'No leasing' policies are solid, but could face future challenges

It has become well settled law that a condominium association can amend its declaration to eliminate leasing. Needless to say, this can be a harsh reality for many owners without some exceptions.

In a real estate "depression," condominium boards of directors must begin to consider less harsh measures for specific situations, including financial hardship and leasing to blood relatives.

Associations need to consider whether existing investors can be grandfathered, whether to grandfather certain existing tenants (particularly handicapped or elderly); whether the right to rent can be retained by owners who had first occupied their units for a specified period; and whether a certain percentage of units can be permitted to lease. In many instances, the association can make exceptions to allow itself to rent units if it acquired a condo through a right of first refusal.

These considerations, as well as others, colored the different types of amendments being considered these days.

Rules adopted by a board require written notice to all owners and can be adopted at an open board meeting after a meeting of owners, though it can be revoked by a subsequent board following the same procedure. Frequent shifts in leasing rules can result in problems for owners and affect unit market prices.

Clearly, the best way to restrict or eliminate leasing is for owners to support an amendment to the covenants rather than rely on board amendment. A validly adopted amendment must be recorded under the Illinois Condominium Property Act, and thereby becomes public record. It could only be overturned or revoked by another valid amendment.

Simply put, a rule must withstand much tougher scrutiny than a validly adopted amendment. While a board-adopted policy must meet tests, an amendment to the declaration is presumed valid unless proven otherwise. Therefore, an association is always better off amending the covenants than relying upon board-adopted policies and then being subjected to a much tougher standard.

Installment contract sales: In a real estate market where a mortgage is harder to find than a 10-cent cigar, contract sales can be a valuable tool for selling property. In difficult economic times, this type of financing can facilitate sales when the property won't appraise to value, or the buyers have a history of financial or credit problems.

Essentially, a contract sale is seller financing. However, courts are sometimes faced with determining whether a contract purchaser is really an "owner" occupant or whether the contract sale is a sham to get around a no-leasing restriction. Court rulings have varied based on the specific facts of the sale, the nature of the transaction, and the intent of the parties and the association.

Typically, the buyer makes a small down payment and pays monthly toward the loan. The agreement frequently amortizes the payments on a 30-year schedule, although the full amount is due in a balloon payment after a shorter period, such as five years, with provisions for extensions. The seller retains legal title and will convey a deed to the buyer only after payment of the entire purchase price. A default by the purchaser results in loss of all interest in the property and forfeiture of all payments made to date.

Section 19(b)(11) of the Illinois Condominium Property Act outlines the voting rights of sellers and purchasers involved in an installment contract to purchase the unit. The act provides that the purchaser has the right to vote and attend meetings "unless the seller expressly retains in writing any or all of such rights." Evidence of the sale "shall" be made available to the board.

However, this legitimate method of selling and buying real property through a "contract sale" can also open the door for a violation of association policy when an unscrupulous owner wants to avoid enforcement of a "no leasing" policy through a sham installment purchase contract. Rules should be adopted for contract sales in order to test their validity.

In one Cook County case where identical sales contracts were executed by a defendant involving three condominium units, the defendant (contract seller) entered into articles of agreement with the occupants with identical nominal down payments equal to a typical security deposit amount. The defendant advertised his units as a "lease with an option to buy." The monthly "installments" approximated the former rent payments the same occupants had paid while they had been tenants. Typically, articles of agreement provide for a short term of installment payments with a balloon payment after a few years. In these agreements, it was a five-year term with automatic five-year renewal periods for 30 years.

The trial court held, and the appellate court affirmed in an unpublished opinion, that the sales contracts were voidable because they were actually leases. The amendment to the declaration to restrict leasing of units was thus valid and enforceable and the defendant's installment agreements were rendered void.

A conscientious board of directors can scrutinize these contract sales and articles of agreement deals to make sure they are good faith transactions. For example, the board can adopt a policy where a certified copy or duplicate copy of the Articles of Agreement must be recorded in the office of the Recorder of Deeds in the county in which the property is located. A recorded copy and Recorder's receipt must then be submitted to the board of directors.

The seller can be required to provide the buyer with title insurance from a national insured title company for Articles of Agreement. Or the seller can be asked to verify under oath that he/they have executed a deed to buyer and that the original is being held in escrow, with a true and accurate copy provided to the board of directors at the time of closing.

These and other types of rules can be adopted so the association is sure it is a legitimate sale.

What does the future hold? In a tight real estate marketplace with limited rental property, restrictive condominium rental policies could come under attack, especially since many former rental communities have converted to condominium living, making even fewer rental properties available. Lack of affordable housing may reach a "crisis" level in some parts of the country.

Conversely, in times of low mortgage rates and an active real estate buyers market, more potential tenants have the opportunity to become owners. In such a climate there is less likelihood of a legal challenge to a restrictive rental policy than during a housing crunch.

Ultimately, the needs of the market may dictate the continuing efficacy of such policies and amendments of leasing restrictions. Alternatively, it may legitimize the argument against "restraint on alienation." Only time and economics will tell.

• Jordan Shifrin is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at jshifrin@ksnlaw.com. This column is not a substitute for consultation with legal counsel. Past columns can be read at www.ksnlaw.com.