September 2014
In This Issue:
Intent Irrelevant in Fair Housing Act Claim
Association Is Entitled to Judgment Against Former Unit Owner for Unpaid Assessments
Association Breached Fiduciary Duty to Unit Owner
Leasing Prohibition Is Unreasonable and Invalid
Altering “No Pet” Policy Is Reasonable Accommodation under Fair Housing Act
Cashed Check Is Full Satisfaction of Claim for Unpaid Assessments
Voting Restriction Violates Texas Law
Short-Term Rentals Violate Use Restriction
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Intent Irrelevant in Fair Housing Act Claim

Hollis v. Chestnut Bend Homeowners Association, No. 13-6434 (6th Cir. July 29, 2014)

Architectural Control/Covenants Enforcement/Federal Law and Legislation: A Tennessee federal appeals court vacated a ruling that an association’s refusal to approve a sunroom addition to a home where handicapped children resided was not a violation of the Fair Housing Act.

The Sixth Circuit Court of Appeals has reversed the ruling of the lower court in this case (974 F. Supp. 2d 1096), which was reported in the December 2013 issue of Law Reporter.

Chestnut Bend subdivision in Franklin, Tenn., is subject to a declaration of covenants, conditions, and restrictions (declaration) administered by Chestnut Bend Homeowners Association (association). Charles and Melanie Hollis resided in the community with their five children, two of whom are physically and mentally disabled. The declaration provides that exterior improvements must be approved by the association’s architectural review committee (ARC).

The physician treating the Hollis children advised the Hollises that the disabled children would benefit from a therapeutic living environment that was designed to stimulate their development. The Hollises submitted four proposals to the ARC to add a sunroom to their house. The first three proposals were rejected for being incomplete or were denied for aesthetic reasons.

In December 2011, the ARC approved the fourth application with one change—they wanted the Hollises to cover the roof with shingles rather than metal—and referred the application to the board of directors for a final decision. The board approved the application with the shingled roof requirement.

The Hollises responded, reminding the board it had previously identified metal as an acceptable roofing material. They also stated metal roofing was cost effective and relatively easy to install, besides providing sensory stimulation important for the development of their two children with Down Syndrome. While the Hollises had previously indicated that the sunroom would provide a play area for the children, this last correspondence was the first time the disability was mentioned to the association. The Hollises further indicated that they would proceed “with available legal options” if the board did not consent to the metal roof.

The board did not immediately respond, and the Hollises sued the association in February 2012 for discrimination under the Fair Housing Act (FHA). The association argued the Hollises failed to demonstrate all necessary elements for a successful claim under the FHA. The trial court concluded the association had proffered a legitimate, nondiscriminatory reason for denying the Hollises’ application for approval of the sunroom.

In reaching its decision, the trial court applied the test established by the Supreme Court for employment discrimination cases in McDonnell Douglas Corp. v. Green, 411 U.S. 792, 93 S. Ct. 1817 (1973). The trial court awarded summary judgment (judgment without a trial based on undisputed facts) to the association after determining that the Hollises failed to produce evidence showing that the association's assertion that it denied the proposal based on aesthetics was “unworthy of belief.” The Hollises appealed.

A disabled person alleging unlawful housing discrimination can rely on any of several different theories to establish an FHA violation—disparate treatment, disparate impact, failure to make reasonable accommodation or failure to permit a reasonable modification. The Hollises urged the court to treat their complaint as a reasonable modification claim. The FHA defines discrimination as including a refusal to permit a handicapped person to make reasonable modifications to existing premises or a refusal to make reasonable accommodations in rules, policies or practices when such modifications or accommodations are necessary to afford that person equal opportunity to enjoy a dwelling.

The appeals court noted that the trial court’s focus on “ill will” followed from its reliance on the McDonnell Douglas test, but also highlighted why it was wrong to presume the test applied to all FHA claims. A reasonable accommodation or modification claim should instead focus on the operative element—reasonableness. The burden the modification would impose on the association must be weighed against the benefits to the Hollis children. A modification should be deemed reasonable if it does not impose a fundamental alteration in the nature of a program or undue financial burden.

In addition to proving the reasonableness and necessity of the modification or accommodation, the plaintiff must also prove that (i) he or she is disabled, (ii) he or she requested a modification or accommodation, (iii) the defendant refused to make the modification or permit the accommodation, and (iv) the defendant knew or should have known of the disability at the time of refusal.

In sum, the appeals court held that the trial court erred when it applied the McDonnell Douglas test, which focuses on the request’s intent rather than its reasonableness. Accordingly, the trial court’s decision was vacated. The case was remanded to the trial court with instructions to apply the proper test to determine whether the Hollises had established that no genuine issue of material fact exists and they are entitled to summary judgment as a matter of law.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Association Is Entitled to Judgment Against Former Unit Owner for Unpaid Assessments

Cambridge Apartments Condominium Association v. Williams, No. 1-13-3226 (Ill. App. Ct. Aug. 15, 2014)

Assessments: An Illinois appeals court affirmed a ruling that an association was entitled to judgment against a former unit owner for unpaid assessments that became due after the unit’s transfer because the association had no notice of the change in ownership.

Cambridge Apartments Condominium Association (association) manages Cambridge Apartments in Chicago, Ill. In October 2012, the association sued Zojacqueline Williams, the owner of Unit 110, for delinquent assessments and other common charges in the amount of $2,494.30 plus additional sums as they became due. The association also asserted it was entitled to possess the unit under the Illinois Forcible Entry and Detainer Act (act).

Williams asserted she sold the unit to Patricia Bennett in January 2012. She also claimed the deed was not recorded at the time of sale because the association had a delinquent water bill, which precluded obtaining a water certificate necessary to record the deed in Cook County. Williams provided a copy of the purchase agreement, which she and Bennett had signed, and an unrecorded deed for the unit that was witnessed in June 2012.

The association’s president, Alma Jordan, testified that the association sent a notice in May 2012 to Williams in Santa Monica, Calif., indicating a debt of $6,671.35 for Unit 110. The association’s account ledger indicated that, as of August 2013, Williams still owed assessments in the amount of $2,086.24.

Bennett testified she owned Units 104 and 110 in the Cambridge building. She said she gave the association a check for $3,957.05, which was the amount the association claimed was due for Unit 110 through October 2011. She later learned that there were also unpaid assessments for November and December of 2011, and she paid the association $806.12 for those months.

The association asserted that all checks received for Unit 110 were credited to Williams’ account because, as far as they knew, Williams remained the owner of Unit 110.

In September 2013, the trial court entered judgment in favor of the association against Williams in the amount of $2,086.24. The court subsequently awarded the association $5,529 in attorney’s fees and $573 in court costs. Williams appealed, arguing the association was not entitled to judgment against her because she did not own the property.

Under the act, the association may be entitled to possess the unit if the association serves a demand for payment of past due assessments and the owner fails to pay. While the failure to record a deed does not affect its operation as a conveyance, it may affect the grantee’s rights as to third parties. The Illinois Conveyances Act provides that a deed takes effect from and after the time of recording as to all creditors and subsequent purchasers without notice of the conveyance. The association is a creditor with respect to the unpaid assessments. Furthermore, the condominium declaration requires a seller to give the association at least 30 days’ prior written notice of a unit transfer.

While Bennett testified she informed Jordan by telephone that she purchased Unit 110 and provided the association with written notice that she owned the unit, Bennett could not produce a copy of the letter. Furthermore, Jordan testified the board had no knowledge that title had been transferred. The association cashed checks from Bennett for Unit 110, but, absent notice, could have believed Bennett was merely handling the payments for Williams.

The appeals court found that Williams failed to establish that the association was a creditor without notice in this case. Thus, the unrecorded deed to Bennett did not preclude the association from obtaining a judgment against Williams.

Accordingly, the judgment of the trial court was affirmed.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Association Breached Fiduciary Duty to Unit Owner

Schuh v. Plaza Des Plaines Condominium Association, No. 1-13-1999 (Ill. App. Ct. July 24, 2014)

Association Operations: An Illinois appeals court affirmed a ruling that a condominium association breached its fiduciary duty to a unit owner by failing to promptly address a water infiltration problem that resulted in extensive mold damage to the unit.

Mary Ann Schuh owns a unit in Plaza Des Plaines Condominium in Des Plaines, Ill. The condominium is managed and maintained by Plaza Des Plaines Condominium Association (association).

In August 2010, after a hard rain, Schuh discovered water running from an electrical outlet in her unit. She notified the management company about the water infiltration by telephone, voice mail and e-mail messages over several days. When Schuh finally spoke with a management company employee by phone, she was told the association “was working on it.”

Eight months later, the management company sent an inspector to Schuh’s unit, 11 other units and the roof. The inspector noted water infiltration at the living room window, a six-inch water stain on her wall and buckling paint. He also observed that the balcony door was wet.

The inspector’s findings indicated the problem had gone on in some areas since as early as 1996, and he noted it is common for brick façades to require full-wall re-pointing every 25 years due to the climate. The test findings listed several likely sources of the water infiltration. The inspector recommended that an exterior restoration company inspect exterior elements and that roofers regularly inspect the roof to ensure proper storm-water dispersal and to determine whether algae or other organic substances might be present.

In June 2011, Schuh hired a company to test her unit for mold because the management company was taking too long to address possible mold in the building. The mold tests indicated toxic mold was present in the unit, and the testing company recommended remediation. The testing company indicated that toxic mold is most problematic for children and the elderly.

Schuh, who is elderly, arranged for mold remediation at a cost of $2,187.14. She also retained a home remodeling company to repair damage resulting from the remediation process. The work included replacing insulation and drywall, painting the living room ceiling, reinstalling the electrical outlet and removing debris. This work cost $1,900. Schuh also replaced damaged carpet at a cost of $2,000.

When Schuh asked the association to reimburse her remediation costs, she received a response from the association’s attorney, stating, “The association remains unconvinced about the exact nature of the alleged damages and the work that was actually performed.”

In February 2013, Schuh sued the association, alleging it breached its fiduciary duty to her. The trial court awarded damages to Schuh of $27,497 ($5,497 in actual damages, $12,000 in attorney’s fees and $10,000 in punitive damages). The trial court held that the association’s delay of nearly two years to address water infiltration in Schuh’s unit showed indifference to her rights. It found Schuh to be extremely credible and concluded that mold was in the unit and that Schuh had obviously suffered. The association appealed.

The association challenged the trial court’s award of punitive damages. The association did not believe it had breached its fiduciary duty so severely that punishment was warranted. In reviewing the punitive damage award, the appeals court considered three questions: (1) were punitive damages available for this type of claim; (2) did the evidence support a finding that the association acted fraudulently, maliciously or in a manner that warranted such damages; and (3) did the trial court abuse its discretion in imposing punitive damages?

The appeals court found the evidence showed a pattern of neglect and a reckless indifference on the association’s part toward Schuh, to whom it owed a fiduciary duty. The association ignored Schuh’s repeated requests to inspect and repair her unit from August 2010 until May 2011. It refused to reimburse her expenses to repair the damage. When she hired an attorney and incurred legal fees in order to demand reimbursement, the association still refused to reimburse her costs.

The association argued that the punitive damages award conflicted with its business judgment. Under the business judgment rule, “absent evidence of bad faith, fraud, illegality, or gross overreaching, courts are not at liberty to interfere with the exercise of business judgment by corporate directors.” The rule protects directors who have been careful and diligent in performing their duties from being subjected to liability for honest mistakes of judgment. However, the appeals court pointed out that is not what occurred in this case, where the association was neither diligent nor careful but instead chose to ignore Schuh’s plight. The association did not inadvertently make an honest mistake of business judgment, but simply failed to do its job, something not protected by the business judgment rule.

Finally, the association argued that there was no breach of fiduciary duty because the condominium governing documents required Schuh to obtain prior written approval from the board before making changes to her unit, which she failed to do. The court found this assertion disingenuous.

The trial court’s judgment was affirmed.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Leasing Prohibition Is Unreasonable and Invalid

Studiger v. Honeytree Townhouse Improvement Association, No. 3-13-0821 (Ill. App. Ct. Aug. 7, 2014)

Covenants Enforcement: An Illinois appeals court affirmed a ruling that an amendment to the association’s restrictive covenants that prohibited leasing units was unreasonable, invalid and unenforceable.

Honeytree is a townhouse development in Romeoville, Ill. Honeytree Townhouse Improvement Association (association) is responsible for enforcing the development’s restrictive covenants.

In 1972, Peggy Lee Studiger purchased a townhome in Honeytree, although she lived in Chicago. She never intended to live in the townhome, and she leased it consistently for 26 years until 2007, when the association adopted an amendment to its restrictive covenants that prohibited leasing units.

The amendment provided in part that “each Lot Owner or member of the Lot Owner’s ‘Immediate Family’ . . . shall occupy and use his or her Unit as a private residence, and the rental or leasing of Units shall be prohibited.” The amendment also provided that a unit that was subject to a written lease before the amendment’s effective date could continue to be leased until the lease expired or two years from the amendment’s effective date, whichever occurred first, provided a copy of the lease was submitted to the association prior to the amendment’s effective date. The amendment became effective in July 2007. Neither units owned by the association nor leases entered into by the association were subject to the leasing restrictions.

Studiger submitted a letter to the association in September 2007 requesting a hardship exception, which was permitted under the amendment. The association denied her request; no reason was given for the denial. In 2011, Studiger sued the association, seeking a declaration that the amendment was unreasonable, invalid and unenforceable as to her townhome.

Studiger stated at trial she did not have an immediate family member who could live in the townhome. Most of her tenants stayed for several years, and she never received any complaints from the association about her tenants or the residence. The association stated that the amendment was proposed in response to problems that arose from rental units. Approximately 83 percent of the association’s members voted to adopt the amendment.

The trial court found that the amendment was arbitrary because it allowed the association to lease the residences, but owners could not. The court also noted several problems with the amendment, including the fact that properties could be vacant for many reasons, including death, which would violate the amendment and the fact that the hardship exception provided no guidance on how it was to be applied. The trial court concluded the amendment was “vague, ambiguous, unreasonable, and arbitrary in the application.” Accordingly, the trial court ruled in Studiger’s favor. The association appealed.

The appeals court applied the established law on restrictive covenants. The appeals court observed that restrictions on property use are not favored in Illinois, but courts will enforce restrictive covenants if they are reasonable, clear, definite and not contrary to public policy. Generally, any doubts and ambiguities in a restrictive covenant are construed in favor of free use of the property, although that construction may not be employed to ignore or defeat specific language contained in a restrictive covenant.

The appeals court found no fault with the trial court’s analysis. The amendment purported to prohibit leasing units, yet it allowed the association to do so. The amendment also purported to require occupancy, despite the fact that countless reasonable circumstances could prevent an owner from complying, which would subject the owner to sanctions with no means to recoup his or her losses. Further, the amendment provided no standards to review non-owner occupancy or hardship applications, thereby subjecting both applications to potentially arbitrary enforcement. Accordingly, the appeals court held that the amendment was not reasonable, clear or definite, and the trial court did not err when it ruled in Studiger’s favor.

The judgment of the trial court was affirmed.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Altering “No Pet” Policy Is Reasonable Accommodation under Fair Housing Act

Warren v. Delvista Towers Condominium Association, Inc., No. 13-23074-CIV-MARTINEZ-GOODMAN (S.D. Fla. July 29, 2014)

Federal Laws and Legislation: A Florida U.S. District Court held that a county ordinance banning pit bull dogs was preempted by the Federal Fair Housing Act with regard to service animals.

Delvista Towers is a condominium in Miami-Dade County, Fla., that is managed and maintained by Delvista Towers Condominium Association, Inc. (association). Paul Alexander Warren owns a unit in the condominium.

Warren’s psychiatrist diagnosed him with Severe Recurrent Major Depressive Disorder (depressive disorder) and Post Traumatic Stress Disorder (PTSD). He strongly recommended to the association that it make an exception to its “no pet” policy as a reasonable accommodation under the Fair Housing Act (FHA) to allow Warren to live with his assistance animal because of the dog’s therapeutic use and function. Warren sent the association a letter explaining his disorder; he attached the psychiatrist’s recommendation and requested a reasonable accommodation to the no-pet policy.

The association requested additional information to “properly evaluate” Warren’s claim that he required a reasonable accommodation and threatened him with the possibility of a lawsuit if the information was not provided within 10 days.

Thereafter, Warren retained legal counsel who again petitioned the association for the accommodation on his behalf. The association did not grant the accommodation, arguing that the accommodation was unreasonable because the dog was allegedly a pit bull, a breed banned by a Miami-Dade County ordinance.

Warren sued the association, claiming the association violated the FHA when it denied him the ability to live in his unit with his emotional support animal. He argued that his emotional support animal was essential because it alleviated one or more symptoms of his depressive disorder and PTSD.

The association filed a motion for summary judgment (judgment without a trial based on undisputed facts). The association challenged Warren’s mental health status and contended that his pit bull was dangerous, regardless whether it met the criteria for a support animal. Warren responded that rulings and notices issued by the United States Department of Housing and Urban Development (HUD) prevented applying breed restrictions to a request for reasonable accommodation under the FHA.

To prevail on a failure-to-accommodate claim under the FHA, a plaintiff must establish that (1) he or she is disabled within the meaning of the FHA; (2) he or she requested a reasonable accommodation; (3) the accommodation is necessary to afford him or her an opportunity to use and enjoy his or her dwelling; and (4) defendants refused to make the requested accommodation.

FHA has adopted rules (Section 100.204 of the Code of Federal Regulations) that provide examples of situations where an accommodation has been found to be reasonable. One example illustrates that a building with a no-pets policy must accommodate a blind person and his or her seeing-eye dog in order for that person to have an equal opportunity to enjoy a dwelling. This example specifically demonstrates that altering a no-pet policy to allow an assistance animal is a reasonable accommodation.

The association did not allege that allowing Warren to have an assistance animal would impose an undue burden or fundamentally alter the nature of its operations. Therefore, the court held that an emotional support animal was a reasonable accommodation under the FHA.

Under HUD regulations, a request for an assistance animal can be denied if the animal’s behavior poses a direct threat and if its owner takes no effective action to control the animal’s behavior to mitigate or eliminate the threat. However, FHA requires that a significant risk—not a remote or speculative risk—exist to deny the reasonable accommodation. Particularly, HUD adopted a notice stating that a request to accommodate an assistance animal can be denied if “(1) the specific assistance animal poses a direct threat to the health and safety of others that cannot be reduced or eliminated by another reasonable accommodation; or (2) the specific assistance animal would cause substantial physical damage to the property of others that cannot be reduced or eliminated by another reasonable accommodation.”

Since HUD rules require the assistance animal’s behavior be evaluated, the court held that it could not issue a summary judgment until such factual questions had been answered. The court next examined whether the local ordinance could determine the matter or whether federal law preempted the local law.

Section 3615 of the FHA provides that “any law of a state, a political subdivision, or other such jurisdiction that purports to require or permit any action that would be a discriminatory housing practice under [the FHA] shall to that extent be invalid.” In this case, if the county ordinance was enforced, it would violate the FHA by permitting a discriminatory housing practice. Accordingly, the court held that the county ordinance was preempted by the FHA.

The association’s motion for summary judgment was denied.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Cashed Check Is Full Satisfaction of Claim for Unpaid Assessments

St. Croix Lane Trust & M.L. Shapiro, Trustee v. St. Croix at Pelican Marsh Condominium Association, Inc., No. 2D13-3636 (Fla. Dist. Ct. App. Aug. 8, 2014)

State and Local Legislation and Regulations: A Florida appeals court ruled that when the association deposited an owner’s check offered in full accord and satisfaction for unpaid assessments, the association’s claim against the owner was fully satisfied.

St. Croix at Pelican Marsh Condominium is located in North Naples, Fla., and is managed by St. Croix at Pelican Marsh Condominium Association, Inc. (association). The association foreclosed its lien on a unit for unpaid assessments, interest, late fees, costs and attorney’s fees. St. Croix Lane Trust (trust) purchased the unit at the foreclosure sale in March 2012.

The trust bid $100 for the unit, which was insufficient to pay the association’s foreclosure judgment. The association wrote the trust a letter demanding payment of $36,584.54, which included several years of unpaid assessments, accrued interest, late fees, a substantial balance for a delinquent water bill, costs and attorney’s fees. The association also demanded the trust pay the assessment due on January 1, 2012, the first day of the quarter during which the trust took title to the unit.

The trust did not pay the amount demanded, and the association filed a lien against the unit. In May 2012, the association sent a demand letter to the trust.

The trust responded in writing disputing the amount of the association’s claim. The trust maintained that its liability to the association was limited to its share of the first 2012 quarterly assessment, prorated from the date it took title to the unit. However, the trust offered to pay $840, the full amount of the first quarterly assessment, to settle the matter. The letter from the trust’s attorney to the association’s attorney accompanying the check indicated that the check was offered “in full and final satisfaction of all claims against the Trust and the property.”

The association’s attorney responded by email, “You know our position, and the case law used to support it. I have instructed my staff to apply this as a partial payment once it’s received (despite the restrictive endorsement).” The association received the check and deposited it. Despite retaining the check, the association threatened to foreclose its lien against the unit.

The trust sued the association seeking: (1) a determination that it was not obligated to pay the association past due assessments and other amounts claimed; (2) an order discharging the association’s lien against the unit; and (3) an award of attorney’s fees and costs.

Both parties filed motions for summary judgment (judgment without a trial based on undisputed facts). The trial court ruled in the association’s favor, holding that the trust was jointly and severally liable with the previous unit owner for all amounts claimed by the association through the foreclosure date, less the $840 payment. The trial court’s ruling was based on Section 718.116(1)(a), Florida Statutes, which provides that “a parcel owner, regardless of how his or her title to property was acquired, including by purchase at a foreclosure sale, is jointly and severally liable with the previous parcel owner for all unpaid assessments that came due up to the time of transfer of title.” The trust appealed.

The appeals court determined, however, that the principle of accord and satisfaction was the determining factor. (Accord and satisfaction is a method of discharging a claim where the parties agree to give and accept something to settle the claim; the “accord” is the agreement of the parties and the “satisfaction” its execution or performance.)

Section 673.3111(2), Florida Statutes, entitled “Accord and satisfaction by use of instrument,” provides that “the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.”

The appeals court concluded that when the association cashed the trust’s check, which was tendered in full and final satisfaction of the association’s disputed claim, an accord and satisfaction occurred. If the association did not wish to accept the $840 check in full settlement of its claims, it should have returned the check instead of depositing it.

The association argued that the Florida Condominium Act requires a different result. Section 718.116(3), Florida Statutes, provides:

Any payment received by an association must be applied first to any interest accrued by the association, then to any administrative late fee, then to any costs and reasonable attorney’s fees incurred in collection, and then to the delinquent assessment. The foregoing is applicable notwithstanding any restrictive endorsement, designation, or instruction placed on or accompanying a payment. (Emphasis added.)

The association argued the statute protects an association against accord and satisfaction when it cashes a check tendered in payment of assessments and related charges.

However, the appeals court interpreted the statute to mean the association must apply payments to amounts due in accordance with the statute without regard to any accompanying instructions to the contrary. The legislative intent was not to alter the law of accord and satisfaction by implication.

The appeals court reversed the trial court’s judgment and remanded the case for entry of a judgment declaring that any obligations of the trust that became due before the trust acquired the property were discharged by an accord and satisfaction. In addition, the judgment should cancel the association’s lien against the unit.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Voting Restriction Violates Texas Law

Storck v. Tres Lagos Property Owners Association, Inc., No. 06-13-00066-CV (Tex. App. Aug. 8, 2014)

State and Local Legislation and Regulations/Association Operations: A Texas appeals court ruled that an association’s board election was invalid because only members who were current on their assessments were permitted to vote.

Tres Lagos is a subdivision in Franklin County, Tex., which is managed by Tres Lagos Property Owners’ Association, Inc. (association). In 2008, Carl Storck purchased five lots in the subdivision and moved into a home located on the property. Tres Lagos is subject to covenants and restrictions that restrict lots to single-family residential use and further require lot owners to pay assessments to the association.

Based on actions by the Franklin County Commissioners’ Court in 2002 to “deplat” the five lots, Storck did not believe his lots were subject to the subdivision’s restrictions, covenants, assessments and fees. Accordingly, he operated a commercial business on the lots and never paid assessments to the association.

In 2009, Storck sued the association, alleging it violated its bylaws and articles of incorporation by failing to maintain common areas, soliciting proxy votes, holding meetings without a quorum, failing to name a registered agent for process service, failing to provide proper meeting notices, failing to obtain liability insurance for the swimming pool, failing to make required IRS filings and failing to seek members’ votes to amend the covenants and restrictions.

The association filed a counterclaim, seeking a determination that (1) Storck’s lots were subject to the subdivision’s easements, rights-of-way, covenants and restrictions, including all assessments and late fees owed for association membership, and (2) the Commissioner’s Court deplat order was void to the extent it canceled the covenants and restrictions for Storck’s lots.

In 2011, the trial court entered an order declaring that the Commissioners’ Court did not have authority to cancel, modify or otherwise change or limit the Tres Lagos covenants and restrictions with respect to Storck’s lots. Accordingly, the trial court found that Storck’s lots had continuously been subject to the subdivision covenants and restrictions.

In 2013, the court entered final judgment in the association’s favor, finding that Storck’s lots were subject to the subdivision covenants and restrictions and that Storck owed the association $4,000 in unpaid assessments. The trial court enjoined Storck from operating a commercial business on his lots and awarded attorney’s fees to the association. Storck appealed.

Among Storck’s arguments on appeal, he asserted the association’s board election was invalid. He based his argument on Section 209.014 of the Texas Property Code, which requires the board to call annual meetings. Although the board called a membership meeting in September 2011, notice of the meeting indicated that only members who were current on their assessments would be permitted to vote. The meeting was adjourned when the directors were advised that the voting requirements had changed; members in arrears were, in fact, entitled to vote. In light of the new information, no business was conducted, and the meeting was rescheduled for July 2012.

Since the July 2012 meeting was reconvened from the September 2011 meeting, the board believed that a quorum could be established by counting the proxies given for the September 2011 meeting. At the July 2012 meeting the then current board members were re-elected.

Storck disputed the validity of the election because delinquent members were excluded from voting in violation of the Texas Property Code and were not counted for quorum purposes. Section 209.0059(a) of the Texas Property Code provides that “[a] provision in a dedicatory instrument that would disqualify a property owner from voting in a property owners’ association election of board members or on any matter concerning the rights or responsibilities of the owner is void.”

The Tres Lagos bylaws allow the association to suspend a member’s voting rights if the member’s assessments are delinquent. This bylaw provision disqualified approximately 12 members from voting at the July 2012.

The appeals court concluded that the bylaws were not a “dedicatory instrument,” which is defined in the Property Code as:

each governing instrument covering the establishment, maintenance, and operation of a residential subdivision. The term includes restrictions or similar instruments subjecting property to restrictive covenants, bylaws, or similar instruments governing the administration or operation of a property owners’ association, to properly adopted rules and regulations of the property owners’ association, and to all lawful amendments to the covenants, bylaws, rules, or regulations.

The appeals court determined that the definition was not meant to establish a definitive list of dedicatory instruments. Instead, it interpreted the phrase “subjecting property to” as modifying a restriction. For example, a document that subjects property to bylaws is a dedicatory instrument, although the bylaws might not fall into that category.

The appeals court agreed with the trial court that, in this case, the recorded covenants and restrictions requiring compulsory membership in the association were, in total, the dedicatory instrument. However, the appeals court differed with the trial court on the voting restriction’s validity. Because the dedicatory instrument subjected the property to the bylaws and the bylaws were effectively incorporated into the dedicatory instrument, the appeals court concluded that the bylaws voting restriction was void under the statute’s terms.

The evidence was uncontroverted that delinquent members were excluded from voting at the July 2012 meeting; since the association met the quorum requirement based on the number of members present who were current with their assessments (rather than basing the requirement on the total number of all members), the appeals court found that the trial court erred in finding that a quorum was established.

The appeals court reversed the trial court’s judgment with respect to the July 2012 election and rendered judgment that the election was invalid.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Short-Term Rentals Violate Use Restriction

Vonderhaar v. Lakeside Place Homeowners Association, Inc., No. 2012-CA-002193-MR (Ky. Ct. App. Aug. 8, 2014)

Use Restrictions: A Kentucky appeals court upheld a ruling that short-term rentals constituted a commercial enterprise that violated a subdivision’s use restrictions.

Patrick and Carolee Vonderhaar and Ronald and Lisa Adams (collectively, homeowners) are co-owners of property located in the Lakeside Place subdivision in Russell County, Ky. The subdivision is subject to a declaration of covenants and restrictions and is managed by Lakeside Place Homeowners Association, Inc. (association).

The declaration specifically provides that no lot may be used or occupied for any purpose other than as a private single-family residence for the owner and the owner’s family or tenant. The declaration further provides that no lot may be used for business or commercial purposes apart from, or in connection with, private residential use.

When the homeowners purchased Lot 22 in the early 1990s, the Adams obtained an opinion letter from the developer, granting them permission to rent their property on a short-term basis. After a home was constructed on Lot 22, the homeowners rented it for several years before they purchased Lot 13.

Association members became concerned when the homeowners built a house on Lot 13 and immediately used it for short-term rental, rather than a single-family residence. The association sued the homeowners since the rentals violated the use restrictions. The association also claimed the homeowners rented to large groups who disturbed others with loud music, trash in the roadways and parked cars that blocked community roads.

The trial court entered judgment in the association’s favor and restricted the homeowners from renting or leasing their property. The homeowners appealed.

The homeowners argued that the trial court erred in determining the declaration prevented rentals because it specified a tenant was a permissible party and provided no specific detail as to how long property could be rented. They claimed the declaration plainly stated that property used by a single-family tenant was acceptable. The homeowners asserted that the declaration was not specific enough to restrict renting the properties at issue.

They contended the declaration clearly allowed rental arrangements and did not specify how long the property could be rented or leased.

The homeowners further argued that the trial court erred in determining that their rentals were for business use or that, alternatively, this created a second ambiguity in the declaration. The homeowners argued that merely receiving money for the rented property did not mean the property was being used for non-residential or business purposes.

The appeals court found that the homeowners had treated their property as a business for tax purposes, identified the property as a “motel,” advertised the property on various rental websites, had a rental agreement with check-in and check-out times and paid hotel and motel taxes for the property. The appeals court held that the homeowners, after having described the rental enterprise as a business to the IRS, could not now characterize it to the contrary.

The homeowners argued that their renters engaged in the same recreational activities in the subdivision as other owners or tenants who resided there full time. The appeals court held that the issue was not what the renters did on the property but, rather, that the property was being rented as a hotel or motel.

The appeals court determined the developers did not intend for subdivision properties to be used as motels or hotels as the homeowners were doing. The appeals court agreed with the trial court that there was a significant difference between a family’s long-term home rental and short-term rentals to different persons every weekend. The appeals court agreed that the homeowners violated the restrictive covenant and upheld the trial court’s grant of summary judgment to the association (judgment without a trial based on undisputed facts).

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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