By Michael S. Hunter
With the growth of Airbnb, VRBO and other web-based short-term leasing platforms over the last several years, many communities have had legitimate concerns with the impact that short-term leasing has on the character of their communities. Complaints about misbehaving tenants, overcrowding, loud parties late into the night, and other problems (even shootings – see here) are commonplace. Thus, many communities began adopting amendments to their restrictive covenants to ban short-term leases by requiring that all leases have a minimum term – typically 30 days, six or 12 months.
On February 23, 2024 the North Carolina Court of Appeals issued a ruling on a dispute over short-term leasing restrictions adopted by a condominium at Sugar Mountain (in Avery County). The case is Mileview LLC v. The Reserve II at Sugar Mountain Condominium Owners’ Association (which I will refer to as “The Reserve II”). Sugar Mountain is a resort community consisting of one of North Carolina’s largest ski resorts, along with a golf course and other amenities and activities outside of ski season.
As background for its opinion, the Court of Appeals looked to another court decision from the North Carolina Supreme Court issued in 2006, Armstrong v. The Ledges (“Ledges”). In Ledges, the court was tasked with deciding whether or not an amendment to a community’s restrictive covenants approved by the homeowners was “reasonable” in light of the developer’s original intent for the character of the community. In Ledges, the Supreme Court held that the developer’s original intent was for the community to have a homeowners association with limited responsibility and authority. The amendment in question greatly expanded the association’s responsibility and authority, beyond the limited role the developer had envisioned for the community and that many owners had relied upon when choosing to purchase a home there. Even though the amendment had been approved by a super-majority of the owners, the court struck down the amendment as being unreasonable, finding that the minority of owners who did not support the amendment were entitled to the benefit of their bargain – i.e., they were entitled to a community with an association that had limited responsibility and authority (including the authority to levy assessments). In its opinion, the court stated:
“In other words, when examining the permissibility of an amendment to an association’s declaration, we must determine whether the amendment ‘preserves the original nature of the bargain’ by remaining faithful to the ‘purpose of the original declaration.’”
In response to the Ledges case, the North Carolina legislature attempted to essentially overrule the case by revising the Planned Community Act, adding a provision that gives amendments the presumption of validity as long as they are approved by the requisite percentage of owners under the community’s declaration of restrictions or applicable statutes. However, this change to the statutes only created a presumption of validity, a presumption that can be overturned with the right set of facts.
In The Reserve II, the condominium owners approved an amendment to The Reserve II condominium declaration in 2021 abolishing short-term leasing from November through March. A number of the owners sued the association to challenge the validity of the amendment, and the trial court ruled in their favor. On appeal, the Court of Appeals found uncontroverted evidence that the condominium was established by the developer with the intent that, since the condominium was located in a resort area, it was anticipated that unit owners would be permitted to lease their units for short terms, and in fact many owners had done so for many years without objection from the association. In its opinion the court stated:
“Given the language of the original declaration, taken together with uncontroverted evidence on the record that short-term rentals were commonplace at the complex, the trial court correctly ruled that the amendment was unreasonable in the context of the original declaration under [Ledges].”
The Court of Appeals in The Reserve II followed the logic laid out by the Supreme Court in the Ledges decision 18 years ago, confirming that amendments to a community’s governing documents may not be valid if they stray too far from the developer’s intended vision for the community – and a vision that many owners may have relied upon when deciding to purchase a home. The case is an “unpublished” opinion, so it technically does not establish a binding precedent in similar cases, but it is a clear indication of the court’s leanings.
If your community has concerns about leasing, give one of our attorneys a call to discuss it. We have prepared amendments to restrictive covenants addressing leasing for hundreds of clients over the years, and there are a lot of options to consider.
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