One of the lasting effects of the COVID-19 pandemic is an increase in home based businesses in condominium and homeowners associations. The Small Business Administration estimates that over fifty percent of all small businesses in the United States are home-based, with an even larger percentage of small businesses in certain sectors such as construction and professional technical services being based out of the home. People use their homes for everything from daycare operations (both for humans and pets) to music and dance lessons to even personal training and fitness coaching.
However, in a condo or homeowners association, a problem caused by even a few extra “customers” can be amplified. The additional vehicular or pedestrian traffic can increase the maintenance cost associated with living in the condominium, including the additional use of roads, as well as parking and other common areas, including elevators. The business performed by the unit owner can create additional noises or unsightly smells or sights that can permeate between units or from one condominium unit to the next. And, depending on the type of business being performed, operating a home-based business in a condo or homeowners association setting could increase the liability for the homeowners association if something were to happen to the customer of the unit owner.
To avoid disputes, it is suggested that each board review the restrictive covenants that govern its community association (these restrictions could be in the declaration, HOA bylaws, rules and regulations, deeds, or recorded covenants) to see what those documents say about what is allowed and what is not allowed. Then, if any of the restrictive covenants are outdated or not in line with the expectations of the homeowners association, investigate whether an amendment to the HOA bylaws is possible, and if not, whether the creation of HOA rules that cover home-based businesses should be considered. If either of these avenues is chosen, it is also suggested that a community association attorney be retained to assist with the process, because there is a good chance that any change will require the consent and votes of the unit owners and, possibly the mortgagees for the unit owners, to be effective.
When the homeowners association board begins to look for possible restrictions in the declaration, HOA bylaws, rules and regulations, deeds, or restrictive covenants, it is important to first identify the type of business restrictions that potentially exist in those documents. The business restrictions in these documents tend to fall into one of the following distinct groups: (1) a general restriction that the unit may be used for “residential purposes only” or “single-family residential purposes,” or that purports to ban all commercial activity; (2) a preclusion of only specified home-based businesses, which, by implication would allow other such businesses to be conducted; (3) a provision that allows a unit owner to telecommute or perform its business out of a home office environment only; or (4) a provision that allows for home-based businesses to be conducted subject to certain caveats or conditions, including the situation where the business does not have on-site employees and does not produce odors or noises outside the specific unit. Each of the four different types of restrictions comes with its own set of potential issues, and if the restriction is not worded properly, could be subject to attack by the unit owners. Therefore, regardless of the type(s) of restrictions in the current version of the declaration, HOA bylaws, rules and regulations, deeds, or restrictive covenants, it is a worthwhile exercise to have a community association attorney review them with the board.
Problems Facing Condo Associations Dealing With Home-Based Business Restrictions
There are many issues that a board for a condo association or homeowners association may encounter regarding business restrictions within the association. Most of those issues will center around enforceability and the process for enforcing the restrictive covenants. Although there are only a handful of reported decisions in Illinois discussing the enforceability and/or enforcement of home-based business restrictions, a few are worth mentioning to help guide the board through the process.
The enforceability of a home-based business restriction in a homeowners’ association was at issue in the 2015 case of Neufairfield Homeowners Ass’n v. Wagner, 2015 IL App (3d) 140775, 42 N.E.3d 941. In Wagner, the homeowners association’s covenants, conditions, and restrictions document stated that all lots were to “be used for Single Family Dwellings.” However, later in that restrictive covenants, there was an exception for the operation of personal businesses which stated specifically that unit owners could operate a home-based business if: (1) the business is conducted within the residence; (2) it is not prohibited by local ordinance or regulation; and (3) no motor vehicle with business markings would be parked on the lot or the common area overnight. The restrictions also provided no business activities “shall require or allow customers or the public to frequent the Property for such home occupation.” The homeowners at issue operated a daycare business out of the home, which was licensed by the state. When analyzing the claims and defenses, the appellate court provided the general law in Illinois regarding the enforceability of restrictions:
Generally, restrictive covenants affecting land rights will be enforced according to their plain and unambiguous language. In interpreting a covenant, the goal of the court is to give effect to the actual intent of the parties when the covenant was made. The language of a declaration of subdivision covenants, conditions and restrictions is determinative of the developer’s intent, and the declaration is construed most strongly against the developer as its author. Covenants should be strictly construed so that they do not extend beyond that which is expressly stipulated; all doubts must be resolved in favor of the free use of property and against restrictions.
Id. at ¶16 (citations omitted). In the end, the trial court and the appellate court found in favor of the homeowners. The reason is that the dictionary definition of “frequent” is “habitual” or “persistent,” and in the court’s opinion, having seven or eight cars entering and leaving the subdivision twice a day did not constitute a “frequent” commercial activity. Therefore, because restrictions are strictly construed in favor of free use, there was no clear violation of the restrictions. Surprisingly, the court decided the issue of “frequent” activity on a summary judgment motion, thereby finding that it was so clear cut that the restriction was not being violated that a trial was not warranted.
There are some situations in which Illinois courts have found violations of restrictive covenants related to home-based business, however. For example, in Gerber v. Hamilton, 276 Ill. App. 3d 1091, 1093, 659 N.E.2d 443, 444 (5th Dist. 1995), a home-based beauty salon was found to violate a deed restriction that provided that “[n]o business, trade or other commercial enterprise shall be set up on any lot.” Although the deed restrictions in that case provided an exception for “professional work” in the home, the Court there stated that a commercial enterprise with business invitees did not fit within that exception. Courts have also made similar holdings in cases such as Amoco Realty Co. v. Montalbano, 133 Ill. App. 3d 327, 478 N.E.2d 860 (2nd Dist. 1985) (general commercial use restriction barred use of property to operate construction business); and Wier v. Isenberg, 95 Ill. App. 3d 839, 420 N.E.2d 790 (2nd Dist. 1981) (home-based psychiatry practice violated commercial use restriction).
As these cases highlight, many times the language used in the declaration, HOA bylaws or HOA rules can be ambiguous, and because restrictive covenants are often construed in favor of free use, any such ambiguities in the deed restrictions may be construed against the homeowners association. Accordingly, it is important that community associations amend their restrictive covenants if the language is not clear or lends itself to subjective interpretations. This issue can be exacerbated when the governing documents for the condominium or homeowners association were drafted many years ago before computers and the internet made it much easier to conduct business in a residence. Even further, because what constitutes a potential violation of a commercial use restriction is not always clear-cut, boards may be faced with a challenge by a unit owner that other businesses have been allowed to operate without objection thereby creating a potential selective enforcement or waiver issue. For all these reasons, it is suggested that if a board is alerted to the operation of a home-based business in the homeowners association that steps be taken to immediately confirm what is, and what is not, allowed and to act quickly if warranted.
Amending Restrictive Covenants
If a homeowners association decides that the restrictions as they currently exist need to be changed, it is important to understand the process. Amendments to condominium documents are governed by Section 27 of the Illinois Condominium Property Act, which states that an affirmative vote of 2/3 of those unit owners voting must approve the amendment, unless the declaration or condominium bylaws provides for some other majority between 50% and 75%. Therefore, approval of any amendments will require somewhere between 50.1% and 75% of the unit owners voting depending on the language in those documents. Additionally, if the declaration or bylaws requires mortgagee consent, there is a mechanism for sending notice to those mortgagees in Section 27 as well. The Common Interest Community Association Act (which governs many homeowners associations) does not have an amendment provision other than for scrivener’s errors or for banning leasing, so in that situation, the language of the declaration and bylaws will control.
Alternatively, a homeowners association could consider the option of creating, or amending, rules and regulations that supplement pre-existing restrictions in the HOA bylaws. This process should be done with the assistance of a community association attorney to confirm that the provisions of the operative documents and the Illinois Condominium Property Act or the Common Interest Community Association Act are followed, and if a vote is necessary, that the vote is conducted properly.
Policing restrictive covenants on commercial uses in relation to home-based businesses can be a daunting task for a homeowners association. Even if the governing documents for the HOA provide that all unit owners must seek permission to operate a business out of a unit, there is always a chance that the unit owners have not read the HOA documents or that they will not be followed in every situation. Additionally, many HOA bylaws were drafted before the invention of the internet, or the COVID-19 pandemic, which allowed for many more home-based businesses to operate easily. If a decision is made to amend the HOA bylaws to button up provisions related to business operations, it may also be worthwhile to do this in conjunction with an overall update to the governing documents to make sure they comply with other issues that were not originally considered at the time that the documents were initially drafted. Many community association documents are outdated and did not, and could not, anticipate advances in technology or recent changes to the law, including issues that have arisen the use of drones, electric vehicles and the sale and use of marijuana. Although a complete update to the HOA bylaws may involve more attorney time, it could provide comfort to the homeowners association that the HOA bylaws are up to date and save time, effort, and attorneys’ fees if a dispute were to arise with a unit owner as to what is, and what is not, allowed under the documents.
Adam Toosley is a member at Hirzel Law, PLC and focuses his practice on real estate litigation, zoning and land use, construction, and financial services litigation. Over the course of his career, he has represented property owners, landlords, condominium associations, lenders, and all parties in the construction chain, handling all aspects of real estate-related disputes, including construction defect cases, payment, and landlord-tenant disputes as well as real estate foreclosures, mechanic’s lien cases and fraud and business tort claims in state and federal court as well as in mediations and arbitrations throughout the United States. He is licensed in both Michigan and Illinois. He can be reached at 312-626-4535 or at email@example.com.
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