Leasing Restrictions/Prohibitions and Tennessee Associations
October 7, 2013

May a homeowners or condominium association restrict the leasing of property within the bounds of the residential development encumbered by the CCRs or Master Deed?  This has long been an unanswered question in Tennessee.  On January 30, 2013, the Tennessee Court of Appeals rendered a decision in The Preserve at Forrest Crossing Townhome Association, Inc., v. DeVaughn addressing this matter.

Prior to addressing the case, first let’s address the concept of a leasing restriction or prohibition.  What such a restriction or prohibition does is restrict the ability of property owners to lease their property to renters.  The idea is not that renters are troublesome.  Rather, the concept addresses the economic reality that purchasers that buy property with an intent to lease the property usually look to purchase property at lower purchase prices.  This can drive down home values in the area.  Thus, when other homeowners go to sell or refinance their homes, the comparable sales of other homes has been reduced by these sales to non-resident owners.  The concept, then, is about preserving property values.

It should be noted, though, that in some instances leasing restrictions and prohibitions inhibit an association’s ability to apply for FHA financing.  What this means is that such restrictions may inhibit the association from getting onto the FHA approved list for FHA loans.

In Forrest Crossing, Ms. DeVaughn purchased a townhouse unit in 2004.  Her unit was created pursuant to a master deed.  In May 2006 the association passed an amendment restricting leasing at Forrest Crossing.  This provision was amended in May 2008.  Whether Ms. DeVaughn voted for or against the two leasing restrictions is unknown.  Subsequently, Ms. DeVaughn leased her unit to a third-party.  The association filed suit to enforce the leasing restriction.  It is important to note that the leasing restrictions were approved in accordance with the terms of the master deed after Ms. DeVaughn initially purchased her unit.  Thus, it could be argued that Ms. DeVaughn was vested with the right to lease upon purchase of her unit, as this was one of the many rights a property owner traditionally has.

The court noted that this issue had not been addressed by Tennessee courts.  The court reviewed cases from other jurisdictions on this issue and held that such a restriction is consistent with the Horizontal Property Act, the governing documents of Forrest Crossing, and not against public policy.  Thus, the court held that the leasing restriction was permissible.

This is an important case for Tennessee associations.  Now there is substantive law supporting the validity of leasing restrictions in Tennessee.

That being said, I have some concerns with the restrictive language used in this case.  I believe that it went too far in not grandfathering certain permissible leasing.  Since it is only a Tennessee Court of Appeals decision, it is not necessarily the final word.  There are some issues remaining around the edges on this matter.  Nevertheless, this should give much comfort to an association that has leasing restrictions and those considering leasing restrictions.

Given the property rights and amendment procedures involved in leasing restrictions, I would advise that any association considering such an amendment consult with an attorney familiar with this area of the law prior to amending its documents.

Tags: , , , , , , , , , , , , , , , ,

Share Article

Leave a Comment: