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Condominium Law FLASHPOINTS August 2021

Kenneth Michaels, Jr., Bauch & Michaels, LLC, Chicago
312-588-5000 | E-Mail Kenneth Michaels, Jr.

Airbnb Rentals Do Not Violate Prohibition Against Leasing but Do Violate Prohibition Against Conducting Business on Property

This month, we examine a case that closely analyzes two provisions in almost all condominium declarations — prohibitions against leasing and prohibitions against conducting business on the condominium property — in the context of Airbnb rentals. In a careful application of principles of contract interpretation, the First District, affirming the trial court, held that a unit owner conducting Airbnb rentals did not violate the condominium declaration’s prohibition against short-term leasing but did violate the prohibition against operating a business on the property. Wood v. Evergreen Condominium Ass’n, 2021 IL App (1st) 200687.

Facts

The plaintiff unit owner sought declaratory judgment and a breach of fiduciary duty judgment against the condominium association and its acting president. The association was composed of 12 units in Chicago’s Old Town neighborhood. Within one month of purchasing her unit, the plaintiff was elected to the board and as president. Within seven months, she was served with notice of violating the declaration by renting her unit through Airbnb. The following month, she was removed as president. Also, the building was added to the City of Chicago’s “Prohibited Buildings List,” which effectively bans Airbnb-style rentals from the building. 2021 IL App (1st) 200687 at ¶5.

The Lawsuit

The plaintiff sought a declaration that (1) the notice of violation was invalid, (2) placing the building on the prohibited building list was invalid, and (3) unit owners may not be banned from short-term transient occupancy in the building. 2021 IL App (1st) 200687 at ¶6. The association moved to dismiss, arguing that (1) the prohibition against short-term leasing in §7 of its declaration prohibited Airbnb rentals and (2) the prohibition against conducting business on the property in §11(b) of the declaration similarly prohibited the rentals. The unit owner responded that Airbnb rentals are licenses, not leases, and that §7 applied to short-term leases only. She also argued that the Airbnb rental was no more a business use of her unit than other unit owners leasing their units over a longer term. Additionally, the Airbnb rentals were conducted over the Internet, not on the property, and §4(b) of the declaration permitted all unit owners and their invitees to use the common elements and units for a residence and incidental purposes.

The trial court granted the motion to dismiss, holding that §7 did not prohibit the plaintiff from licensing her unit through Airbnb but that §11(b) prohibited her from conducting her short-term rental business on the property. 2021 IL App (1st) 200687 at ¶10. The plaintiff appealed.

Appellate Court’s Analysis

As this appeal arose from granting a motion to dismiss under §2-615 of the Civil Practice Law, the standard of review is de novo. The motion challenged the legal sufficiency of the complaint, so the complaint must be construed in a light most favorable to the plaintiff. All well-pleaded facts must be taken as true. 2021 IL App (1st) 200687 at ¶13. The appellate court also noted that to the extent the court was required to interpret terms of the condominium declaration, construction of clear and unambiguous contract language is a matter of law subject to de novo review. 2021 IL App (1st) 200687 at ¶14.

Principles of Contract Interpretation Applied

In the beginning of its analysis and throughout the opinion, the court referenced numerous principles of condominium law and contract interpretation. Without citing the cases relied on by the court, those principles could be catalogued as follows:

1. A condominium declaration is a contract between the association and unit owners governing the operation of the property and association and sets forth the board of directors’ duties related to management of the property and association. 2021 IL App (1st) 200687 at ¶17.

2. In examining a unit owner’s rights, the Condominium Property Act, declaration, and bylaws must be construed as a whole. Id.

3. Declarations are construed according to the principles of contract interpretation. 2021 IL App (1st) 200687 at ¶18.

4. The goal of contract interpretation is to give effect to the parties’ intent. Id.

5. The court must interpret the contract as a whole and apply the plain, ordinary meaning of unambiguous terms. 2021 IL App (1st) 200687 at ¶¶18, 51.

6. The fact that parties disagree as to the meaning of terms does not render the terms ambiguous. 2021 IL App (1st) 200687 at ¶18.

7. Terms are ambiguous only when they may have more than one reasonable interpretation. Id.

8. A restriction in a condominium declaration is clothed in a high presumption of validity unless it is shown to be arbitrary, against public policy, or in violation of a fundamental constitutional right of the owners. 2021 IL App (1st) 200687 at ¶19.

9. A primary goal in interpreting a restrictive covenant is to give effect to the intent of the parties, considering the entire document. 2021 IL App (1st) 200687 at ¶20.

10. The court will not add terms to a contract to change the plain meaning expressed by the parties. 2021 IL App (1st) 200687 at ¶27.

11. Covenants should be strictly construed so that they are not read to extend beyond what was expressly stipulated, and all doubts should be read in favor of free use of the property. 2021 IL App (1st) 200687 at ¶28.

12. When a contract does not define terms, the court must look to the plain, ordinary, and popular meaning of those terms. 2021 IL App (1st) 200687 at ¶35.

13. The court must give effect to all of the contract’s provisions if it is possible to do so. 2021 IL App (1st) 200687 at ¶51.

14. When both a general provision and specific provision in a contract address the same subject, the more specific clause controls. Id.

Prohibition Against Leasing

The plaintiff did not challenge §7 of the declaration, the prohibition against leasing, on the basis that it was arbitrary, violated public policy, or infringed on a fundamental right. Instead, she contended that the restriction did not prohibit Airbnb leasing. 2021 IL App (1st) 200687 at ¶21. Section 7 provided:

Subject to Paragraph 3, any Unit Owner shall have the right to lease, or permit a subsequent sublease or assignment of all (but not less than all) of his Unit upon such terms and conditions as the Unit Owner may deem acceptable, except that no Unit shall be leased, subleased or assigned for a period of less than thirty (30) days. 2021 IL App (1st) 200687 at ¶22.

The plaintiff argued that her Airbnb terms of service granted only a limited license, not a lease to the unit, and, therefore, §7 was not violated. The association countered that the relationship between the plaintiff and her guests may have been a license, but in relationship to the association, the plaintiff violated §7 regardless of whether it was labeled a lease or a license. 2021 IL App (1st) 200687 at ¶¶23 – 24.

Illinois recognizes that as terms of art and based on their common and accepted usage, the terms “lease” and “license” are not synonymous. 2021 IL App (1st) 200687 at ¶25, quoting North Avenue Properties, L.L.C. v. Zoning Board of Appeals of City of Chicago, 312 Ill.App.3d 182, 726 N.E.2d 65, 73, 244 Ill.Dec. 469 (1st Dist. 2000). A lease has a definite agreement as to extent and bounds of the property and transfers exclusive possession. A license entitles a party to use the premises for a specific purpose subject to the management and control of the owner. 2021 IL App (1st) 200687 at ¶25, quoting North Avenue Properties, supra, 726 N.E.2d at 72. Although the plaintiff’s Airbnb agreements had not been admitted to the trial court, given the posture of the case at dismissal and construing the allegations in the complaint in a light most favorable to the plaintiff, the court assumed that the plaintiff’s Airbnb agreements were licenses, not leases. 2021 IL App (1st) 200687 at ¶26. The court recognized that it could not read terms into the contract to make §7 applicable to licenses, as well as leases. Also, restrictive covenants must be read narrowly. Therefore, the appellate court affirmed that §7 did not bar the plaintiff from licensing her unit for a short term to guests.

The court rejected the association’s argument that §11(a), which prohibited using a unit for anything other than housing, supported the association’s reading of §7. There was nothing to indicate that the plaintiff’s licenses were for using the unit for anything other than housing. 2021 IL App (1st) 200687 at ¶30. The court also rejected the association’s argument that unless §7 was read to include Airbnb agreements, the association would have no recourse for damages to the condominium property caused by licensees. The obvious response to this argument was that the plaintiff remained in control of her unit and responsible for her guests and invitees’ conduct. 2021 IL App (1st) 200687 at 31. The unit owner remained responsible for damage to the condominium property.

Prohibition Against Conducting Business Activity

The plaintiff challenged the trial court’s reading of §11(b) of the declaration to hold that her Airbnb licensing activities constituted conducting business on the property, which was prohibited. The plaintiff argued that the court’s reading of “business” would reach an absurd result prohibiting such activities as ordering a pizza, responding to e-mails or telephone calls, or listing a unit for sale. 2021 IL App (1st) 200687 at ¶33. Section 11(b) provided:

The Units and Common Elements shall be occupied and used as follows:

* * *

(b) No industry, business, trade, occupation or profession of any kind, commercial, religious, educational or otherwise, designed for profit, altruism, exploration or otherwise shall be conducted, maintained, or permitted on any part of the Property. 2021 IL App (1st) 200687 at ¶34.

Focusing on the term “business,” both the trial court and appellate court looked to the plain meaning of the term. The appellate court readily found that the plaintiff’s Airbnb activities met the dictionary definition of business as constituting “dealings or transactions especially of an economic nature.” 2021 IL App (1st) 200687 at ¶36.

The court rejected the plaintiff’s efforts to use federal tax laws to distinguish between business and hobby activities or the definition of business under the Employee Retirement Income Security Act of 1974, Pub.L. No. 93-406, 88 Stat. 829. The City of Chicago has specific ordinances regulating short-term housing similar to a hotel, requiring registration with the city, and mandating satisfying operating requirements. Additionally, the city imposes a tax on vacation rentals and shared housing for short-term transient housing. All of this pointed to the fact that the plaintiff’s Airbnb agreements were conducting a business. 2021 IL App (1st) 200687 at ¶¶37 – 39.

The court also rejected numerous other arguments made by the plaintiff. Based on the definitions contained in the declaration, the plaintiff’s argument that the §11(b) prohibition was limited to conducting business on the common elements failed because the definition of “unit” within the declaration expressly provided that units were part of the “property.” 2021 IL App (1st) 200687 at ¶40. The plaintiff’s argument that to the extent she conducted business, it was conducted on the Internet, not on the property, failed because the physical occupation of the unit on the property by licensees was essential to the agreement. 2021 IL App (1st) 200687 at ¶41. Also, the plaintiff’s argument that further language in §11(b) prohibiting “for sale” or “for rent” signs as limiting the scope of prohibited business activities was rejected as rendering the signage prohibition as redundant. 2021 IL App (1st) 200687 at ¶¶42 – 43. Additionally, the court summarized that there were 15 subsections to §11 in the declaration, which related to various uses. Looking at §11 as a whole, the appellate court found that the section sought to define permissible and impermissible uses of the property, not just visible manifestations of doing business on the property. 2021 IL App (1st) 200687 at ¶44.

The plaintiff’s argument that the defendant’s reading of §11(b) would prohibit any business from being conducted on the property, such as ordering a pizza, responding to e-mails, or returning phone calls, was negated by §11(p) of the declaration, which provided that §11 “shall not be construed to prevent or prohibit a Unit Owner from maintaining his personal professional library, keeping his personal business or professional records or accounts, handling his personal business or professional telephone calls, or conferring with business or professional associates, clients, or customers in his dwelling Unit.” 2021 IL App (1st) 200687 at ¶¶47 – 49.

The court also rejected the plaintiff’s argument that the trial court was incorrect in reading §7 (the section permitting longer-term leasing) as an exception to the general prohibition in §11 to conducting business. The plaintiff argued that §7 was “self-contained” and that the court was reading §11 too broadly. The appellate court read these sections together, as did the trial court, to be a general prohibition to conducting business on the property with a carve-out for long-term leasing if certain conditions are met. 2021 IL App (1st) 200687 at ¶¶50 – 52.

Finally, the court rejected plaintiff’s citing of 15 cases from foreign jurisdictions finding prohibitions against conducting business on association property as ambiguous and not prohibiting short-term rentals. The court noted that the plaintiff failed to explain these cases beyond a single sentence summary of the holdings. The court took the added measure of reviewing the cases and found only one of the cases, a Missouri one, Mullin v. Silvercreek, Condominium Owners Ass’n, 195 S.W.3d 484 (Mo.App. 2006), involved language similar to the instant case. 2021 IL App (1st) 200687 at ¶57. Although the language in Mullin was similar to §11(b), the Missouri declaration continued with language that the prohibition against conducting business on the property did not prohibit leasing from time-to-time. Additionally, the Missouri declaration expressly permitted nightly rentals. So, the court found that Mullin actually supported the court’s holdings in the instant case.

For more information about condominium law, see CONDOMINIUM LAW: GOVERNANCE, AUTHORITY, AND CONTROLLING DOCUMENTS (IICLE®, 2021). Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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