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Beware of condo board’s right to reject buyer

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POSTED August 9, 2012 7:35 p.m.

DEAR BENNY: I have some questions regarding an owner’s right to rent his condo:

1. Does the condo board have the right to change the rules regarding acceptable terms for a lease? For example, can it say the lease must be for a minimum of six months and not more than a year?

2. Other than exercising the right of first refusal, can the board decline an applicant?

3. Can the board terminate a lease after it has been executed? --Steve

DEAR STEVE: This is a very serious issue facing many condominium associations today. Why? Because FHA, perhaps the most pre-eminent lender in this area, has imposed restrictions on the number of investor owners that can own condominium units. If your condominium complex has more than 50 percent investors, you will not be able to refinance your current mortgage through FHA nor will a potential buyer be able to get an FHA-insured mortgage loan.

And the secondary mortgage lenders such as Fannie and Freddie also have similar restrictions.

Accordingly, many associations are scrambling to impose restrictions so as to meet the FHA requirements.

One thing is clear: In order to have valid restrictions on renting, a board cannot do this merely by adopting a rule. For example, if the bylaws state that leases must be for a minimum of six months, the board cannot by rule change this to a minimum of one year.

The courts throughout the country that have addressed this issue are unanimous that in order to have a valid restriction, it must be done by an amendment to the association bylaws. In fact, when I counsel my condominium association clients, I insist that they amend both the declaration as well as the bylaws.

However, the board can impose conditions, such as (a) requiring that a copy of the lease be immediately provided to management or (b) requiring that a lease addendum be included stating that the tenants understand they reside in a condo and must adhere and abide by the condo rules and regulations.

When selling your condo unit, your condo board may have a right of first refusal, which means you must allow the board to buy it at the same price you are offering it for sale. Some condo associations also allow a board to reject/approve a potential buyer.

If your bylaws (or declaration) contain language allowing the board to reject an applicant, then clearly the board has this right. If the legal documents do not include such language, then the board cannot reject anyone.

One word of caution: If the legal documents allow a board to reject/approve potential buyers, the board must be very careful as to why it is rejecting someone. If it is based on financial reasons, that may be acceptable. But it cannot be based on such matters as race, sexual preference, religion, etc. Bottom line: I dislike the concept that a board can -- for any reason -- reject a potential buyer.

In regards to the board’s ability to terminate a lease after it has been executed, it cannot, but if the owner has somehow violated the legal documents, the board can impose fines or take other legal action against that owner consistent, of course, with what the legal documents authorize.

DEAR BENNY: Let’s say a couple is getting divorced after 34 years. The house was purchased shortly after the marriage and put in the wife’s name only. A few years ago the wife put the house in her daughter’s name alone, but the couple still resided there until their recent separation. Now they are wondering who owns what share of the house.

The husband did all the upkeep and improvements on it over the years. They both made payments on the mortgage until the wife’s parents paid it off for them. Who gets what or owns what in this situation?--Lisa

DEAR LISA: I am not a divorce attorney, although I often get involved when there are real estate issues. State law differs, so my response can only be general in nature. I suspect that both husband and wife will have their own attorneys who will be fighting over who gets what.

In general, however, many states have adopted a concept of “equitable distribution.” If a couple has been married for many years, the courts will consider such factors as who made the mortgage payments, current market conditions, and even the emotional needs of the parties.

In your situation, the fact that the house was never in the name of the husband may create problems for the husband, but since he was making payments and was living in the property for a long period of time, those facts will be considered in deciding how much the husband will get or how much he will have to pay.

Bottom line: The parties should try very hard to reach an amicable settlement. My definition of such a settlement is where both sides walk away unhappy but nevertheless walk away. The only alternative is a lengthy, expensive court battle where a neutral judge will make a decision. That, in my opinion, is not in the best interests of either party.

DEAR BENNY: For 25 years I have lived in a four-bedroom, 2.5-bath home built in the 1960s. It sits on a 6.5-acre lot in an upscale suburb of Chicago. Zoning here requires a minimum lot size of 5 acres. Homes here range from $425,000 to $12 million.

My house needs updating of bathrooms and kitchen, new windows, etc. Houses even better than mine have been razed and replaced with new, expensive ones. Apparently buyers wanted the lots because of the location and the fact there are mature trees and landscaping.

My thinking is that most upgrades return only about 50 percent of their costs on average, so why would I want to do them other than to increase the likelihood of a quicker sale? My intent is to do only cosmetic improvements such as new paint or carpets, window treatments, wallpaper removal, minor landscaping, etc.

I am 65 years old and want to move to a smaller home that requires little upkeep. I’ve had diverging opinions from Realtors as to the best course to follow. --Donald

DEAR DONALD: From what you have described, and based on your age and objectives, I cannot recommend that you spend lots of money on upgrades. You are correct; many such upgrades will not increase the value of your house.

In my opinion, the cosmetic improvements you mention should suffice. But I would add one more item to your list: “declutter.” Step outside of your house and then go back in pretending you are a potential buyer. What do you see? Is there a lot of “clutter” in the house, such as too much furniture, or newspapers and magazines all over? Are there storage bins or racks in your closets? Is there enough sunlight coming into the house during the day?

The more attractive your house looks when you first walk into it, the more likely it will positively impact a potential buyer.

 

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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