Is a rental cap on the number of units that can be rented in a condominium a use restriction? If so, the Washington Condominium Act requires a 90 percent vote of the unit owners, not counting the condominium developer’s votes, to impose or lift a rental cap. This question comes up frequently in practice, and Division One of the Washington Court of Appeals recently reaffirmed this rule in its opinion in Filmore LLLP v. Unit Owners Ass’n of Centre Pointe Condo., 333 P.3d 498 (Wash. Ct. App. 2014), issued on September 2, 2014.
It may not be immediately obvious that a restriction on renting a condominium unit is a “use” restriction if residential uses are allowed whether there is a rental cap or not. Use restrictions are often thought to refer only to residential versus nonresidential uses. But courts have interpreted changes to use restrictions to include changes to rental caps by looking at the ordinary meaning of the word “use” as, for example, “the legal enjoyment of property that consists in its employment, occupation, exercise, or practice,” and by noting that the Washington Legislature did not intend to narrowly define the word “use”.
The Filmore court cited to the recent Washington Supreme Court case of Wilkinson v. Chiwawa Communities Ass’n, 180 Wn.2d 241, 327 P.3d 614 (2014) (which we blogged about here). In the Chiwawa case, the supreme court required 100 percent approval of an amendment prohibiting short-term rentals even though the governing documents only required a simple majority to enact the prohibition. The supreme court reasoned that since the amendment created new covenants, rather than changed existing ones, 100 percent approval was required. Never mind that the difference between a new covenant and a changed covenant is murky at best, the Filmore court cited the case to support its ruling that requiring 90 percent approval on “a new leasing restriction scheme that substantially alters the status quo protects condominium owners’ reasonable and settled expectations.” Fillmore, 333 P.3d at 510.
The Washington Condominium Act is clear that the 90 percent approval applies to changes to use restrictions, including changes to leasing provisions, and not the 67 percent approval which applies to other amendments. Because later amendments requiring 90 percent approval (and likely approval from unit-secured lenders) are difficult to pass, it is important for condominium developers to give serious consideration to whether it should include (or not include) rental caps at the time the condominium is created. Rental caps may be important for other reasons too, such as preserving the unit owners’ ability to obtain federally backed mortgages (specifically FHA loans) because lending rules require a certain number of owner-occupied units in a condominium project.