RISKS VS. REVENUE

EVALUATING THE PROS AND CONS OF RENTING ASSOCIATION AMENITIES TO NON-OWNERS

To rent or not to rent association amenities to non-owners. That is a question boards often ponder as they eye opportunities to increase their revenue. But third party rentals also entail risks that boards must recognize and weigh against the potential benefits.

Liability is the most obvious risk but it isn’t first on the list. That distinction goes to the Americans with Disabilities Act (ADA). By renting space to third parties, a community association might be classified as a “place of public accommodation” subject to the ADA and thus required to make common areas and amenities accessible to individuals with disabilities.

A Crucial Difference

Federal and state fair housing laws are similar to the ADA in that they require associations to ensure that residents can “fully enjoy” their communities. But there is a crucial difference: Under the fair housing laws, although boards must allow owners to modify facilities and spaces to make them accessible, the owners requesting these modifications must pay for them. Under the ADA, associations would be required to pay for the modifications members of the public might demand.

So a guest attending an event hosted by a non-owner might file an ADA complaint, citing the need for a ramp leading to the swimming pool or a wheelchair lift if there is no elevator. Compliance could be costly, to say the least. Renting amenities to third parties may trigger ADA compliance requirements, and it is a risk boards should consider when contemplating making association amenities available to the public.

Liability Concerns

Boards must also consider the liability risks created when they rent association space to non-residents or to owners, for that matter. A guest who is injured at an event will almost certainly sue the association as well as the owner or non-owner who sponsored it.

Liability risks are greatest if alcohol is served. The essential risk management strategy for these risks is insurance – specifically, social host liability insurance – which boards should require for anyone hosting an event at which alcohol is offered. Associations that host these events should themselves obtain social host liability insurance to provide liability coverage they might need without tapping the association’s master policy and risking an increase in the premium.

Not all gatherings pose significant liability risks, of course. For example, while discussions at book club meetings, for which association space might be rented, can become heated, the groups are usually small and the behavior doesn’t typically become raucous, even if wine is served. Graduation parties, birthday parties and similar large gatherings are another matter.

Instead of (or in addition to) requiring social host insurance, some boards require hosts to have a certified bartender – licensed and insured – in charge of the alcohol. The bartender’s insurance, like the host’s, would cover damages if an inebriated guest is injured or injures someone else. An experienced bartender would also be better equipped to prevent excessive drinking that might produce liability claims.

Unless the association controlled the serving of alcohol, it should not be on the hook for damages at either an owner-or non-owner event, but the association would have to cover defense costs if it is sued. Although the master insurance policy should provide that coverage, some policies specifically exclude claims related to “commercial use” of association space. And renting to a third party could be defined as a commercial use. For some boards, this may be an argument against renting to third parties; it is definitely a reason for the board to make sure the association understands what its master policy covers and what it does not.

Authority, Access and Agreements

Liability and potential ADA compliance are the primary concerns for associations renting space to third parties, but not the only ones. Other issues boards should consider include:

Leasing authority. Some governing documents specify that amenities are for the use of residents only, which would permit rental to residents but not to third parties. If the documents are silent on this issue, as most are, the board could approve a rule specifically permitting rentals to non-residents, or prohibiting them.

Owners’ access to amenities. Boards that rent space to owners or non-owners for private functions should do so infrequently and at off-peak times, anticipating that residents will object if they are unable to use amenities for which they are paying. For obvious reasons, you should not rent the clubhouse or the swimming pool on Memorial Day or the Fourth of July. That picture of owners lined up with their kids outside the swimming pool fence looking disappointed – and angry - would (as they say in politics) “not be a good look.”

Protecting the association’s interests.

Whether renting facilities to owners or third parties, boards should require the hosts to sign a licensing agreement or a rental agreement detailing the terms of use. The agreements should specify, among other requirements, the host’s obligation to:

• Have appropriate insurance coverage – either directly, through a social host liability policy or indirectly, by hiring a licensed and insured bartender.

• Direct traffic to be sure guests park only in designated areas. This is a particular concern if the guest list is large or the parking area is small.

• Control the behavior of their guests.

• Pay for any damage for which guests are responsible.

• Clean up after the event. Some boards require third party hosts to pay a deposit to cover potential clean-up costs and damage. With owner hosts, boards typically rely on their ability to bill the owners directly and to attach a lien on their property if necessary to collect.

The agreement should also specify that the association has the authority to terminate the event if it becomes a nuisance to residents or threatens their safety or association property.

Looking at the list of potential concerns and contingencies, I usually advise association clients that the risks of renting space to third parties outweigh the benefits. If boards reach a different conclusion, and some do, I advise them to be sure they understand the risks and take reasonable steps to mitigate them.

If you have any questions regarding this topic, please contact Mark Einhorn or any MEEB Attorney.