ga. 1985); Ritchey v. Villa Nueva Condominium Ass’n, 81 Cal.App.3d 688, 146 Cal.Rptr. 695 (1978). Essentially, these cases all stand for the proposition that condominium ownership is unique and involves greater restrictions on owners’ rights, including a unit owner’s inability to challenge an amendment to restrictive covenants adopted after the owner purchased the unit where the owner knew such amendments could occur at the time of purchase.

In that regard, the Court placed particular emphasis on the Florida Supreme Court’s 2002 decision in the condo case Woodside Village Condominium Ass’n. Id. There, a condominium association amended its restrictive covenants in its bylaws to limit the leasing of units to a 9-month term in any 12-month period. Woodside Village Condominium Ass’n, 806 So.2d at 454. As emphasized by the Tennessee Court of Appeals, the Florida Supreme Court recognized that “condominium living is unique and involves a higher number of restrictions on individual unit owners than other property owners experience.” DeVaughn, 2013 WL 396000, at *5 (emphasis added) (citing Woodside Village Condominium Ass’n, 806 So.2d at 456). Thus, “increased controls and limitations upon the rights of unit owners to transfer their property are necessary concomitants of condominium living.” Woodside Village Condominium Ass’n, 806 So.2d at 456 (emphasis added).

Further, the relevant restrictive covenants provided that they could be amended and set forth a procedure for the same. Id. at 460. The Tennessee Court of Appeals reflected that such amendments “‘should be clothed with a very strong presumption of validity when challenged’ because [condominium] unit holders purchase their individual unit knowing that restrictions may be imposed.” DeVaughn, 2013 WL 396000, at *6 (citing Woodside Village Condominium Ass’n, 806 So.2d at 457; Hidden Harbour Estates, 393 So.2d at 639-40). Thus, the condominium unit owners “were ‘on notice that the unique form of ownership they acquired when they purchased their units . . . was subject to change through the amendment process, and that they would be bound by properly adopted amendments.’” Id. (emphasis added) (quoting Woodside Village Condominium Ass’n, 806 So.2d at 461).

Based on the conclusions of these other jurisdictions involving the “unique form of ownership” association to condominiums, the Court held that the amendment applied to the unit owner and affirmed the trial court. It is also imperative to understand DeVaughn’s distinction of Graham v. Bd. of Dir. Of Riveredge Village Condominium Ass’n, 1994 WL 597009 (Tenn. Ct. App. 1994). The appellate court opined that Graham did not control, among other things, because the amendment at issue in that case was not properly promulgated, and importantly, noted that it involved condos in a tourist area where short term vacations were common:

The Graham court stated in dicta that the proposed limitations on renting units was unreasonable because the condominiums are located in a tourist area where families often travel to spend short-term holidays . . . The record here contains no evidence that The Preserve is located in a tourist area or that owners of units at The Preserve purchased their units for the purpose of renting them out to tourists.

DeVaughn, 2013 WL 396000 at n. 4 (emphasis added).

The resort chalet in our case is located in the Center Hill Lake development of Four Seasons in DeKalb County, where tourists regularly travel to enjoy the nearly limitless benefits of lake life. To ignore this important distinction of DeVaughn is folly. Even as a condo case, Graham much more readily applies to the immediate facts than does DeVaughn. However, it is important to note that the subject property is not a condominium; it is a resort chalet on Center Hill Lake. But there is more: Four Seasons’ singular precedent involving condos in conventional suburban areas no longer applies – even to condos. DeVaughn involved facts prior to enactment of the Tennessee Condominium Act of 2008, which ironically requires unanimous consent of unit owners to prohibit short term leasing. See Tenn. Code Ann. § 66-27-317(d).

Not only does DeVaughn not apply here; it doesn’t even apply to condos. Even if it did apply, however, Graham v. Bd. of Dir. Of Riveredge Village Condominium Ass’n, 1994 WL 597009 (Tenn. Ct. App. 1994), makes it clear that the Tennessee courts have a soft spot for such developments, where short term leasing is more common, such as lakes, mountains, etc. Of course, it is possible that notwithstanding all of the foregoing, we were still somehow incorrect about the status of Tennessee property law related to retroactive application of restrictive covenants. With that possibility in mind, we looked to some of the foreign jurisdictions relied upon by DeVaughn to determine if those states substantially differed from the general rule in Tennessee. They didn’t.

For example, the DeVaughn court cited Hill v. Fontaine Condominium Ass’n, Inc., 334 S.E.2d 690, 690–91 (Ga.1985), as support for the proposition that the Georgia court “upheld a condominium declaration amendment limiting permanent residence to people over 16 years of age, requiring a couple who owned unit before amendment was adopted to move after baby was born.” DeVaughn at *6 (emphasis added). The holding of the Georgia Court of Appeals in Hill is only applicable in the context of amendments to condominium instruments under the Georgia Condominium Act. See Ga. Code Ann. § 44-3-70 et seq.

In Georgia, like Tennessee, a property owner is generally not subject to retroactive application of an amended restrictive covenant prohibiting short term leasing. For example, in Charter Club on River Home Owners Ass’n v. Walker, 689 S.E.2d 344, 345 (Ga. Ct. App. 2009), the relevant charter permitted home owners to lease their residences. See id. at 345. The charter was in effect when the defendant purchased a home. Id. Subsequent to Walker’s purchase of her home, the association passed an amendment to prohibit the leasing of residences. Id.

The trial court granted summary judgment in the defendant’s favor, holding that that the amendment was inapplicable to Walker because it, like the purported amendment here, imposed a greater restriction on Walker’s use of the land to which she did not consent. Id. at 346.  In support of its ruling, the trial court relied upon OCGA § 44-5-60(d)(4), which provides, in pertinent part, that “no change in the covenants which imposes a greater restriction on the use or development of the land will be enforced unless agreed to in writing by the owner of the affected property at the time such change is made.” Id. at 346. 

The Georgia Court of Appeals affirmed the trial court’s grant of summary judgment. Id. at 347. Importantly, that court stated, “The Amendment prohibits a specific use of the property, i.e., residential leasing to anyone chosen by the owner, which was specifically within Walker's ownership rights when she purchased the property. For this specific reason, OCGA § 44–5–60(d) renders the Amendment inapplicable to Walker.” Id. at 346-47 (emphasis added). Further, the Georgia Court of Appeals explained: 

In our review of restrictive covenants, we are mindful that “the general rule is that the owner of land has the right to use it for any lawful purpose. Restrictions upon an owner’s use of land must be clearly established and must be strictly construed. Moreover, any doubt concerning restrictions on use of land will be construed in favor of the grantee,” because restrictions on private property are not favored in Georgia.

Id. at 346 (internal citations omitted). 

Accordingly, Georgia law is of no greater benefit to Four Seasons than are the cases the DeVaughn court cited from other foreign jurisdictions. Under Florida law, “in order to establish a covenant that runs with the land, the following must be shown: the covenant touches and concerns the land; intent; and notice.” PGA N. II of Florida, LLC v. Div. of Admin., State of Florida Dep't of Transp., 126 So. 3d 1150, 1153 (Fla. Dist. Ct. App. 2012). In Florida, like Tennessee, “restrictive covenants are strictly construed against those who assert the power to limit the homeowner’s free use of his land.” Young v. Tortoise Island Homeowners, Inc., 511 So.2d 381 (Fla. 5th DCA), rev. denied, 518 So.2d 1278 (Fla.1987). Covenants imposed by a general plan, which restrain the free use of real property, are not favored under Florida law. Lathan v. Hanover Woods Homeowners Ass'n, Inc., 547 So. 2d 319, 321 (Fla. Dist. Ct. App. 1989). Further, “covenants that run with the land must be strictly construed in favor of free and unrestricted use of real property.” Id.  

As expressly recognized by the Court of Appeals in Florida, which is certainly no stranger to condos, “People elect not to purchase in condominiums because they do not want to restrict their control over their own property.” Holiday Pines Prop. Owners Ass’n, Inc. v. Wetherington, 596 So. 2d 84, 88 (Fla. Dist. Ct. App. 1992) (emphasis added). “[I]nherent in the condominium concept is the principle that . . . each unit owner must give up a certain degree of freedom of choice which he might otherwise enjoy in separate, privately owned property.” Hidden Harbor Estates, Inc. v. Norman, 309 So.2d 180, 181-82 (Fla. 4th DCA 1975). Under Florida law, “Condominiums and the forms of ownership interests therein are strictly creatures of statute.” Woodside Vill. Condo. Ass'n, Inc. v. Jahren, 806 So. 2d 452, 455 (Fla. 2002). “In Florida, Chapter 718, Florida Statutes, known as Florida’s ‘Condominium Act,’ gives statutory recognition to the condominium form of ownership of real property and establishes a detailed scheme for the creation, sale, and operation of condominiums.” Id.

The DeVaughn court relied heavily on the Florida Supreme Court’s decision in Woodside Vill. Condo. Ass'n, Inc. v. Jahren, where a condominium association amended its restrictive covenants in its bylaws to limit the leasing of units to a 9-month term in any 12-month period. Woodside Village Condominium Ass’n, 806 So.2d at 454. As emphasized by the Tennessee Court of Appeals, the Florida Supreme Court recognized that “condominium living is unique and involves a higher number of restrictions on individual unit owners than other property owners experience.” DeVaughn at *5 (emphasis added) (citing Woodside Village Condominium Ass’n, 806 So.2d at 456). Thus, “increased controls and limitations upon the rights of unit owners to transfer their property are necessary concomitants of condominium living.” Woodside Village Condominium Ass’n, 806 So.2d at 456. 

Despite the extensive treatment given to the Woodside case by the DeVaughn court, it is not even persuasive authority here. Indeed, it actually supports our client’s position. Moreover, the Woodside case does not reflect the current law of Florida, let alone Tennessee. The relevant provision within Florida’s “Condominium Act” now states:

(13) An 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.

Fla. Stat. Ann. § 718.110(13) (emphasis added). Under current Florida law, “Restrictive covenants are not favored and are to be strictly construed in favor of the free and unrestricted use of real property.” Wilson v. Rex Quality Corp., 839 So. 2d 928, 930 (Fla. Dist. Ct. App. 2003). Further, “Restrictive covenants pertaining to the free use of real property are to be strictly construed in favor of the homeowners.” Boyce v. Simpson, 746 So. 2d 507 (Fla. Dist. Ct. App. 1999) (emphasis added).

In line with these principles, the Florida Court of Appeals held in a widely circulated opinion that “short-term vacation rentals” do not violate “restrictive covenants requiring property to be used only for residential purposes and prohibiting its use for business purposes.” Santa Monica Beach Prop. Owners Ass'n, Inc. v. Acord, 219 So. 3d 111, 114 (Fla. Dist. Ct. App. 2017), reh’g denied (May 12, 2017). The Santa Monica case will become even more relevant in Part III of this series.

[C]ourts in a number of other states have considered the issue and those courts have almost uniformly held that short-term vacation rentals do not violate restrictive covenants nearly identical to those at issue in this case. See Houston v. Wilson Mesa Ranch Homeowners Ass’n, 360 P.3d 255 (Col. App. 2015); Wilkinson v. Chiwawa Communities Ass’n, 180 Wash.2d 241, 327 P.3d 614 (2014) (en banc); Estates at Desert Ridge Trails Homeowners’ Ass’n v. Vazquez, 300 P.3d 736 (N.M. Ct. App. 2013); Russell v. Donaldson, 222 N.C.App. 702, 731 S.E.2d 535 (2012); Slaby v. Mountain River Estates Residential Ass’n, 100 So.3d 569 (Ala. Civ. App. 2012); Applegate v. Colucci, 908 N.E.2d 1214 (Ind. Ct. App. 2009); Mason Family Trust v. DeVaney, 146 N.M. 199, 207 P.3d 1176 (N.M. Ct. App. 2009); Ross v. Bennett, 148 Wash.App. 40, 203 P.3d 383 (2008); Scott v. Walker, 274 Va. 209, 645 S.E.2d 278 (2007); Lowden v. Bosley, 395 Md. 58, 909 A.2d 261 (2006); Mullin v. Silvercreek Condo. Owner’s Ass’n, 195 S.W.3d 484 (Mo. Ct. App. 2006); Pinehaven Planning Bd. v. Brooks, 138 Idaho 826, 70 P.3d 664 (2003); Yogman v. Parrott, 325 Or. 358, 937 P.2d 1019 (1997) (en banc); Catawba Orchard Beach Ass’n v. Basinger, 115 Ohio App.3d 402, 685 N.E.2d 584 (1996). Subsequent cases have further supported these rationales.

Florida law is of no greater benefit to Four Seasons in this matter than are the cases the DeVaughn court cited from other foreign jurisdictions. Indeed, short term rentals are highly favored in Florida and not surprisingly so. In Armstrong v. Ledges Homeowners Ass’n, Inc., 633 S.E.2d 78, 82 (N.C. 2006), the North Carolina Supreme Court found:

On 24 November 2003, a majority of the Association members adopted “Amended and Restated Restrictive Covenants of the Ledges of the Hidden Hills” (Amended Declaration). The Amended Declaration contains substantially different covenants from the originally recorded Declaration, including a clause requiring Association membership, a clause restricting rentals to terms of six months or greater, and clauses conferring powers and duties on the Association which correspond to the powers and duties previously adopted in the Association's amended by-laws.

Id. at 83 (emphasis added). Under North Carolina law, “Covenants accompanying the purchase of real property are contracts which create private incorporeal rights, meaning non-possessory rights held by the seller, a third-party, or a group of people, to use or limit the use of the purchased property.” Id. at 85. 

The Court then explained further, in pertinent part:

The term amend means to improve, make right, remedy, correct an error, or repair. Amendment provisions are enforceable; however, such provisions give rise to a serious question about the permissible scope of amendment, which results from a conflict between the legitimate desire of a homeowners’ association to respond to new and unanticipated circumstances and the need to protect minority or dissenting homeowners by preserving the original nature of their bargain. In the same way that the powers of a homeowners’ association are limited to those powers granted to it by the original declaration, an amendment should not exceed the purpose of the original declaration.

Id. at 86–87 (emphasis added). 

Moreover, the North Carolina Supreme Court held, “a provision authorizing a homeowners’ association to amend a declaration of covenants does not permit amendments of unlimited scope; rather, every amendment must be reasonable in light of the contracting parties’ original intent.”  Id. at 87 (emphasis added). This is because, as that state’s high court explained:

A disputing party will necessarily argue that an amendment is reasonable if he believes that it benefits him and unreasonable if he believes that it harms him. However, the court may ascertain reasonableness from the language of the original declaration of covenants, deeds, and plats, together with other objective circumstances surrounding the parties’ bargain, including the nature and character of the community. For example, it may be relevant that a particular geographic area is known for its resort, retirement, or seasonal “snowbird” population. Thus, it may not be reasonable to retroactively prohibit rentals in a mountain community during ski season or in a beach community during the summer . . .

Correspondingly, restrictions are generally enforceable when clearly set forth in the original declaration. Thus, rentals may be prohibited by the original declaration. In this way, the declaration may prevent a simple majority of association members from turning established non-rental property into a rental complex, and vice-versa.

In all such cases, a court reviewing the disputed declaration amendment must consider both the legitimate needs of the homeowners’ association and the legitimate expectations of lot owners. A court may determine that an amendment is unreasonable, and, therefore, invalid and unenforceable against existing owners who purchased their property before the amendment was passed; however, the same court may also find that the amendment is binding as to subsequent purchasers who buy their property with notice of a recorded amended declaration.

Id. at 88 (emphasis added). 

Perhaps truer words were never spoken. Thus, North Carolina law is of no greater benefit to Four Seasons in this matter than are the cases the DeVaughn court cited from other foreign jurisdictions. 

Four Seasons inasmuch admitted that DeVaughn did not apply to the circumstances of this dispute when it responded to our summary judgment motion. However, that is the subject of Part III of this series.