Commercial Activities Within the HOA
In William Douglas Management’s 37 year history we have encountered an array of businesses operated within HOAs we manage. Be it single family home HOAs or multifamily HOAs, it seems like every HOA has had to deal with members operating businesses from their home at one time or another. We have discovered businesses such as a multiple chair hair salon to a telemarketing call center to a medical doctor seeing patients in their home. Recently we had an HOA member hosting church services from his home. This was discovered because of the ensuing parking issues.
The internet has released a range of commercial activities within HOAs that were virtually unheard of 20 years ago. Receiving a great deal of media attention are overnight rentals or weekly vacation rental services such as Airbnb, VRBO, and HomeAway. These commercial activities have been challenges to many HOAs. While some HOA governing documents do address short-term rentals, interestingly enough, the majority of HOA documents make no mention of the issue.
The Difficulty of Proving Commercial Activity
Difficulty may arise when attempting to prove a commercial activity is actually occurring within a member’s home or, more precisely, determining this business activity to a legal certainty. A legal certainty so that the HOA’s governing documents can be enforced.
HOA boards are routinely scrutinizing online sites, such as Airbnb and VRBO, for any short term rental advertisements within their HOA. However, if a member is advertising on one of these sites, does that constitute legal proof that the member is “actually” renting out their home or part of their home?
For example, the member advertising admits; “Yes, I advertise, but I have never had anyone book.” An attorney could possibly defend this action by stating that the governing documents do not prohibit advertising, they only prohibit the actually renting.
Another consideration is home offices. With many members working from home, does this constitute a business being operated from their home? What if a salesman has a second phone line installed for a business phone or fax machine, but does not have an actual room within their home with an office setup?
An HOA we manage had a situation where a telephone call center was being operating out of a single family home. This call center operated for a number of months with about a dozen or so people coming in the morning and leaving in the late afternoon. Even with all of the automobiles and people coming and going, the only legal point or verifiable element that the HOA could make in court was that a commercial T3 communication telephone line had been installed at the residence. Fortunately, with the people arriving and leaving, the preponderance of the T3 line was deemed to be enough for the HOA to prevail.
Short term rentals can be even more difficult to substantiate because of the low profile nature of this online enterprise. We had an HOA member who was allegedly renting her home out as a bed-and-breakfast. This was only discovered when a “guest” accidently backed their car into a neighbor’s car and discussions ensued. It could not be determined where or if the HOA member was advertising her home for this purpose. The owner was called to a hearing before the board of directors to discuss the matter. During the hearing the member denied she was operating a bed and breakfast from her home and that she “just had a lot of different friends visiting.” Nonetheless, after the board hearing, the member’s many “friends” stopped visiting.
If questions arise about commercial activities, the first place to seek guidance is the HOA’s governing documents, generally the declarations of covenants or the master deed (Certain situations may arise that involve the articles of incorporation). If there is language specifically addressing commercial activities it may be similar and as nonspecific as this:
Section 7.8 Commercial Activities. No commercial activities can be conducted on any lot or from any structure, common or private, within the association. No commercial vehicles can be maintained within the association.
The example language above is extremely broad and could be deemed vague. Vague being defined per Merriam Webster as: not clear in meaning; stated in a way that is general and not specific; not thinking or expressing your thoughts clearly or precisely, indistinct being.
One basic rule of contract law (Governing documents are essentially contracts between the association and the membership) is that contract conditions must be certain. This legal principle can more accurately be summarized as contractual terms must be sufficiently certain, and not too vague or too ambiguous to be legally enforceable. It is usually advisable to avoid having a judge determine if contract conditions are certain.
The Nuisance Clause
If there is no specific commercial activities language in the governing documents, the nuisance clause is what is generally fallen back on for possible enforcement. An example of a nuisance clause:
Section 7.2 Nuisance. No obnoxious, offensive or unlawful activity shall be conducted within any home or lot, or on or about the Common Elements, nor shall anything be done thereon or therein which may be or which may become an annoyance or nuisance to the other Owners, or endanger the health and safety of any Owner.
While the nuisance clause is better than nothing, it can be extremely broad such as the Commercial Activities example noted previously. This nuisance clause language could be deemed legally unenforceable.
A Final Option
If the HOA’s governing documents do not include language that specifically addresses commercial activities, many times the declarations of covenants and the articles of incorporation will have a statement of purpose or reason for establishing the HOA.
Declarant is the owner of a parcel of real estate containing a total of approximately 417.67 acres located on Happy Glen Avenue near the intersection of Main Street in Springfield, Springfield County, as more particularly described on Exhibit A attached hereto (the “Land”). The Land has constructed 364 single family lots in which Declarant will constructed a total of 364 residential single family homes. Declarant has also constructed common amenities on the Land such as streets, sidewalks, clubhouse, swimming pool, parking lot, landscaped areas and other improvements. Declarant desires to submit the Land and the improvements located on the Land (collectively, the “Association”) to the terms and provisions of the Planned Community Act.
This statement of purpose clearly establishes the association as a “residential” entity. In certain instances this may be the only language in a set of governing documents giving the HOA authority or standing as solely a residential community.
Amending the Governing Documents
If the governing documents do not provide specific authority regarding commercial activities, or have enough teeth to enforce, pursuing a document amendment may be an option. While it is typically difficult to amend governing documents, because of the high threshold of affirmative votes needed, many times this may be the HOA’s only viable option. Working with the HOA’s attorney on crafting the proper language that can survive being dissected by a judge is of paramount importance.
When it comes to restricting commercial enterprises, attorneys are tasked with writing amendments that are even more difficult to encapsulate. The gray area of this situation is what constitutes a commercial enterprise. Many times in governing documents there will be language similar to: “No commercial activities are permitted in which nonmembers will be entering and leaving members’ homes such as what is found in a retail store operation.” Thus, this wording in an amendment would forbid Tupperware parties.
Because of home offices and the occasional Tupperware party, attorneys will ideally craft wording that revolves around the problems created by commercial enterprises. If an enterprise is invisible from the street and neighbors, does not generate noise and does not cause traffic and parking issues, the attorney many times will craft the amendment language on the negative impact. This is generally done with emphasis on parking and traffic related impacts or possible safety concerns.
Utilizing Local Ordinances or Zoning
If amending the HOA’s governing documents is not a practical option, another possible less arduous path may be local ordinances or zoning. Most municipalities have ordnances restricting commercial activities within residential homes and residential communities. Certain activities might even fall under state regulatory agencies. While code enforcement or other governmental agencies may have broader enforcement abilities than the HOA, there is still a level of proof or evidence of an ordnance infraction that has to be met. Code enforcement officers often encounter the same issues that boards and our managers encounter of knowing there is commercial activity being conducted, but unable to prove this to a level of certainty in a court of law.
While commercial activities can be a very complex situation within any HOA, there are two main elements of resolution. The first being governing document interpretation, plan of action and possibly seeking legal guidance from the HOA’s attorney to clarify or address possible pitfalls. The second element being documentation of the business activity. The manager, board members and neighbors need to document all activities witnessed or witnessed by others. Detailed and dated activity records on a number of occasions have been the one critical element in boards being successful in hearings and court cases.
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