Current case law does not condemn all changes to rent control | Ward and Smith, PA

The North Carolina Court of Appeals recently released two cases that raise the question of whether a lease modification containing rent restrictions can be adopted by a condominium association or a homeowners association.

Both cases – Mileview LLC, et al. v. The Reserve II at Sugar Mountain Condominium Owners Association (February 2024) and McDougald v. White Oak Plantation Homeowners Association, Inc. (August 2024) – are unpublished decisions, meaning they have no precedential value for future cases. While these cases are not binding precedents, they are instructive. They show how the Court of Appeals views rent control changes in certain contexts.

In both cases, the Armstrong v. Ledges Homeowners Association, Inc. Standard that changes must be appropriate. Armstrong is a 2006 North Carolina Supreme Court case that established the perspective under which future changes must be examined by a court. The two recent Court of Appeals cases mentioned above strike down changes to rent control as unreasonable by applying the “reasonableness test” under Armstrong.

Some stakeholders active in the community association space now believe that these cases indicate that any changes to rent control will fail. This is not the lesson of the Armstrong case, and these recent unpublished cases hardly suggest such a result. No doubt the North Carolina Supreme Court will have to revisit this issue to explain how Armstrong should rightly be applied to changing communities, new technologies and refined agreements. But it is a stretch to say that all rent controls are dead. Here are five reasons why rent controls under the Armstrong Standard, regardless of recent unpublished decisions:

1. The Armstrong The decision itself suggests that changes to the rent cap could be valid.

The Armstrong The case addressed changes that gave the Ledges Homeowners Association broad assessment powers, whereas previously the association had only limited powers to collect assessments. This was a sea change for this community. However, in evaluating these assessment changes, the Supreme Court was direct about how changes to rent controls might be viewed in the future, giving some examples:

For example, it may be relevant that a particular geographic area is known for its resorts, retirees, or seasonal “snowbirds.” Therefore, it may not make sense to retroactively prohibit rentals in a mountain community during ski season or in a beach community during the summer. Likewise, it may not make sense to continually increase levies in a retirement community where residents live primarily on a fixed income. Finally, a homeowners association cannot unreasonably restrict rentals of property by imposing a lien or “collection” of rents (which is essentially a levy); although it may make sense to limit the frequency of rentals to prevent rental properties from becoming like a motel.

Although this wording does not directly correspond to the amendment at issue in Armstrongshows that the Supreme Court did not intend to preclude all rent restrictions in the future. The last sentence explicitly suggests that a rent restriction related to the “frequency of rentals” might be an appropriate modification.

2. The reasons for the changes may be plausible.

Sceptics who are convinced that all changes to rent control will soon collapse overlook the fact that the Armstrong The most important test remains that of reasonableness, which is a community and contract-specific analysis. Dictionaries generally define “reasonable” as something that is fair, reasonable or appropriate. Armstrongthe reasonableness of the change will determine whether it is valid. This does not mean that any conceivable rent restriction would be unreasonable, even if the community has never had a rent restriction in the past. The reasonableness of a change will examine those features that Armstrong instructs a court to take into account, inter alia, the nature and character of the community, the arrangements to be modified and the reasons for the modifications when assessing appropriateness.

Two examples can illustrate this. First, a condominium is at risk of insurance carriers treating it differently due to the number of rental properties in the community. Therefore, the condominium community may pass a rent restriction amendment to limit the frequency of rental properties in the condominium. If a condominium has always been a residential complex but is in danger of losing its residential character from the perspective of the insurance carriers providing the insurance, a rent restriction to preserve the residential character of the condominium in all aspects seems to make sense. This preserves the original character of the condominium and what it was intended to be. It also limits the frequency of rental properties to avoid seeming like a motel, something that Armstrong Second, a municipality may already have contractual restrictions on tenants’ use of land, and it should be reasonable to make changes to clarify or update those restrictions based on current use and terminology. Both examples should withstand scrutiny under Armstrong.

3. The existing restrictions may make a change worthwhile.

A community that provides for differential tenant treatment and restrictions from the outset, as well as restrictions that define the character of the community, may support a rent restriction modification. Older covenant provisions such as “no transient occupancy” may not be sufficient on their own, but combining these types of provisions with covenant terms, owner-occupancy restrictions, and other covenant terms that explain the non-rental nature of the community may be sufficient to sustain a rent restriction modification.

4. Prior changes to competition restrictions may be useful.

One of the biggest misunderstandings of Armstrong The case put forward by the proponents is that Armstrong requires that a community go back to its origins to assess the appropriateness of a change. This may be true in relation to a community that has not experienced any changes over the years, but a community that has changed its restrictive covenants should Armstrong Adequacy test applied to the current arrangements in place at the time of the change. It is a misinterpretation of Armstrong to suggest that the original agreements should be the standpoint from which the adequacy of an amendment is assessed when a community has amended and restated its declaration or has made many applicable amendments in the past. A community should not be forced to revert to its restrictive agreements from the 1970s when previous amendments were validly adopted in the 2000s and 2010s and were not challenged during the limitation period provided for such a challenge. This type of analysis itself would be unreasonable and is certainly not what Armstrong intended.

A community that has implemented rent restrictions through prior amendments should have the basis upon which to now modify its rent restrictions. It is reasonable for a community that has restricted rents to add additional details and restrictions to those prior agreements. As the Supreme Court stated in ArmstrongThe purpose of an amendment is to “improve, correct, remedy, correct an error or repair” an agreement. An amendment to “improve” the pre-existing rental restrictions should be Armstrong.

5. A common consensus can prevent a challenge.

Any community considering a rent control change should first attempt to reach consensus among community members on the terms of the proposed rent control. It is far better to avoid a potential rent control change lawsuit in the first place than to endure the struggle with the uncertainty of a court outcome. There are many arguments a litigator can make in this area until the North Carolina Supreme Court issues guidance on the scope of ArmstrongReasonableness test with respect to rent restrictions. If the community can reach consensus, the chances of a challenge drop dramatically. It is a long and costly battle for a group of owners to challenge a rent restriction change, and the more “consent” community members have, the less likely such a challenge becomes. Community consensus can be achieved by working through the least burdensome rent restriction so that the needs of the community are met without imposing more than necessary on owners who wish to rent. The scope of a change will be influenced by the attempt to reach that consensus, and this is the type of effort a court may find beneficial to the community association’s argument for reasonableness. Evidence of committee actions to evaluate issues, community surveys or test votes, and other community member input can show how reasonable this change is for the community. They can also limit or eliminate the potential for a challenge. An experienced community association attorney can help an association by suggesting steps that can be taken to reach consensus.

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Challenges to rent control amendments remain a hot topic for litigation in North Carolina. Our firm’s Community Associations Practice Group has handled both rent control litigation and the drafting of rent control amendments from the mountains to the coast. Every community is different, so each rent control amendment considered or adopted should be evaluated separately to determine whether it meets the Armstrong Reasonableness test. There is no clear rule that all changes to rent control will fail, but municipalities should be cautious when considering these changes.