November 2, 1994.
BLOUNT CIRCUIT, CA No. 03A01-9404-CH-00137 HON. W. DALE YOUNG JUDGE, AFFIRMED AND REMANDED.
CHARLES DUNGAN, WITH DUNGAN MEARES, OF MARYVILLE, TENNESSEE, FOR APPELLANTS
PHILLIP REED, OF MARYVILLE, TENNESSEE, FOR APPELLEES
The Defendants appeal from a declaratory judgment holding the Board of Directors was without authority to impose certain limitations and restrictions on the rental of Plaintiffs' residential units located in the condominium complex.
The Plaintiffs-Appellees are the owners of four units in a condominium complex known as Riveredge Village Condominiums. Three of the Plaintiffs, the Grahams, the Mixons and the Rays, are non-resident owners and rent their units on a regular basis during the tourist season. The other Plaintiffs, Mr. and Mrs. Wright, are resident owners but are opposed to the rental restrictions adopted by the Board of Directors of the condominium association. The Defendant-Appellants are members of the Board of Directors of the association.
Riveredge Village Condominiums is a small development located in the foothills of the Great Smoky Mountains National Park in Townsend. It consists of 12 two-bedroom units and elements including a swimming pool, bath-house, clubhouse, tennis courts, and parking areas.
The master deed for the condominiums provides as follows for the leasing or renting of individual units by their owners:
"III. COVENANTS, USES, and RESTRICTIONS "1. Units: Each of the units shall be occupied only by an owner, his servants, and guests, or an authorized rental client as a residence as hereinafter provided, and for no other purpose. Provided, however, that the term `residence' shall not exclude occupancy by overnight guests or rental clients. No units may be divided or subdivided into a smaller unit nor any portion thereof sold or otherwise transferred."
The majority of the resident owners who do not rent have, over the years, come to object to rentals in the complex. Their dissatisfaction has been largely generated by the conduct of rental clients. Their complaints involve such matters as unsupervised small children and rowdy behavior on the part of some adults.
In October, 1992, the Defendant Board of Directors, acting on the complaints of the non-leasing owners, called a meeting of the condominium association for the purpose of amending the master deed to eliminate rentals. A 75% majority of the votes was required to carry the proposed amendment. The amendment failed, however, by a vote of eight to four.
Approximately one month later the following resolution, as pertinent to this appeal, was adopted by the Board of Directors of the association: "[T]he following Rules and Regulations shall apply to the rental or leasing of units: All rental and/or lease agreements . . . shall be for at least (Amended to one-month periods); No rented or leased unit may be occupied by any person under the age of twelve (12); The monthly assessment for owners during any month when his/her unit is rented or leased shall be $200.00 (This is $100.00 per month above usual $100.00 maintenance fee.); During any rental or lease period, the owner shall not have the right to use the common areas."
The Plaintiffs objected to the regulations and insisted the Board of Directors was without authority to adopt and enforce such restrictions on unit owners in the condominium complex. They filed a declaratory judgment action asking the court to declare the rights and liabilities of the parties pursuant to T.C.A. § 29-14-103. They asked the court to construe the master deed of the condominiums, the charter of incorporation of the association, and the by-laws of the association. In their complaint, Plaintiffs alleged the regulations in the November resolution were inconsistent with the condominium master deed and thus invalid. They alleged Defendants attempted to accomplish their objective to eliminate rentals in the complex by adopting regulations which would effectively make renting units impossible. They further alleged some of the Defendants had approached Plaintiffs' tenants, telling them the units were improperly rented and blocking their access to common areas. They asked that the Defendants be temporarily and permanently enjoined from interfering with the rental rights of the Plaintiffs and they also asked for damages.
For answer, Defendants denied the material allegations in the complaint. They alleged the November resolution was an attempt by the Board to reasonably regulate the affairs of the association.
Upon the trial of the case, the chancellor declared the regulations contained in the resolution to be void. He enjoined the Defendants from further interfering with Plaintiffs' rental agent. He found the Defendants were not liable for damages due to Plaintiffs' failure to offer sufficient proof.
The Defendants have appealed, presenting the following issues for review:
"Did the trial court err in holding . . . the Board of Directors of the condominium association did not have the right to limit the rental of the respective owners' units to a period of one month or greater. . . .;
"Did the trial court err in holding . . . the Board of Directors did not have the right to restrict rental of units to exclude children under the age of twelve. . . .;
"Did the trial court err in holding . . . the Board of Directors did not have authority to impose an additional fee on an owner who rented;
"Did the trial court err in holding . . . the Board of Directors could not prohibit owners from using the common areas during a lease or rental period;
"Did the trial court err in holding that the Board of Directors did not have authority to regulate rentals but only to regulate the common areas."
We first consider Defendants' last issue, since it is the pivotal issue on appeal. Defendants argue the trial court erred in finding the Board of Directors did not have the authority to regulate rentals, but only to regulate the common areas of condominium properties. We cannot agree.
A condominium complex is created by the recording of a master deed. See T.C.A. § 66-27-103. The administration of the condominium is governed by the by-laws, which must specify the powers of the board of administration (Board of Directors) and must be recorded with the master deed. See T.C.A. §§ 66-27-111 and 66-27-112. The by-laws in this case "are expressly subject to the effect of the terms, provisions, conditions and authorizations contained in the Articles of Incorporation and Master Deed. . . ."
Section IV, J, 3 of the by-laws provides the Board has the power "[t]o make and amend Rules and Regulations governing the use of the property, real and personal, owned and operated by the Association for the use and benefit of unit owners. . . ." Section III, 6 of the master deed provides "[r]easonable Rules and Regulations concerning the use of the common elements may be made and amended from time to time by the Association in the manner provided by its Articles of Incorporation and By-Laws. . . ." The common elements consist of "the entire dedicated property other than the units and limited common areas. . . ." (Emphasis ours.)
After a careful examination of the condominium documents, we find the Board's regulatory authority does not extend to the individual units or to the limited common areas; rather, the Board's authority is confined to the common elements of the complex.
Defendants argue the Board's power to create the regulations at issue is derived from the following provision in the master deed: "III. COVENANTS, USES, AND RESTRICTIONS. . . . 18. Leasing Restrictions: Any lease or rental agreement must be in writing and subject to the requirements and provisions of this Master Deed and the Association."
We decline to interpret this provision as vesting in the association (Board of Directors) the power to regulate rentals. Rather, we construe this provision to mean rental agreements will be subject to the requirements of the association acting within its power to regulate the common areas, and the rental agreements must conform to the provisions of the master deed.
Defendants rely on the Florida case of Beachwood Villas Condominiums v. Poor, 448 So.2d 1143 (1984) (Fla.App. 4 Dist 1984), in which the court found a rule enacted by a board of directors regulating rentals was within the scope of the board's authority. The facts in the Beachwood Villas case are, however, distinguishable from the facts in the case at bar. In Beachwood the condominium declaration provided "[t]he Board of Directors may, from time to time, adopt or amend previously adopted rules and regulations governing and restricting the use and maintenance of the condominium units." Id. at 1144. (Emphasis ours.) No such powers are vested in the Board of Directors in the case at bar. Their power is limited to the common property. Defendants' argument is without merit.
In Bailey v. Master Plumbers, 103 Tenn. 99, 52 S.W. 853 (1899) the supreme court, at 122, said: "The action of a non-profit association, like that of all other corporations, must be limited to the powers enumerated in the charter, plus those necessarily implied from the object of incorporation." We hold the Board of Directors in the case at bar was without express or implied authority to promulgate rules inhibiting the rental of individual condominium units.
The first and second issues presented by Defendants concern the Board's regulations restricting rental periods to a one-month minimum and prohibiting children under 12 in a rented unit. It follows from our holding set out above that these regulations are invalid and beyond the regulatory authority of the Board of Directors.
We are also of the opinion that even if the regulations were within the scope of the Board's power, they are unreasonable. The record shows the condominiums are located in a tourist area where people, mostly families, go to spend short-term holidays, and there is little or no demand for monthly rentals. The record shows the rules restricting the duration of the rental periods and prohibiting rental to families with young children would virtually eliminate the possibility of renting the units. This would be a substantial impairment of the right to rent the individual units as expressly granted to the owners in the master deed, and therefore it is unreasonable.
Although condominium properties are normally highly restricted, to the extent which individual units are not restricted, the individual property rights are protected. The master deed not only serves to restrict the properties, it also shields the owners' rights in their individual units.
As noted above, before adopting the resolution at issue, the Board of Directors called a meeting of the association for the purpose of amending the master deed to eliminate rentals altogether. Section XI, 3 of the master deed, however, provides "no amendment shall discriminate against any unit owner or against any unit or class or group of units unless the unit owners so affected shall consent. . . ." Thus, had the amendment carried, it would have still required the consent of all the renting owners to become effective. Also, the condominium master deed and by-laws and any modifications thereto must be recorded in the county register's office. T.C.A. §§ 66-27-107, 66-27-108, 66-27-111 and 66-27-112. The statute contemplates a method to put prospective purchasers on notice as to the restrictions and by-laws upon which they may rely in making a decision to buy or not to buy a particular unit in the condominium complex.
In Hidden Harbour Estates v. Norman, 309 So.2d 181, 182 (Fla.App. 1975) the court said an owner of a condominium unit "must give up a certain degree of freedom of choice which he might otherwise enjoy in separate, privately owned property." With this we agree. We do not, however, endorse the view that a person who voluntarily submits himself or herself to the condominium form of property ownership surrenders all individual property rights. The condominium concept must operate within its governing documents and the applicable statutes. Defendants' second and third assignments of error are overruled.
Defendants' issues three and four concern the regulation prohibiting an owner who rents his unit from using the common areas during a rental or lease period and the regulation which requires owners who rent their units to pay $100 per month more in common expenses than non-renting owners. We find these regulations are also beyond the power of the Board of Directors.
T.C.A. § 66-27-206 of the Horizontal Property Act provides "an apartment owner [shall have] exclusive ownership to the [apartment and shall have] a common right to share, with other coowners, in the common elements of the property."
Section VII, 3(A) of the master deed provides "[e]ach unit shall have an appurtenant undivided share and interest in the common elements. . . ." Section IV, 1.6 provides "[e]very owner shall have an undivided interest in and a right of easement of enjoyment in and to the common areas which shall be appurtenant to and shall pass with the title to every unit. . . ." Section VII, 4 provides "the common area consists of the entire dedicated property other than units and limited common areas. . . ." Thus, the Horizontal Property Act and the master deed provide that the right of a unit owner to the common elements is indivisible from the owner's interest in the condominium unit itself.
"The coowners of the apartments are bound to contribute pro rata toward the expenses of administration and of maintenance and repair of the general common elements. . . ." T.C.A. § 66-27-114. Section VII, 6 of the master deed provides "each unit owner shall be liable for a proportionate share of the common expenses, such share being the same as the undivided share of the common elements which are appurtenant to his unit. . . ." Both the statute and the master deed mandate that the expense of common elements be allocated proportionately among unit owners. No distinction is made between owners who rent and those who do not.
The opinion of the New Jersey Supreme Court in Thanasoulis v. Winston Towers 200 Ass'n, 542 A.2d 900 (N.J. 1988) is instructive on these issues. That case involved a policy established by the condominium council which prevented non-resident owners from renting parking spaces in the common property parking garage. Resident owners could rent spaces at the rate of $25 per month. Tenants of non-resident owners could rent spaces from the association at the rate of $75 per month. The Thanasoulis court held the parking regulation was beyond the power of the council to promulgate, reasoning the individual condominium owner owns his unit together with an undivided interest in the common elements such as the garage. While the association possessed broad discretionary control over the garage and could establish reasonable rules and regulations concerning the size of spaces, speed limit, and other rules to maintain safety and order, it could not expropriate the economic value of the unit owner's interest in the parking space. The court said, at 907:
Plaintiff purchased a property interest that included a proportionate undivided interest in the parking facilities, and the right to rent a parking space. That property interest was permanent and inseparable from his unit and could be altered only through the specific procedures contained in the [Condominium Act] and the master deed. Accordingly, defendant exceeded its authority. . . .
A similar difficulty arises here in regard to the regulation preventing an owner who rents from using the common areas during a rental period. The Plaintiffs' right to the use and enjoyment of the common areas is inseparable from their property interest in the unit itself. That property interest can only be altered by amendment to the master deed, combined with the consent of the owners affected.
The master deed contains three specific limitations on the property right:
"1. Owners' Easements of Enjoyment: Every owner shall have an undivided interest in and a right of easement of enjoyment in and to the common areas which shall be appurtenant to and shall pass with the title to every unit, subject to the following provisions:
"(A) The right of the Association to suspend the voting rights of an owner for any period during which he is in default in the payment of the assessment against his unit, and for a period of thirty (30) days for any infraction of its published Rules and Regulations after hearing by the Board of Directors of the Association.
"(B) The right of the Association to dedicate or transfer all or any part of the common elements to any public agency, authority, or utility for such purposes and subject to such conditions as may be agreed to by the members.
"No such dedication or transfer shall be effective unless an instrument signed by seventy-five percent (75%) of all those entitled to vote and agreeing to such dedication or transfer has been recorded.
"(C) The right of the Association to reasonably limit the number of guests of owners."
Although the condominium Board has the authority to adopt regulations for the administration of the common property, it is without authority to prohibit an owner's use of that property simply because he or she is renting to tenants.
Moreover, the master deed provides "any owners may delegate, in accordance with the By-laws, their right of enjoyment to the common elements and facilities to the members of their families, their tenants, or contract purchasers who reside on the property." The regulation adopted by the Board does not restrict the right of enjoyment of the common elements to an owner who chooses to delegate the enjoyment of the common elements to members of the family, or to contract purchasers. Rather, the regulation applies solely to owners who choose to delegate to tenants the enjoyment of the common elements. This results in discriminating against owners who rent their units, and that is forbidden.
In the Thanasoulis case, supra, 542 A.2d 900, the court further found the parking regulation was invalid because it discriminated against a non-resident unit owner by making him or her bear a disproportionate share of the common expenses. The court said, at 906:
[T]he Association is prohibited by the [Condominium Act] from discriminating against a plaintiff because he is a nonresident owner. Under the act, plaintiff is only proportionately liable for his share of the common expenses. . . . In effect, defendant has required plaintiff, through his tenant, to contribute three times more money to the common-expense fund for parking privileges than do other unit owners who do not rent their units. The result is that plaintiff is compelled to bear a disproportionate share of the common expenses.
The same applies to the regulation at bar which requires an owner who rents to pay into the common expense fund twice the amount paid by non-renting owners. Pursuant to the regulation, the owners who choose to rent their units bear a disproportionate share of the common expenses. The rule therefore constitutes a direct contravention of the provisions in the governing statute and master deed which expressly prohibit this kind of discrimination. Cf. Coventry Square Condominium Association v. Halpern, 436 A.2d 580 (N.J.Dist.Ct. 1981) (amendment requiring unit owners who rented their units to pay a security deposit was held invalid as creating a limited special class and the concomitant duty to make a security deposit by such members of that specially created class.)
We find the Board's actions in establishing the regulations restricting a renting owner's use of the common areas and in requiring him or her to pay more than a proportionate share of the common expenses were ultra vires acts and must be held invalid.
Plaintiffs also present an issue for our review. They argue the trial court erred in finding they failed to prove damages by a preponderance of the evidence. We cannot agree.
It appears to be the rule in this State, as generally elsewhere, that lost or expected profits are recoverable as damages for breach of contract, provided they can be proved with reasonable certainty, and are not in fact remote or speculative. (Citations omitted.)
And in 22 Am.Jur.2d § 625, the general rule is stated as follows:
As in the case of damages generally, the rule in both tort and contract actions is that a recovery for lost profits will be allowed only if their loss is capable of being proved, and is proved, with a reasonable degree of certainty. No recovery can be had for loss of profits which are determined to be uncertain, contingent, conjectural, or speculative.
Applying the foregoing rule to the facts in the case at bar, we agree with the trial court's finding that Plaintiffs' damages were not proved with reasonable certainty. The record shows that after the Board adopted the resolution at issue in November, 1992, Plaintiffs Martin and Dorothy Graham and Plaintiffs Hayward and Juanita Mixon essentially ignored the enactment of the new regulations and continued to rent their two units in the same manner as before. This practice was curtailed in July, 1993, however, when the rental agent, Ms. Donavan, who was handling the two units, decided to cease managing them after being approached by Defendant Robinson, president of the condominium Board, on the subject of the new regulations. Mrs. Graham testified as to the loss of rental revenue as follows:
"Q. Now, in 1991, what amount of rental did you earn renting the unit out? For you and your husband.
"A. Before any expenses, $11,534.85.
"Q. In 1992, what was the gross rental amount?
"Q. And for the year 1993 . . .? . . . .
"A. — to date, it's $967.44.
"Q. . . . what amount of rental did you have in July of 1993?. . . .
"A. . . . in July we had $311.21. And she (Ms. Donavan) quit renting shortly there — about the 15th, I believe it is.
"Q. Have you had any rental since that date?
Mr. Mixon testified to his loss of revenue as follows:
"Q. In 1992, what was your gross amount that you made on your rental then in July of 1992?
"A. Total income was a little over seven thousand dollars in 1992.
"Q. What was it for July of 1992?
"A. Eighteen hundred and ninety-five dollars.
"Q. What was it for July of 1993?
Ms. Donavan testified as to her visit from Defendant Robinson as follows:
"Q. He [Mr. Robinson] just told you that overnight was not permitted anymore?
"Q. And then he made some comment regarding your license, did you say?
"Q. What exactly do you recall that he said about your license?
"A. Not exactly, but to the effect that if I was violating the Homeowners Association then possibly there could be some problem with my license.
"Q. And what actions did you take on those comments, if any?
"A. I personally decided not to continue with the management of the units."
Mr. Robinson, however, testified to the contrary:
"Q. Did you ever threaten to take [Ms. Donavan's] real estate license or any such thing as that?
"A. No, sir.
"Q. Did you ever give her any indication that you intended to complain with regard to her realtor license?
"A. No, sir."
It appears the trial court accepted Mr. Robinson's testimony and decided the proof was insufficient to show he was guilty of any wrongdoing directly resulting in a loss of rental revenue to the Plaintiffs. In APCO Amusement v. Wilkins Family Restaurants, 673 S.W.2d 523 (Tenn.App. 1984) this court said, at 529:
It must be remembered that it is the trial court's province alone to evaluate the credibility of witness testimony, and the reviewing court will not interfere with findings made by the trial court which hinged on such credibility unless the evidence is clearly otherwise. (Citations omitted.)
Plaintiffs' assignment of error is overruled.
The issues of the Appellants are found in favor of the Appellees. The issue of the Appellees is found in favor of the Appellants. The decree of the chancellor is affirmed.
The cost of this appeal is taxed to the Appellants and the case is remanded to the trial court for any further necessary proceedings.