New Idaho HOA Decision From Supreme Court

New Idaho HOA Decision From Supreme Court

June 23rd, 2015
Author:  Jeremy Evans
Although Idaho courts rely on principles of contract construction to interpret covenants, conditions, and restrictions, there are a few instances that highlight the unique nature of these equitable servitudes and covenants appurtenant to title.  One such instance arises when the owners decide to amend terms of their governing documents to restrict rental of private property.   This situation was recently addressed by the Idaho Supreme Court in Adams v. Kimberley One Townhouse Owner’s Association, Inc.  The Kimberley One decision provides new guidance and clarity in this area to homeowner associations in Idaho that wish to amend their covenants.

Unlike a contract, most declarations of covenants, conditions and restrictions (called generally in the Kimberly One opinion and herein “CC&Rs”) contain a provision that permits a supermajority of the owners to amend the terms of the CC&Rs with a vote.  Usually at least two-thirds of the total votes are required, although sometimes more votes are needed.  Often the amendment must also be recorded on title to the subdivision before it becomes effective.  The specific terms of the CC&Rs will dictate how an amendment is passed and becomes effective.

Legal counsel advising homeowner and condominium associations are often asked whether there are limits to what a CC&R amendment can change.  This question has been particularly keen in relation to rental restrictions.  Some CC&Rs contain clear limits on the manner or number of rentals permitted in the community.  Other associations have CC&Rs that are silent on this topic. 

In response to the recent financial crisis, 2011 updates to federal lending regulations made the percentage of owner occupancy relevant to lending qualification for condominium communities.  This immediately brought the issue of rental restriction amendments to the attention of condominium and townhome associations seeking pre-qualification for federal lending.  Likewise, single-family communities facing depreciation of home values in their neighborhoods saw rental restrictions as a way to stave off neighborhood blight.  Many homeowners perceived tenant-occupied properties in their neighborhood as a source of depreciation or neglected appearances. 

More recently, the explosion in popularity of short-term rentals facilitated by online communities such as “Airbnb” has instigated a housing rental equivalent of taxi debate raised by “Uber” and other car-sharing sites.  Idaho courts have found that a typical restriction of property to “residential” or “non-commercial, non-business” uses does not limit or prohibit short-term, vacation-type rentals.  Therefore specific rental restrictions are often considered a tool to limit non-traditional uses of residences seen as a threat to home values and neighborhood tranquility.

The legality of amending CC&Rs to add rental restrictions has been a sticky issue for many jurisdictions.  The right to rent one’s property is arguably a fundamental property right.  Owners facing economic hardship, military activation, or job relocation in a depreciating real estate market often see no choice but to rent their homes.  Investors purchasing more than one residential property in the hope of making a profit likewise depend on rental income to support their real estate inventory.  There has a been a split between jurisdictions as to whether a majority of owners in a community can lawfully amend their CC&Rs to prevent a minority of owners from renting out their properties, or limit the number of rentals, or interfere with the rental of private property in any way. 

The Kimberley One decision has now set a clear precedent in Idaho on this question.  It also clarifies that owners can amend the requirements for amendment of their CC&Rs, and indicates that the Supreme Court is willing to uphold a homeowner associations’ assessment of fees and costs against owners as a “cost of enforcement”, even in declaratory actions or when the association is the defendant in an underlying action or appeal brought by the owner against the association.

As summarized by the Court, Adams purchased a unit in the Kimberley One Townhouse Subdivision (the “Subdivision”) in approximately 2003.  Adams lived in the unit from time to time, but by 2012, he converted it primarily to use as a short-term rental.  Adams’ short-term tenants precipitated complaints by the other owners.  After a number of board meetings and requests that Adams resolve the problems, the owners passed an amendment regulating rentals.  Adams strongly opposed the amendment, but was outvoted by a supermajority, who passed and enacted the amendment in accordance with the CC&Rs.

The rental amendment contained the following terms:

(a) The owner must execute a written document (i.e. lease) with the renter;

(b) The document must be approved in advance by the board;

(c) Advertising for the unit must be approved by the board;

(d) No rentals for fewer than six months will be approved;

(e) No subleasing is permitted;

(f)  Owner must provide contact information to the board;

(g) The board has discretion to grant exceptions to these rental requirements and to create house rules for their enforcement.

The terms included in this 2013 amendment are interesting for a number of reasons.  First, they provide a guideline of what the Supreme Court has found permissible in Idaho, so they may very well become a template for many future rental restrictions..  However it should be noted that although the Supreme Court allowed that “house rules” could include a fining provision in 2013, on July 1, 2014 the Idaho Legislature enacted Idaho Code 55-115, which would prevent or limit fining in this manner.  These guidelines should also be read in the context of the Court’s counters to Adams’ position.   Second, these approved restrictions make short term rentals impossible in this association.  It is hard to see how an “Airbnb” type of rental could operate under this type of regime.  Third, by preserving the power to grant exceptions to the requirements, a board may be able to avoid some still-unresolved Fair Housing challenges to a rental restriction. 

In drawing this conclusion, the Court looked at past Idaho cases and reviewed the jurisdictional split on this issue between those courts that permit amendments that add rental restrictions and those that only permit changes or modifications to existing restrictions.  The Court declined to follow Washington’s courts and instead found “Idaho’s approach to C&R amendments to be more consistent with that line of cases which do not draw a bright-line distinction between the addition of new restrictions and the modification of existing restrictions.”  In other words, each owner had notice that an amendment was possible, and adding rental restrictions by amendment is not beyond the reasonable expectations of that possibility.  In finding this amendment acceptable, the Court also validated an earlier amendment by the owners of the Kimberley One Association that reduced the percentage of votes necessary for amendment.

While the Court warns that “there is a point at which an amendment to CC&Rs will go too far, and have too adverse an effect on those bound by it,” it declines to find that restricting an existing use of property as a short term rental is such a case.  However the Court does draw a hypothetical distinction between Adams’ use of the unit as a short term rental “for a few months when the Association began discussing an amendment” and a situation where the rental had been ongoing for “ten years.”  The Court seems to anticipate that there could be a right to rent that eventually vests in the owner, even though an amendment can include “significant changes” in use.

Finally, the Court addresses an argument that is raised in CC&R enforcement cases large and small.  The CC&Rs in this case entitled the Association to attorney fees if it prevailed in an action to enforce the CC&Rs.  Adams argued unsuccessfully that he brought this action as a declaratory judgment, not an enforcement action.  The Supreme Court upheld the district court’s award of fees and costs to the Association, holding that “[i]n substance, this action was brought in response to the Association’s attempt to enforce the 2013 Amendment…  Therefore this action was properly characterized as one ‘to enforce the [CC&Rs]”.  It is encouraging to see the Court resolve this question by reviewing the substance of the action instead of the form it takes.