Entity Ownership and Leasing Restrictions

Entity Ownership and Leasing Restrictions

By: Michael J. Zenner, Esq.

In the aftermath of the Great Recession, many community associations are faced with an increased number of units or lots owned by corporations, limited liability companies and other legal entities. Some of these entities are family trusts or limited liability companies established for estate purposes and owned and controlled by the people who reside on the property.  Others, however, are investment companies that have purchased large numbers of properties at foreclosure or in other distressed situations. In the latter case, the typical business plan is to lease the properties for a number of years until real estate prices return to prior levels and the properties can be sold at a substantial profit.

Many community covenants prohibit or restrict the leasing of units or lots in the community.  “Leasing” is typically defined as “the regular, exclusive occupancy of a Unit by any persons other than the Owner.” However, there is some question as to how such provisions should be applied in the case of a unit or lot owned by a corporation or other legal entity that cannot itself occupy the property.  As further discussed below, the answer may lie in examining, on a case by case basis, the relationship between the occupant and the entity owner.  If the relationship is, in substance, a landlord tenant relationship, the leasing restrictions should be applied and enforced just as they would be applied and enforced against a natural person who owns and leases their property.  

The first step is to require entity owners to provide the association with certain information regarding the entity and the occupant(s) or prospective occupant(s) of their unit or lot.  Such information would include copies of the organizational documents for the entity, the names of and contact information for the occupant(s), the relationship between the occupant(s) and the entity and documentation showing the relationship between the occupant(s) and the entity.  Entity owners should also be required to provide the association with a copy of any lease or other agreement governing occupancy of the premises. The submission of such information could be accomplished by adoption of a regulation or on a case by case basis.

The information submitted by the entity owner should be reviewed by the association to determine whether or not the arrangement is, in substance, a lease. For example, if the submitted information establishes that the property is owned by a revocable trust established to avoid probate and that the occupants of the property are the trustees or beneficiaries of the trust, it would most likely not be appropriate to treat the arrangement as a lease.  On the other hand, if the submitted information reveals that the occupant has no significant ownership or other beneficial interest in the entity and is paying rent to the entity, it might be appropriate to treat the arrangement as a lease.  Other information that could be pertinent in determining the nature of the relationship is whether the property was listed or advertised as a rental property prior to occupancy, the number of properties owned by entity and when the relationship between the entity and the occupant was established.  Unfortunately, it sometimes becomes apparent that the entity ownership arrangement is a sham created for the purpose of circumventing legitimate leasing restrictions.

Community associations may wish to consider amending their covenants to include express provisions governing the occupancy of entity owned properties.  Such an amendment would strengthen your association’s hand in enforcing community leasing restrictions and help to preserve the character of your community as a community of primarily owner occupied homes.