Recent Cases in Community Association Law

Law Reporter provides a brief review of key court decisions throughout the U.S. each month. These reviews give the reader an idea of the types of legal issues community associations face and how the courts rule on them. Case reviews are for information only and should not be applied to other situations. For further information, full court rulings can usually be found online by copying the case citation into your web browser.

Failure to Follow Contract’s Termination Procedure Costs Association

Homefield Commons Homeowners Association v. Roy H. Smith Real Estate Co., No. ED103858 (Mo. Ct. App. Oct. 11, 2016)

Homefield Commons Homeowners Association (association) governed the Homefield Commons subdivision within the Homefield development in St. Charles County, Mo. Homefield Master Homeowners Association (master association) governed the entire development.

The association contracted with the Roy H. Smith Real Estate Company (company) to manage the association for 2014.

On March 29, 2014, the association sent the company notice that it wished to terminate the contract because the company managed both the association and the master association, which created a conflict of interest. The letter identified two conflict examples, asserting that the association had given the manager specific instructions that were ignored because the manager followed the master association’s directions.

The company did not receive the letter until April 23rd, but it responded on April 28th, stating it could correct or explain the issues if given the opportunity. The company asserted that the association’s concerns were vague or inaccurate and that the association had not allowed the required cure period.

On May 5th, the company sent the association another letter indicating that it was assigning a new manager for the association who would follow all the association’s operational procedures. The letter did not address the association’s claims about a conflict of interest.

On May 6th, the association sent a second letter, rejecting the new manager as a solution and reiterating its desire to terminate the contract. The association indicated that the first notice would “stand” because the company’s efforts to rectify the conflict of interest were not acceptable. The association instructed the company to transfer all its files to another management company.

Despite the association’s instructions, the company continued to withdraw its $2,385 per month management fee from the association’s bank account in June, July, and August. In September, the association closed the bank account.

The association sued the company to recover the fees paid after the purported contract termination. The company asserted that the association had not properly terminated the contract and counterclaimed for the management fees due through the contract term (September through December).

The trial court found that the contract required three steps to terminate. First, the dissatisfied party had to give written notice of its concerns. Second, the other party had 30 days to cure the problems. Third, if the dissatisfied party was still dissatisfied at the end of the cure period, it could give notice of termination, and the contract would terminate 30 days thereafter.

The trial court issued judgment in the association’s favor, finding that the first notice satisfied step one, that the company did not address the conflict of interest, and that the second notice satisfied step three. The trial court also determined that the contract was terminated 30 days after the company received the second notice. The trial court allowed the company to retain the fee for June since the contract was not terminated until mid-month, but it awarded the association the fees for July and August. The company appealed.

The appeals court held that technical accuracy in the notice’s wording was not required, but it needed to be clear enough that it could not have been reasonably misunderstood. Finding that the company could not have reasonably misunderstood the association’s desire to terminate the contract for conflicts of interest, the appeals court agreed with the trial court that the first notice satisfied step one.

However, the appeals court determined that the second notice was premature and did not properly terminate the contract. The contract allowed a 30-day cure period before the association could give an effective termination notice. Since no termination notice was sent following the 30-day cure period, the appeals court held that the association did not properly terminate the contract.

Accordingly, the trial court’s judgment was reversed and the case remanded for the trial court to evaluate the company’s claim for management fees through the contract term.

Restrictions Prevent Use of Adjacent Property Not Subject to Restrictions

Lancaster v. Evans, No. 215067 (Ala. Civ. App. Nov. 18, 2016)

Harold and Candy Lancaster (Lancaster) and Walter and Traci Evans (Evans) owned adjoining lots in the Clearwaters Subdivision along Lake Martin in Tallapoosa County, Ala. The subdivision was subject to restrictive covenants contained in the recorded plat.

In January 2015, Evans began replacing a pier extending from his lot into the lake and constructing a boathouse over the water at the end of the pier. The day after construction began, Lancaster delivered a copy of the restrictive covenants to Evans and told Evans that he objected to the boathouse. A week later, Evans told Lancaster that he would comply with the restrictive covenants and would build only a pier with boatlifts. However, Evans continued constructing the boathouse.

Lancaster filed suit against Evans in February 2015, alleging that Evans had violated the restrictive covenants by starting boathouse construction. Despite being served with the lawsuit, Evans completed the boathouse.

The restrictive covenants prohibited building any structure over the water other than a stationary pier or floating dock. However, gazebos on piers were permitted if approved by the adjacent lot owners, the architectural control committee, and Alabama Power (the lake’s owner). The restrictive covenants imposed requirements on size and style for gazebos and specified that a gazebo would not be permitted if it interfered with the other lot owners’ views.

Lancaster asserted that the boathouse negatively impacted his property’s value. Lancaster’s lot was located at the back of a narrow slough (depression or hollow, usually filled with mud or mire), which Evans’ boathouse and dock narrowed even further. It blocked Lancaster’s view and inhibited boat access to his lot.

In response, Evans claimed that no architectural control committee had been formed, making the restrictive covenants ambiguous since it was not possible to obtain approval. Evans argued that such ambiguity prevented the restrictive covenants’ enforcement and only Alabama Power’s consent was required to construct a boathouse over the lake.

Evans also asserted that the provisions of the restrictive covenants regarding the lake were not enforceable because they did not “touch or concern” Evans’ lot. Further, Evans argued that enforcing the restrictive covenants would create an unjust hardship on him because the expense to remove the boathouse outweighed the benefits to Lancaster from its removal.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) to Evans, finding that the restrictive covenants were ambiguous and attempted to restrict property owned by a third party not bound by the restrictive covenants. Lancaster appealed.

Two requirements must be met for a restrictive covenant to be enforced. First, the restrictive covenant must have been intended by the covenant’s creator to run with the land. This requirement was satisfied by the plat’s language.

Second, the restrictive covenant must touch and concern the land. A restrictive covenant touches and concerns the benefited or burdened land when it affects the land’s value or its use and enjoyment. The appeals court held that the restrictive covenants touched and concerned Evans’ lot because the boathouse was built to enhance the lot’s use and enjoyment and because the boathouse was physically connected to the lot through the pier.

The appeals court also held that Evans’ argument about architectural control committee approval was immaterial because boathouses were not permitted by the restrictive covenants under any circumstances.

The relative-hardship test prevents a restrictive covenant from being enforced if to do so would harm one property owner without substantially benefiting another property owner. However, the relative-hardship test does not apply when the defendant had notice of the restrictive covenants before violating them. The appeals court found that Evans proceeded with the boathouse’s construction with full knowledge of the restrictive covenants. Not only did Evans have constructive notice of the restrictive covenants through the reference on his deed, but Lancaster personally delivered a copy of the restrictive covenants to Evans before the boathouse was completed.

Accordingly, the appeals court reversed the summary judgment grant to Evans with respect to the boathouse’s construction but affirmed the summary judgment grant with respect to other claims which Lancaster failed to pursue on appeal.

Articles of Incorporation Insufficient to Create Governing Authority

Sager v. Ivy Falls Plantation Homeowners Association, Inc., No. A16A0976 (Ga. Ct. App. Oct. 27, 2016)

Ivy Falls Plantation is a 109-lot subdivision in Columbia County, Ga. The subdivision’s declaration of covenants (declaration) recorded in 1996 made each lot owner a member of Ivy Falls Plantation Homeowners Association, Inc. (original association) and authorized the original association to collect assessments and perform certain tasks for the subdivision.

In July 2005, the original association was administratively dissolved by the Georgia Secretary of State for failing to file annual registrations and pay the required corporate registration fees. In October 2006, instead of seeking to reinstate the dissolved corporation, two owners filed articles of incorporation for a new corporation (new association) with the same name as the original association. The new association began functioning as the original association.

In July 2010, Cynthia Sager purchased a home in the subdivision. In May 2014, the new association sent Sager a notice that she owed $100 in assessments plus a $10 late fee. Sager disputed that the new association had authority to charge her. She alleged that shortly after her purchase, a majority of the owners voted to dissolve the new association and that the new association did not conduct business or collect assessments until 2013. The new association filed a lien on Sager’s property.

Sager sued the new association and its officers (the defendants) for declaratory judgment (judicial determination of the parties’ legal rights), injunctive relief (order prohibiting or mandating certain action), slander of title (false and malicious statement disparaging a person’s title to property), usury (charging an excessive interest rate), and violation of the Georgia Racketeer Influenced and Corrupt Organizations Act.

The new association canceled the lien, and the defendants filed counterclaims for declaratory judgment and to collect the unpaid annual assessments. All parties moved for partial summary judgment (judgment without a trial based on undisputed facts), determining whether the new association was the successor to the original association.

The trial court ruled in the defendants’ favor, holding that the new association was the successor in interest to the original association based on its “continuity of interest.” Sager appealed.

Under the Georgia Nonprofit Corporation Code, a corporation that is administratively dissolved continues its corporate existence but may not conduct business except to wind up and liquidate its affairs. Thus, there was no dispute that the original association had no authority to charge assessments.

The Georgia courts have applied the common law doctrine of corporate continuity in cases where a new entity refused to honor the debts or liabilities of a predecessor. In such cases, the new entity has been deemed a continuation of the old where ownerships were substantially identical and the objectives, assets, shareholders, and directors were completely identical.

In this case, the appeals court found no transfer of assets from the original association to the new association, no vote of the owners to incorporate the new association, and no other action by a majority of the owners with respect to the new association. Further, the new association provided no evidence that it took action to complete the corporate organization process, elect new directors and officers, or adopt new bylaws.

The appeals court held that there had to be some corporate act that gave the new association authority and linked it to the original association, such as a membership vote or a transfer of assets. Merely filing articles of incorporation for the new association and calling it the governing authority was not sufficient to make the new association a successor to the original association.

Accordingly, the appeals court reversed the partial summary judgment grant to the defendants and the denial of partial summary judgment grant to Sanger with respect to the corporate successor question.

Florida Consumer Collection Practices Act Applies to Collecting Fines

Agrelo v. Affinity Mgmt. Servs., LLC, No. 15-14136 (11^th Cir. Nov. 9, 2016)

Marbella Park Homeowners’ Association, Inc. (association) governed a community in Miami, Fla., and Affinity Management Services, LLC (Affinity) served as its manager. Jorge Agrelo and Olga Fernandez (the owners) owned a home in the community.

The association notified the owners that they had performed unapproved construction, relocated a fence, and removed plants in violation of the community’s declaration of covenants and restrictions (declaration). The owners were given three weeks to correct the violations.

The owners did not correct the violations, and they disputed that they had violated association rules. The association imposed a fine of $100 each day the violations continued, up to a maximum $1,000 fine.

Affinity sent the owners two letters demanding payment of $1,000 in “delinquent assessments.” Affinity warned that failure to pay the amount could result in a lien, foreclosure, personal judgment, wage garnishment, late fees, interest, attorney’s fees, and other collection costs.

When the owners failed to pay, the association turned the matter over to its attorneys at the Meloni Law Firm (Meloni). On August 9, 2013, Meloni notified the owners they were delinquent in the amount of $1,115, which included the fine plus $115 for the August monthly assessment. Meloni also demanded $262.50 in legal fees.

The owners disputed the debt and provided evidence that they had paid the August assessment on time. They also requested information several times in accordance with the federal Fair Debt Collection Practices Act (FDCPA). Meloni sent the owners an account statement reflecting a past due balance for the fine, legal fees, and the September assessment, but the August assessment was shown as paid. The owners again disputed the charges and asserted they had paid for September on time.

In December 2013, Meloni sent the owners a final demand for the fine, the legal fees, and two $25 late fees for September and November assessments. The owners again challenged the amounts due, asserting that the declaration capped the fine at $115 and the fees at $11.50. With each letter, the owners requested information, including evidence that Meloni was licensed to collect debts in Florida.

The owners filed suit against the association, Affinity, and Meloni, alleging that the collection letters violated the FDCPA and/or the Florida Consumer Collection Practices Act (FCCPA) (collectively, the acts). The owners argued that Affinity or Meloni violated the acts by demanding payment for amounts they knew were illegitimate, for communicating with the owners directly when Affinity knew they had legal counsel, and by failing to provide evidence that Meloni was a licensed Florida debt collector. The owners further asserted that the association was vicariously liable (liability imposed on one person for the conduct of another based solely on the relationship between the two parties) for the FCCPA violations committed by its agents.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) to Affinity and the association, finding that the fine was not a debt subject to the FCCPA. The trial court also held the association could not be held vicariously liable for its agents’ FCCPA violations because vicarious liability extended only to principals who are themselves debt collectors. The owners appealed.

Three criteria must be met to constitute a “debt” covered by the acts: (1) a consumer payment obligation arising out of (2) a transaction in which the money, property, insurance, or services at issue is/are (3) primarily for personal, family, or household purposes.

The declaration made the owners contractually obligated for assessments and explicitly treated fines as assessments. The appeals court held that such obligation made the fines a debt subject to the acts. The fact that the debt obligation may have been triggered by tort-like behavior (i.e., alleged declaration violations) did not remove the debt from the acts’ coverage. Accordingly, the trial court erred in ruling that the collection letters were not governed by the FCCPA.

The trial court also erred in ruling that the association could not be liable under the FCCPA because it was not a debt collector. While the FDCPA applies only to debt collectors, the FCCPA is not so limited and applies to all persons collecting debts.

The appeals court further held that the trial court must rule on whether the association could be held vicariously liable for the FCCPA violations of its agents based on Florida agency law. Since the trial court had dismissed the claims against the association for other reasons, it never decided this issue.

Accordingly, the summary judgment grant in Affinity’s favor was reversed, the summary judgment grant in the association’s favor was vacated, and the case was remanded for further proceedings.

Unanimous Consent Required to Eliminate Declaration’s Unanimous Consent Requirement

DA Mountain Rentals, LLC v. The Lodge at Lionshead Phase III Condominium Association Inc., Nos. 14CA2195 & 15CA0203 (Colo. Ct. App. Oct. 6, 2016)

DA Mountain Rentals, LLC (DA) owned a unit in a 12-unit condominium in Vail, Colo., governed by The Lodge at Lionshead Phase III Condominium Association Inc. (association). The condominium declaration for the Lodge at Lionshead III (declaration) provided that it could be amended by owners holding 66 percent of the undivided interests in the common elements (common element interests). However, the declaration provided that each unit’s common element interest and the provisions for allocating common expenses had a permanent character and could not be altered without the consent of all owners and the first mortgagees of record.

In 2012, owners holding 74 percent of the common element interests approved amendments to the declaration. One of these amendments eliminated approval for certain changes. The amendments also deleted other provisions requiring mortgagee approval because they were obsolete under current mortgagee standards. Further, a mandatory buyout provision was added, which required the association to purchase the unit of an owner who was not eligible to vote, who did not vote, or who voted against proposals determining the condominium’s obsolescence.

DA filed suit challenging the amendments’ validity, arguing that the association could not remove the requirements for unanimous owner and mortgagee approval for certain amendments without obtaining the consent of all owners and mortgagees. The association asserted that the Colorado Common Interest Ownership Act (CCIOA) voided declaration provisions that required approval percentages greater than 67 percent to amend a declaration.

Although the declaration was recorded in 1978 and CCIOA did not go into effect until 1992, the CCIOA amendment provision applied retroactively to all common interest communities. The trial court determined that the amendments were validly approved and that eliminating the unanimous owner and mortgagee approval requirements did not violate the declaration or CCIOA. DA appealed.

The appeals court first examined whether the amendments violated the declaration’s approval requirements and then whether CCIOA’s approval cap permitted the amendments. The association argued that the amendments did not violate the declaration because they did not alter the common element interests or the common expense allocations. However, the appeals court found that removing the unanimous approval requirements would permit the common element interests and the common expense allocations to be altered in the future without unanimous owner and mortgagee approval. Therefore, the appeals court held that the amendments violated the declaration’s approval requirements to the extent they eliminated the unanimous consent requirements.

The appeals court reached a different conclusion with regard to the obsolete mortgagee and mandatory buyout provisions because the declaration’s unanimous approval requirements did not address either of these issues, and there was nothing in the declaration to protect the permanency of these mortgagee provisions or to limit adding buyout provisions. Therefore, these amendments were valid under the declaration.

The appeals court found the unanimous approval requirements did not violate CCIOA’s approval cap because another section carved out an exception to the cap. Specifically, no amendment may change a unit’s common element interest without the approval of 67 percent of the total votes in the association “or any larger percentage the declaration specifies.” Thus, CCIOA permitted the unanimous consent requirement for amendments that change the common element interests or common expense allocations. CCIOA also did not preclude lender approval requirements in this context.

DA argued that the mandatory buyout provision violated the board’s duty to deal impartially with owners, the board’s duty of loyalty to owners, and an implied covenant of good faith and fair dealing. The appeals court disagreed, finding that the provision applied uniformly for all owners, so there was no room for the association to favor certain owners over others. The provision required the association to purchase the unit at its fair market value, as determined by an appraisal. It did not give the association any discretion to determine the terms or conditions of the buyout. Since the association had never initiated a mandatory buyout, the appeals court would not engage in speculation about whether the board might fail to act in good faith in the future.

In summary, the appeals court upheld the amendments in all respects except for eliminating requirements for unanimous consent for changes to the common element interests or allocations of common expenses. Accordingly, the trial court’s judgment was affirmed in part and reversed in part.

Declaration Creates Confusion Regarding Developer’s Assessment Obligation

Pulte Home Corporation, Inc. v. Countryside Community Association, Inc., No. 14SC77 (Colo. Sept. 26, 2016)

Countryside Community Association, Inc. (association) governed the Countryside Townhome Subdivision in Fountain, Colo. In 2004, Pulte Home Corporation, Inc. (Pulte), as the developer, recorded a declaration of covenants, conditions, and restrictions (covenants) that indicated it encumbered the property described on Exhibit A or that became subject to the covenants. However, Exhibit A was blank.

Exhibit D to the covenants described annexable property and provided that, upon recording a plat, the annexable property would be known as Countryside Townhome Subdivision Lots 1 through 186. One month later, Pulte recorded a plat showing 186 lots.

The covenants also specified that Pulte could annex land to the community by recording a plat and either a deed conveying the property to someone other than Pulte or a document entitled “Annexation of Additional Land.” The covenants further provided that the obligation for annexed land to pay association assessments would commence immediately upon recording the deed or annexation document.

From 2005 to 2011, Pulte constructed and sold townhomes on the lots. During this time, the association paid for the townhomes’ maintenance. In December 2010, the association billed Pulte $200 as its share of the maintenance costs for the two lots it still owned. Pulte refused to pay.

In June 2011, the association sued Pulte for breach of the covenants, seeking to collect more than $400,000 that it alleged Pulte owed for its lots during the six-year development period. The association also asserted an unjust enrichment claim, arguing that Pulte would be unjustly enriched if it could retain the benefit of the association’s maintenance without paying for it. Further, the association alleged Pulte was liable for breaches of fiduciary duties by its employees serving as the association’s initial board of directors because they misappropriated the association’s funds.

Pulte asserted that its lots were not annexed into the subdivision or subject to association assessments until Pulte conveyed them to individual homebuyers. The association responded that the Colorado Common Interest Ownership Act (CCIOA) imposed an assessment obligation on the lots because the plat made them part of the subdivision.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) to Pulte, and the association appealed. The appeals court reversed in part, finding that the lots became part of the community and subject to assessment when the plat was recorded. The appeals court also affirmed in part, holding that Pulte could not be liable for its employees’ breaches of fiduciary duties. Both parties appealed.

The supreme court held that the plat’s recording, by itself, did not annex the property to the subdivision. If it did, the covenants’ annexation provisions would be pointless. The supreme court determined that Exhibit D’s language did not clearly specify that, once the plat was recorded, all of the property was annexed to the community. Instead, the supreme court found that the covenants’ annexation provisions clearly provided that property would be annexed when a deed from Pulte was recorded.

The supreme court concluded that the appeals court misunderstood what constitutes a declaration under CCIOA. CCIOA expressly contemplates that a declaration may comprise more than one document. To create a common interest community, CCIOA requires a declaration establishing an obligation to pay for expenses associated with the community’s common property that attaches to individually-owned property.

The supreme court held that it took three steps to accomplish the CCIOA-required declaration for this subdivision. The covenants described a common expense obligation, but it did not attach to any property. The plat depicted individual lots, but it was not until an individual lot deed was recorded that the lot became bound by the covenants in accordance with the covenants’ annexation provisions.

The supreme court further held that, although Pulte was responsible for all of the subdivision’s common expenses until the association began charging assessments, Pulte never owned property subject to association assessments since the assessment obligation commenced under the covenants when the lot was conveyed by Pulte.

CCIOA did not impose an assessment obligation on Pulte either because it applied only to property within a common interest community. The lots did not come into the common interest community until they were conveyed by Pulte.

The supreme court also rejected the association’s unjust enrichment claim because such equitable claim applies only in the absence of a contractual obligation. Since the covenants constituted a contract that directly addressed Pulte’s liability for maintenance costs, the association’s unjust enrichment claim was barred.

Accordingly, the appeals court’s judgment was reversed in part and affirmed in part.

Unclear Unit Descriptions Create Boundary Questions

Shores of Panama Club, LLC v. Shores of Panama Resort Community Association, Inc., No. 1D16-0920 (Fla. Dist. Ct. App. Oct. 28, 2016)

Shores of Panama Resort Community Association, Inc. (association) governed a mixed-use condominium in Bay County, Fla. Shores of Panama Club, LLC (Club) owned Commercial Office Unit #1 (Club unit) on the condominium’s ground floor. The Club claimed that the condominium lobby’s front desk and the space behind the desk was part of the Club unit, but the association claimed this open area was part of an adjacent unit (association unit) it owned.

The association sued the Club, asserting that the Club was in wrongful possession of the front desk. Both parties filed motions for partial summary judgment (judgment without a trial based on undisputed facts) on the issue of the front desk ownership.

The declaration of condominium (declaration) defined the units’ boundaries in words, numbers, and diagrams. In words, the units’ perimeter boundaries were generally defined as the center of the walls between one unit and another. The declaration then described the units “more particularly” by square footage, and the declaration specifically stated that the Club unit contained 396 square feet.

The declaration also included a diagram of the condominium ground floor that showed interior walls and labeled each unit by name. The diagram showed that the Club unit included a small walled-off area next to the open front desk area, but it was unclear whether those walls were intended to be interior walls or boundary walls. The walled area comprised only 75 square feet, and both parties agreed that the only way the Club unit could encompass 396 square feet was for it to include the front desk area.

The trial court reasoned that the perimeter boundary definition was a “courses and distances” measurement that superseded the declaration’s square-footage allocation, which the trial court viewed as a “quantity” measurement. Thus, the trial court determined that the front desk was part of the association unit and granted partial summary judgment to the association.

The Club appealed, arguing that the trial court erred in ruling that the Club unit encompassed less than the 396 square feet specified in the declaration. Florida law requires that condominium unit descriptions be strictly construed.

The appeals court found that the declaration’s text definition of perimeter boundaries provided no guidance in this case since the definition did not address interior walls. The appeals court found the square-footage allocation to be the most specific description of the units in the declaration. Moreover, the lack of clarity in both the perimeter boundary definition and the diagram supported the conclusion that the more specific square-footage description should control.

While courses and distances measurements do take precedence over area measurements under Florida law, the appeals court held that the perimeter boundary definition was not a courses and distances measurement. Courses and distances refer to angles and scaled distances shown on a plat that must be followed to establish exact boundaries. By contrast, the perimeter boundary description lacked both direction and distance measurements. Thus, the appeals court was not obligated to give the perimeter boundary description the greatest weight.

The appeals court found that the Florida administrative rules further supported the conclusion that the square footage allocation should control because, where ownership percentage is not based on an equal fractional basis, the rules required the declaration to include the square footage of each unit based on its perimeter boundaries.

Accordingly, the trial court’s judgment was reversed, and the case was remanded for the trial court to enter judgment relating to the front desk ownership in the Club’s favor.

Short-Term Leasing Inconsistent with Residential Use

Tarr v. Timberwood Park Owners Association, Inc., No. 04-16-00022-CV (Tex. App. Nov. 16, 2016)

Timberwood Park Owners Association, Inc. (association) governed the Timberwood Park subdivision in San Antonio, Texas. Kenneth Tarr purchased a home in the subdivision in 2012.

In 2014, Tarr’s employer transferred him to Houston. Instead of selling his San Antonio home, Tarr decided to use it for short-term rentals. He formed a company to manage the rentals and advertised the home online. From June to October 2014, Tarr rented the home 31 times for periods ranging from one to seven days, totaling about 102 rental days. He paid both state and county hotel taxes, which applied to rentals for fewer than 30 days.

In July and September 2014, the association notified Tarr that short-term rentals violated the subdivision’s restrictive covenants, which required that homes be used solely for residential purposes. The association asserted that the short-term rentals constituted commercial use. In September 2014, a hearing was held before the association’s board of directors, and a fine was imposed.

Tarr filed suit against the association, claiming breach of the restrictive covenants and seeking a declaratory judgment (judicial determination of the parties’ legal rights) that the restrictive covenants did not impose duration limits on leasing. Both parties moved for summary judgment (judgment without a trial based on undisputed facts).

The trial court granted summary judgment in the association’s favor and awarded the association attorney’s fees. The trial court ordered Tarr to immediately cease operating a rental business on his property and also ordered that the property not be leased or subleased for short-term rentals to multi-family parties or for temporary or transient purposes by either Tarr or his tenants, successors, heirs, or assigns. Tarr appealed.

If a restrictive covenant’s language is unambiguous, Texas law requires that the restriction be liberally interpreted to give effect to its purpose and intent. However, if the restrictive covenant is ambiguous, all doubts must be resolved in favor of the free and unrestricted use of the property.

Tarr argued that nothing in the residential use restriction limited short-term leasing. He asserted that the short-term renters used the home for the same living purposes as long-term renters, so short-term rentals should not be treated differently than long-term rentals. The association asserted that short-term renters are not residents, so they are not using the home solely for residential purposes. Instead, the association characterized the short-term rentals as transient use.

The appeals court found the phrase “solely for residential purposes” to be unambiguous and have a definite legal meaning. The appeals court held that the term “residence” required “both physical presence and an intention to remain.”

The appeals court found Tarr’s rental agreement with the short-term renters was consistent with transient use because it described the renters as guests and mentioned a check-in and check-out time. The agreement also required a two-night minimum, but a two-night rate would be charged to guests who checked out early. The appeals court found such rental terms inconsistent with any intent to remain in the home and concluded that such transient use was in violation of the residential use restriction.

The appeals court acknowledged that its sister court in the Austin district reached the opposite conclusion last year in Zgabayv. NBRC Property Owners Association, No. 03-14-00660-CV (Tex. App. Aug. 28, 2015) (reported in October 2015 Law Reporter). However, the appeals court disagreed with the Zgabay court on whether the phrase “residential purposes” was ambiguous and did not find the court’s reasoning persuasive.

The appeals court did agree with Tarr that the trial court overstepped its authority in ordering Tarr not to lease his property for transient purposes because the association never asked for injunctive relief (order to take action or refrain from taking action).

Accordingly, the appeals court modified the trial court’s judgment to delete the parts granting injunctive relief and affirmed the judgment as so modified.