April 2018
In This Issue:
Recent Cases in Community Association Law
Association Cannot Foreclose Super-Priority Lien While Leaving Mortgage Intact
Declaration Provisions Trump Rights Conveyed by Deed
Declarant’s Easement Rights Did Not End When Development Period Expired
Subdivision Lot Includes Adjacent Canal
Association Cannot Avoid Paying Litigation Judgments
Statutory Change Did Not Alter Existing Lien Priority
Short-Term Rentals Violate Commercial Use Prohibition
Short-Term Rental Does Not Violate Commercial Use Prohibition
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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 illustrations 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. In addition, the College of Community Association Lawyers prepares a case law update annually. Summaries of these cases along with their references, case numbers, dates, and other data are available online.


Association Cannot Foreclose Super-Priority Lien While Leaving Mortgage Intact

Liu v. U.S. Bank N.A., No. 16-CV-262 (D.C. Mar. 1, 2018)

Assessments: The District of Columbia Court of Appeals held that a condominium association’s foreclosure extinguished the mortgage, despite the foreclosure advertisements and the deed to the new buyer indicating the sale was subject to the mortgage.


Sonata Condominium Unit Owners Association (association) governed the Sonata Condominium in Washington, D.C. In 2007, Jon Michael Lucas purchased a unit in the condominium, financing the purchase with a $589,750 mortgage. The mortgage was later assigned to U.S. Bank National Association (bank).

In 2009, Lucas stopped making mortgage and association assessment payments. The association sought to foreclose its lien under Title 42, Chapter 19 of the D.C. Code (act), which granted super-priority status to the association’s lien for the most recent six months of unpaid assessments.

Between 2011 and 2014, the association scheduled several foreclosure sales, but each time the sale was canceled after the bank paid the outstanding amount. The mortgage gave the bank the right to advance amounts on Lucas’ behalf, with such amounts being added to the mortgage balance.

In May 2014, Lucas was once again delinquent. The association recorded a notice of foreclosure sale indicating that Lucas owed $11,503 and that a foreclosure sale would occur on June 4, 2014, if the delinquent amount was not paid in full by that time. Copies of the notice were sent to Lucas and the bank. The association advertised the foreclosure sale in the newspaper, indicating that the unit would be sold pursuant to the act and that it would be subject to the mortgage.

On June 4th, the association proceeded with the foreclosure sale and sold the unit to Andrea Liu for $17,000. From the sale proceeds, the association deducted six months of unpaid assessments, interest, attorneys’ fees, and foreclosure costs, leaving a surplus of $7,512. The deed to Liu indicated that the unit was transferred subject to the mortgage.

The bank had attempted to pay the delinquent amount to stop the foreclosure, but the association did not receive the check until June 5th, after the foreclosure sale. The check was returned.

In October 2014, the bank sued Lucas and Liu to foreclose the mortgage. The mortgage balance had grown to $799,034 due to late charges, interest, and the advancements. Liu maintained that, under the act, she had purchased the unit free and clear of the mortgage.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) in the bank’s favor. The trial court noted that, at the time the foreclosure sale took place, the law was unclear regarding the effect of association foreclosures. However, it was abundantly clear that Liu purchased the unit subject to the mortgage because the foreclosure advertisements and the deed all specified such.

The trial court also found it obvious that the extremely low purchase price reflected the understanding that the mortgage would remain since the unit was valued at between $700,000 and $750,000. The trial court found that to allow Liu to disavow the mortgage, would result in an inequitable windfall to Liu contrary to the parties’ expectations. Liu appealed.

The act expressly prohibits “variation by agreement.” Liu argued this precluded the association from foreclosing its super-priority lien while leaving the mortgage intact. The bank argued that the association did not actually enforce its super-priority lien rights since the sale documents indicated the sale would be subject to the mortgage.

The appeals court found the association clearly enforced its super-priority lien since it collected assessments for only six months and acknowledged that the mortgage had priority above the association’s lien for the remaining unpaid assessments. It further determined that to allow a condominium association to exercise its super-priority lien while also preserving the mortgage would defeat the purpose of the act’s super-priority lien.

The bank asserted that Liu should be equitably estopped from denying the mortgage. However, equitable estoppel requires that the party have changed his position in reasonable reliance on a false representation or concealment of material fact made by the other party with true knowledge of the facts and intent to induce the other party to act. The bank could not show that it reasonably relied on the sale advertisement to protect its interests. To the contrary, the bank attempted to stop the sale by making payment to protect its interest. Moreover, equitable relief is not available when it would contravene the express statutory provisions.

The appeals court also found that the bank was not prejudiced by the foreclosure since it waited five years to institute its own foreclosure proceedings. The appeals court stated that it was prejudice to condominium associations caused by this very type of unreasonable delay that the super-priority lien was designed to prevent.

The appeals court further noted that while its ruling did result in an unexpected windfall to Liu, any complaints about the act’s foreclosure process must be addressed through the legislative process rather than the court system.

Accordingly, the trial court’s judgment in the bank’s favor was reversed, and the case was remanded for further proceedings.

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Declaration Provisions Trump Rights Conveyed by Deed

Michaelson v. V.P. Condominium Corporation, No. D071215 (Cal. Ct. App. Feb. 21, 2018)

Developmental Rights: The Court of Appeal of California held that a developer could not convey exclusive use rights in a garage since the documents identified the garage as unassigned, making it part of the general common area.


V.P. Condominium Corporation (association) governed the Villa Park condominium in San Diego, Cal. The 11-unit condominium was created in 1981. The condominium plan identified each unit’s associated garage by unit number. The plan identified a 12th garage as unassigned.

The declaration of restrictions (declaration) specified that garages, storage spaces, and parking spaces were exclusive use areas, which the declaration defined as areas appurtenant to the living unit with which the exclusive use area was conveyed. The deeds for 10 of the units specified that the unit was being conveyed along with the exclusive right to use a specific garage appurtenant to the unit and an undivided one-eleventh interest in the condominium.

In August 1981, the developer sold unit 5 to Guy Trenga by a deed that included the same language as the other units, but it also included the exclusive right to use the unassigned garage shown on the plan. In October 1987, Nicholas Mosley acquired unit 5 from Trenga by an identical deed. Mosley lived in the unit for a number of years until he moved to an elder care facility.

After Mosley moved out, the property manager accused Mosley of fraudulently acquiring the unassigned garage. The manager demanded that Mosley convey his interest in the unassigned garage to the association.

Mosley sued the association to quiet title (definitely establish property ownership) in the garage, among other claims. The association argued Mosley could not have validly obtained the right to exclusive use of the garage since the declaration and plan specified the garage was unassigned.

Mosley also claimed he had acquired exclusive use rights based on adverse possession (method of acquiring title by occupying property for years and satisfying other statutory criteria). The association responded that it had allowed Mosley to use the garage because he was the on-site property manager and that his use was not exclusive of other owners.

The association also argued that Mosley did not pay the taxes on the garage. Rather, all owners paid 1/11th of the taxes for the garage since it was part of the general common area. Mosley died while the case was pending, and his daughter, Karen Michaelson, stepped in as successor-in-interest to the unit.

The trial court found the unit 5 deed ineffective to convey exclusive use rights in the unassigned garage because the declaration and the plan did not permit the garage to be assigned. It also rejected Michaelson’s adverse possession claim. Summary judgment (judgment without a trial based on undisputed facts) was granted in the association’s favor. The trial court also awarded the association $76,000 in attorneys’ fees. Michaelson appealed.

The appeals court found that the declaration prohibited conveying exclusive use rights in the unassigned garage. The declaration tied the definition of exclusive use areas to the plan, so it incorporated the plan’s identification of appurtenant exclusive use areas. Since the plan did not identify the unassigned garage as an appurtenant exclusive use area, it did not qualify as exclusive use area under the declaration.

This meant the unassigned garage was part of the general common area. Under the declaration, the common area could not be subdivided, encumbered, sold, or transferred unless 75 percent of the first mortgagees provided their written consent. No mortgagee consent was ever obtained, so the developer lacked the authority to convey exclusive rights in the garage.

Michaelson argued that all garages were exclusive use areas; the unassigned garage was simply one to be conveyed in the future as an appurtenance to an as-yet-unidentified unit. She pointed out that it was customary for developers to offer additional amenities to some units for an additional price. The appeals court disagreed, finding nothing in the declaration to indicate the unassigned garage was to be an exclusive use area.

Michaelson further contended that Mosley had acquired exclusive use rights through adverse possession by occupying the garage for more than five years. However, an essential requirement for an adverse possession claim is that the claimant have paid all taxes on the disputed property. Every unit owner paid 1/11th of the taxes on the common area, and there was no evidence that Mosley paid more to cover two garages.

Accordingly, the trial court’s judgment was affirmed.

©2018 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Declarant’s Easement Rights Did Not End When Development Period Expired

Fairport Real Estate LLC v. Nautical Ridge Condominium Owners’ Association, Inc., No. 2017-L-048, 2018-Ohio-791 (Ohio Ct. App. Mar. 5, 2018)

Development Rights: The Ohio Court of Appeals held that a declarant’s construction and utility easement rights continued after the condominium development period expired, but the declarant failed to reserve an access easement to landlocked expansion property never added to the condominium.


Nautical Ridge Development, LLC (NRD) developed the Nautical Ridge condominium in Fairport Harbor, Ohio. Nautical Ridge Condominium Owners’ Association, Inc. (association) governed the project.

The declaration of condominium ownership (declaration) named NRD as the declarant and stated the declaration was binding on the declarant and successors and assigns who stand in the same relation to the condominium property or additional property as declarant.

The declaration included the condominium property and described additional property the declarant could add to the condominium within seven years. The additional property was landlocked and accessible only through the condominium property.

After completing several phases but before the seven-year expansion right expired, NRD abandoned the project and conveyed the additional property to Fifth Third Bank, N.A. (bank). The deed designated the bank as the successor declarant and stated that the bank had the same relation to the additional property as NRD.

In November 2015, Fairport Real Estate LLC (Fairport) acquired the additional property and the declarant rights from the bank. Fairport received approval from the Planning Commission for the Village of Fairport Harbor to construct apartments on the additional property, conditioned on Fairport obtaining either permission from the association or a court order to use the condominium’s sewer line, retention basin, and roadway.

Fairport sued the association after it refused to grant permission, asserting that it had easement rights, either express or implied by necessity, to use the sewer line, retention basin, and roadway. Alternatively, Fairport asked that the association be ordered to remove its utility lines located in the additional property. The association counterclaimed, asking for a declaration that no declarant or easement rights remained because the development period had ended.

The trial court ruled that, because the development period had ended, Fairport was not a successor declarant and did not have any easement rights. It also held that the association had an implied easement to use the utility lines in the additional property that served the condominium. Fairport appealed.

The association argued that the deed to the bank was ineffective to assign the declarant rights because it did not transfer the declarant obligations to the bank. The appeals court noted that, while the deed stated that the bank did not assume NRD’s liabilities, the bank did not decline to assume the declarant’s liabilities. Therefore, the deed was effective to transfer the declarant’s liabilities to the bank, but the bank did not assume liability for any past action or omission of NRD during the time NRD was declarant.

The association next argued that the declarant rights expired at the end of the seven-year expansion period. The appeals court disagreed, finding that nothing in the declaration or the Ohio Condominium Act mandated that all declarant rights terminate upon expiration of the development period. The appeals court noted that other declarant rights exist besides the expansion right.

The declaration reserved—for the benefit of the association and the declarant—easements in perpetuity to construct, install, maintain, repair, and operate roads, sidewalks, utility lines, and stormwater lines in the condominium property. The declaration also reserved for the declarant an easement for ingress, egress, and utility purposes through the condominium property for so long as declarant had a condominium ownership interest in the condominium property or the additional property.

If the additional property was not added to the condominium, the declaration established a cost-sharing mechanism by which the property owners were to share maintenance and repair costs for the roads, sidewalks, water and sewer lines, retention basin, other utility lines, and devices.

The appeals court held the language clearly established that the declarant had joint easement rights with the association to install, maintain, and operate the roads, storm and sewer lines, and other utilities.

However, the appeals court determined that Fairport did not have an express easement for ingress and egress because such easement was reserved only while the declarant had a condominium ownership interest in the condominium property or the additional property. Fairport had no ownership interest in the condominium property and no condominium ownership interest in the additional property since it was not part of a condominium.

Accordingly, the trial court’s judgment was affirmed in part and reversed in part. The case was remanded with instructions for the trial court to evaluate Fairport’s claim that an implied easement by necessity exists for ingress and egress to the additional property since the property was landlocked.

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Subdivision Lot Includes Adjacent Canal

Pelican Creek Homeowners, LLC v. Pulverenti, No. 5D16-4046, 43 Fla. L. Weekly D 279 (Fla. Dist. Ct. App. Feb. 2, 2018)

Developmental Rights: The Court of Appeal of Florida held that subdivision lots included ownership of adjacent canal and drainage area, and owners outside the subdivision trespassed when they constructed a dock and boathouse extending into the canal and drainage area.


H.A. and Katherine Bussey, Andrew Murray, and Herbert and Mabel Pugh (collectively, plaintiffs) owned lots in the Pelican Creek Estates subdivision in Brevard County, Fla.

Developed in 1960, Pelican Creek Estates consisted of 30 lots, a road down the center, and two canals connecting to the Banana River. The subdivision plat dedicated the streets, alleys, thoroughfares, parks, canals, and drainage easements for public use.

The plat also showed a 10-foot drainage easement (drainage area) along the north side of the northernmost canal. The plat dedicated the drainage area to the county for maintenance, but the county relinquished the easement in 1980. The plaintiffs’ lots were located on the south side of the canal.

John and Dorothy Pulverenti owned property outside of Pelican Creek Estates on the north side of the drainage area. In 2006, the Pulverentis built a dock and boathouse that encroached into the drainage area and the canal.

In 2013, the plaintiffs sued the Pulverentis, asserting they owned the canal and the drainage area and sought to have the dock and boathouse removed. The trial court granted summary judgment (judgment without a trial based on undisputed facts) to the Pulverentis. The plaintiffs appealed.

Ownership of the drainage area and the canal depended on whether the 1960 plat dedication was a common law dedication or a statutory dedication. A common law dedication does not divest the owner of title to the land; it only subjects the land to a public easement. If the easement is later relinquished, title remains in the original owner, free of the easement.

However, a statutory dedication divests the owner of title to the land. To be a statutory dedication, the dedication needs to vest all right, title, easement, and appurtenances in and to the dedicated property to the government.

The appeals court found no evidence suggesting the developer intended to create a statutory dedication. Therefore, ownership of the canal and the drainage area remained with the developer at the time of platting, subject only to the public easement.

Next, the appeals court examined whether ownership of the canal and the drainage area was conveyed with the Pelican Creek Estates lots. When land is subdivided and a plat dedicates roads, canals, or walkways for public use, the sale of the lots adjacent to those features includes title to the dedicated property, unless the deed or dedication expressly provides otherwise.

The appeals court found that neither the plaintiffs’ deeds nor the plat contained a reservation of rights by the developer. Therefore, the plaintiffs acquired title to the drainage area and the canal along with their lots, subject to the dedication for public use.

Next, the appeals court had to determine how much of the land was subject to the public dedication. Generally, the adjacent property owners receive title to half of the land subject to the public dedication. For example, the owners on either side of a dedicated street would each acquire title to the middle of the street.

However, the rule of half ownership is different when the dedicated property is on the perimeter of a plat. In that case, the adjacent owners have title to the full width of the dedicated property. Based on this rule, the plaintiffs asserted they had title to the entire drainage area and canal.

The Pulverentis asserted that the canal and the drainage area were two separate areas, and the plaintiffs should have ownership to the center of the canal but no ownership interest in the drainage area. The appeals court did not agree, finding that this approach would leave the drainage area and the northern half of the canal without an owner. The Pulverentis did not have, and never claimed, an ownership interest in either the canal or the drainage area since their property was outside the platted subdivision.

Therefore, the plaintiffs owned the entire drainage area and the canal, and the trial court should have granted summary judgment in their favor. The trial court also should have ordered the Pulverentis’ dock and boathouse to be removed as the appropriate remedy for the continuous trespass on the plaintiffs’ property.

Accordingly, the trial court’s judgment was reversed in part, but affirmed in part on another issue.

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Association Cannot Avoid Paying Litigation Judgments

Asociación de Titulares de Condominio Castillo v. DiMarco, No. PR 17-009, 65 Bankr. Ct. Dec. 61 (B.A.P. 1st Cir. Feb. 8, 2018)

Risks and Liabilities: The United States Bankruptcy Appellate Panel for the First Circuit held that a condominium association could not file for chapter 7 bankruptcy protection to avoid paying judgment creditors.


Asociación de Titulares de Condominio Castillo d/b/a Castillo Condominium Association (association) governed a 22-unit condominium in San Juan, Puerto Rico. Mona DiMarco owned a unit in the condominium.

As reported in the June 2016 issue of Law Reporter (Castillo Condominium Association v. U.S., 821 F.3d 92 (1st Cir. 2016)), the U.S. Department of Housing and Urban Development (HUD) charged the association with violating the Fair Housing Act for forcing an owner, Carlo Giménez Bianco, to vacate his unit because he was keeping an emotional support animal in violation of the association’s pet prohibition. Ultimately, the association was ordered to pay Giménez $20,000 in damages plus a $16,000 fine to HUD.

One month after the U.S. Court of Appeals for the First Circuit upheld the damage award and fine, the association filed a chapter 7 bankruptcy petition. In the filing, the association reported $104,515 in liabilities but only $14,048 in assets (consisting primarily of cash, equipment, and accounts receivable).

The association named DiMarco and others as unsecured creditors with contingent claims valued at $1 each because they had threatened to sue the association. It also listed HUD and Giménez as unsecured creditors, as well as Charles Fitzwilliams, who had obtained a $60,000 judgment against the association. The three judgment creditors (HUD, Giménez, and Fitzwilliams) accounted for more than 90 percent of the association’s liabilities.

When the association filed the bankruptcy petition, it ceased operating the condominium in its name and formed a new homeowners’ association (HOA) to manage the condominium and collect owner assessments. The association admitted that it filed for bankruptcy protection to avoid paying the judgments.

The association explained that the judgment creditors were trying to claim all the association’s assets, which would leave it unable to meet its operating obligations, such as paying for security, garbage collection, and elevator maintenance. It stated that the HOA planned to pay all the association’s debts except for the judgements and amounts owed for the contingent claims.

DiMarco and HUD moved to dismiss the bankruptcy petition, asserting that the association was using the bankruptcy for improper purposes, specifically to justify its selective treatment of creditors. DiMarco also argued the main purpose of a chapter 7 filing is to liquidate the entity’s assets, but a condominium association can only be liquidated by extinguishing the condominium regime with the consent of all owners. The association argued it could file for bankruptcy protection with a majority consent since the Puerto Rico Condominium Act (act) did not forbid it or impose any higher consent requirement.

The bankruptcy court concluded that the association did not qualify for bankruptcy protection since it was not incorporated. It found that, under the Bankruptcy Code (code), only a natural person or a legal entity qualified as a debtor. Accordingly, the bankruptcy petition was dismissed. The association appealed.

The appeals court found that Puerto Rico law recognized the association as the legal entity responsible for administering the condominium regime. The act expressly provides that the condominium association “shall not assume the entity of a corporation or partnership.” However, it also provides that the association’s board of directors constitutes the executive body for the owners, and it outlines the association’s and the board’s powers and duties.

The appeals court stated that the bankruptcy court should have considered whether the association’s legal characteristics were sufficiently analogous to a corporation or partnership to be a debtor under the code. Although it is rare, some unincorporated entities have qualified for bankruptcy protection.

Nonetheless, a bankruptcy petition should be dismissed if it serves no purpose, results in no benefit for its creditors or the debtor, and only delays litigation already pending against the debtor. The ultimate question is whether the debtor filed the petition to obtain relief available under the particular code chapter or to pursue some other goal. The courts look at all the circumstances leading up to filing the petition, including the debtor’s motives for filing.

An entity debtor is ineligible for discharge, so the only purpose served in an entity chapter 7 case is the fair and orderly liquidation of its assets for the creditors. The appeals court determined that there was no prospect of this occurring. The association had no significant assets to liquidate, and the association admitted it did not file the petition to maximize value for its creditors.

Further, the association was unable to liquidate its assets because that would entail dissolving the condominium regime, which required the consent of all owners under the act. Since the association did not obtain the owners’ unanimous consent, the trial court did not err in concluding that no legitimate purpose would be served by the bankruptcy.

Accordingly, the trial court’s judgment was affirmed.

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Statutory Change Did Not Alter Existing Lien Priority

Four Seasons Racquet and Country Club Property Owners Association, Inc. v. Butler, No. SD35091 (Mo. Ct. App. Feb. 21, 2018)

State and Local Legislation and Regulations: The Court of Appeals of Missouri held that an amendment to the Missouri Uniform Condominium Act’s lien provisions did not alter the priority of an existing condominium association lien.


Four Seasons Racquet and Country Club Property Owners Association, Inc. (association) governed a condominium in Camden County, Mo. Carol Butler purchased a condominium unit in 2000. In 2009, Butler refinanced her mortgage through a new deed of trust and promissory note that were assigned to Arvest Central Mortgage (Arvest).

In 2013, Butler became delinquent to the association. In October 2015, the association recorded a delinquency notice and a lien against the property. Two months later, the association filed a petition to foreclose its lien. In March 2016, the association asked the court to determine that its lien was superior to Arvest’s lien.

The trial court determined that the association’s lien arose in January 2013. Based on the version of the Missouri Uniform Condominium Act (act) in effect in 2013, the association had a lien superior to all other liens, unless Arvest’s lien met one of the statutory exceptions. The trial court found that none of the exceptions applied.

The trial court noted that a 2014 amendment to the act removed the association’s super-priority lien status. However, the trial court reasoned that the amended act should not apply to the association’s lien because it would take away the association’s priority lien rights, which had already vested before the statutory change.

The trial court awarded the association a judgment against Butler in the amount of $66,553. It also granted the association’s foreclosure petition and held that the association’s lien was superior to all other liens on the property. Arvest appealed.

Arvest asserted that the condominium declaration adopted the act “as amended and supplemented from time to time.” Arvest argued this meant that the 2014 amended act should apply retroactively to the association’s lien. The appeals court did not agree.

Declarations and bylaws cannot add to or subtract from the act’s lien provisions, except where the act expressly permits variation. The appeals court found the declaration could no more direct that new law should apply than it could direct that repealed statutes should apply.

In fact, the Missouri Constitution prohibits laws that are retrospective in operation. A law operates retrospectively if it takes away or impairs vested or substantial rights acquired under existing laws or imposes new obligations on past transactions. However, procedural and remedial laws not affecting substantive rights may be applied retroactively. The distinction is that substantive law relates to the rights and duties giving rise to a claim, while procedural law is the mechanism used for pursuing the claim.

The Missouri courts have made clear that granting a lien priority over prior liens is an interference with a vested right. Arvest argued that the 2014 act amendment did not reduce the association’s lien priority, only the amount of the association’s priority lien. The appeals court disagreed, finding that a reduction in the amount of the debt secured by the first-priority lien would be a plain reduction in the lien’s value. It further determined that a reduction in value would amount to an unconstitutional retroactive application of the amended act.

Although the declaration purported to adopt the act, as amended, the appeals court held that such statement had no effect on which version of the act applied. As such, the trial court did not err in granting summary judgment in the association’s favor. The trial court’s judgment was affirmed.

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Short-Term Rentals Violate Commercial Use Prohibition

Edwards v. Landry Chalet Rentals, LLC, No. 51,883-CA (La. Ct. App. Feb. 28, 2018)

Use Restrictions: The Court of Appeal of Louisiana held that using a home for short-term rentals constituted commercial use in violation of the subdivision covenants.


In 2015, Landry Chalet Rentals, LLC (Landry) purchased property in the Timber Point Subdivision situated on Caney Lake in Jackson Parish, La. Landry used the property for vacation rentals, advertised its availability on the internet, and specified a two-night minimum.

G.L. Edwards and Landry’s other neighbors (collectively, the neighbors) were not happy about the rental activity. They complained that Landry’s tenants trespassed on their lots, used their piers without permission, littered, parked boats and vehicles on their lawns, and congested traffic.

In 2016, the neighbors sued Landry for violating the Timber Point restrictive covenants. The covenants permitted lots to be used only for residential purposes. Commercial use was prohibited, which specifically included selling beverages and bait on lots.

The trial court determined that Landry was a business entity using the lot for commercial purposes in violation of the covenants. The trial court ordered that Landry was permanently barred from using the property for vacation rentals. Landry appealed.

Landry contended that vacation rentals constituted residential use. It argued that rental occupancy was entirely different from the bait and beverage stand example given in the covenants as a prohibited commercial use. Landry also argued that the covenants allowed rentals since realtor “for sale” and “for rent” signs were an exception to the covenants’ prohibition on commercial signs on lots.

The appeals court noted that Black’s Law Dictionary defined “commercial” as conducting an activity for profit or a use that furthers an ongoing profit-making business activity. Landry had earned rental income each year since it purchased the lot.

The appeals court also found that Landry insured the property with a commercial insurance policy, which included coverage for both lost rents and business liability in additional to standard property insurance. The appeals court further determined that Landry’s tenants were occupying the property on a transient basis, not for residential purposes.

The appeals court found the trial court reasonably concluded Landry was conducting a commercial operation. Accordingly, the trial court’s judgment was affirmed.

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Short-Term Rental Does Not Violate Commercial Use Prohibition

Vera Lee Angel Revocable Trust v. O’Bryant, No. CV-16-1041, 2018 Ark. 38 (Ark. Feb. 8, 2018)

Use Restrictions: The Supreme Court of Arkansas held that using a home for short-term rentals did not constitute commercial use in violation of the subdivision covenants.


Johnny Angel and Paula Napper (collectively, Angel) managed a home owned by The Vera Lee Angel Revocable Trust (trust) in the Jeffries and Norvell Subdivision adjacent to Lake Hamilton in Garland County, Ark. The subdivision covenants prohibited using the lots for other than residential purposes. The covenants also specified that the property could not be used for commercial purposes, including motel, hotel, tourist court, or apartments.

Angel’s parents originally lived in the home, but when it became vacant, Angel let friends and neighbors use the house on a short-term basis. In 2015, Angel decided to rent the property to vacationers through an internet listing site. He charged $329 per night and required a two-night minimum stay.

In March 2016, Jim O’Bryant and several other neighbors (collectively, the neighbors) sued the trust to stop it from carrying on a commercial business and from engaging in short-term rentals and similar nuisances. The trust counterclaimed, asking the court to find that short-term rentals were not prohibited by the covenants.

The trial court found that renting the property on a short-term basis was commercial use in violation of the covenants. The trial court ordered the trust to stop renting the property and dismissed the trust’s counterclaim. The trust appealed.

The trust argued that the covenants made no mention of rentals and that the home looked like other homes in the subdivision, not like a hotel. The appeals court noted that Black’s Law Dictionary defined “residence” as a place where one actually lives. It determined that whether the home was rented for a weekend or owner-occupied, the house remained a “residence.”

The appeals court also found that Black’s Law Dictionary defined “commercial” as engaging in commerce or involving the ability of a product or business to make a profit. It also determined that each of the commercial use examples cited in the covenants had an outward appearance and manner of operation that was readily distinguishable from a single-family dwelling.

Although the covenants prohibited commercial use, they were silent about rentals. Use restrictions must be strictly construed in favor of the unfettered use of the property. The appeals court noted that the covenants’ drafter could have included an express prohibition on rentals had it intended that effect.

The appeals court held that the lack of a specific restriction against rentals compelled it to reverse the trial court’s judgment.

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