Frequently, the governing documents of condominium associations contain limitations on the ability of owners to lease or sell their property, such as provisions requiring owners to obtain the Association’s approval before such leases or sales may take place. Although these provisions are often very important to the association’s ability to protect its members’ happiness and property values, associations should be aware of certain drawbacks when considering the inclusion of such limitations in their governing documents.
One such drawback of a lease and sale approval provision is a potential inability on the part of purchasers to obtain Federal Housing Administration (“FHA”) mortgage insurance on loans, which often make the loans available with lower down payments and with less stringent credit requirements. The loss of the ability of potential purchasers to obtain such loans may shrink the pool of individuals who can purchase homes in a condominium and, potentially, extend the market time for the sale of units.
The U.S. Department of Housing and Urban Development (“HUD”), responsible for establishing criteria for eligibility for FHA mortgage insurance, has adopted a policy of “free assumability.” Put simply, HUD regulations limit the restrictions which can be placed on the sale or lease of a property for which the FHA is providing mortgage insurance. One such limitation is a general prohibition against provisions in condominium declarations or other covenants which make sales or leasing “subject to the consent of a third party,” including the association.
Notwithstanding the prohibition on provisions in the governing documents requiring association approval for sales or leases, applicable HUD regulations do allow for condominium associations to adopt certain lease and sale requirements, including:
- All leases must be in writing and subject to the declaration and by-laws of the condominium project.
- The condominium association may request and receive a copy of the sublease or rental agreement.
- The condominium association may request the name(s) of all tenants including the tenants’ family members who will occupy the unit.
- Unit owners are prohibited from leasing their units for an initial term of less than 30 days.
- The condominium association may establish a maximum allowable lease term, e.g. six months, twelve months, etc.
- The condominium association may establish a maximum number of rental units within the project; however, the percentage of rental units may not exceed applicable FHA condominium project owner-occupancy requirement.
If a condominium association is considering the adoption of provisions placing limits on unit owners’ ability to lease or sell their units, due consideration should be given to whether the association desires to maintain its eligibility for individuals with FHA insured mortgages to purchase units and whether the lease or sale provisions are compatible with the eligibility requirements promulgated by HUD.