J. Patrick Sutton Cases & Issues Blog

Downtown Austin Condo Buyers, Beware!

Some downtown Austin condos assert they can impose leasing caps without getting a super-majority of owners to amend the filed declarations. Their arguments don't stand up to scrutiny.
In recent months, several condos in and around downtown Austin have imposed limits on the percentage of condo units eligible to be leased out at any given time. This is sometimes called a "leasing cap." Some of the leasing caps have been imposed by a vote of just a few owners who sit on the condo board of directors rather than through an amendment to the condominium declaration (the document filed as of record with Travis County that contains the bundle of rights and obligations for every unit owner). Furthermore, these leasing caps imposed by a few persons fly in the face of express leasing rights contained in the declarations. Typically, the declarations at issue say something on the order of "units may be leased, subject to regulation by the condo board." The condo boards are asserting that they may wholly take away an individual unit owner's declaration-granted right to lease by "regulating" through a lease cap.

Unfortunately, there's no decided case in Texas or anywhere else in the U.S. that supports the idea that a few persons on a condo board can altogether deny a unit owner the right to lease where the leasing right is express and explicit in a filed condo declaration. The lone Texas decision that deals with this problem did allow a condo board to regulate the real estate brokerage requirements of units to be leased (the board there required all who wanted to lease to use the same broker), but the court expressly stated that the declaration's guarantee of the leasing right remained intact for every unit owner. Decisions in other states are even more clear that an express leasing right in a declaration can only be taken away through the process of amending the declaration, not by board action.

The local condo boards are upset that lenders' recent underwriting guidelines disapprove of loans for condos where more than half the units in a building are leased out to non-owners. This is all part of the mortgage meltdown since 2008, and Fannie Mae, Freddie Mac, FHA, and others are trying to limit their already horrendous losses. The condo boards take the position that they have inherent authority to protect lending for their buildings and to prop up unit values.

However, in addition to the fact that mere rule-making isn't sufficient to deny declaration-granted leasing rights in most cases, the condo boards' arguments seem to ignore the fact that many condo declarations -- including those in downtown Austin -- already severely limit or deny leasing rights in the filed declarations. Buyers have always had a choice what bundle of rights to buy, leasing or non-leasing. Furthermore, there are filed declarations that expressly give condo boards the power to do whatever is necessary to meet lenders' underwriting guidelines. Thus, it's sort of sour-grapes for members on a condo board who purchased units in buildings without leasing restrictions to try to block their fellow unit owners' leasing rights. Where a condo with a leasing cap passed only by a board lacks clear exceptions to leasing rights in its declaration, the owners have a legitimate case that the leasing cap is invalid.

Invalid leasing caps can lead to desperate situations for unit owners who purchased in order to lease their units out, especially when the declaration gives absolutely no indication that anything less than a super-majority of owners is required to take away the leasing right. I am personally aware of individuals threatened with financial ruin or foreclosure because of condo board actions imposing leasing caps and, following that, fines, penalties, attorney's fees, late charges, and interest. It's easy to see how an abrupt taking away of leasing rights can in essence re-write the terms under which someone purchased a condo unit.

Some of the Austin leasing caps profess to "grandfather" unit owners who bought prior to the rules. However, in some cases, the leasing right is still subject to being revoked for various reasons; in other cases, there's no protection for the next buyer, making it hard for someone with a "grandfathered" leasing right to sell their unit.

I handle a lot of HOA cases, and there are often good legal arguments on both sides of the issues. However, I have yet to see a compelling legal argument that justifies the imposition of leasing caps through mere rule-making where a declaration otherwise expressly grants a leasing right. Condo buyers, beware!
J. Patrick Sutton Cases & Issues Blog