Holding it All Together: Rental Pool Restrictive Covenant Found Valid

Condominium hotels are condominiums first, and hotels second.  Because of that, it is not uncommon for some of the hotel strata lot owners to second-guess the financial arrangement with the hotel manager and attempt to circumvent steep management fees by renting out their strata lots privately.  Owners who do so may find that – in the short term, at least – they achieve a better bottom line while still benefitting from their strata lot being located in a managed hotel, even if they and their guests lose access to the front desk and concierge, reservations service and room service provided by the manager or the hotel chain.  Eventually, though, if too many owners get the same idea, chaos can result.  When owners rent out their strata lots, distribute keys and arrange cleaning services through different channels, guests can become confused and, at a certain point, the operation can become uneconomic for the hotel manager without access to all or substantially all of the strata lots for rental purposes.

The solution is to impose restrictions on the individual strata lots to ensure that they are available for short term transient rental as part of the hotel operation, in a manner that binds subsequent owners.  Typically, developer have attempted to do so by registering a private restrictive covenant against title to each of the hotel strata lots in favour of a strata lot that comprises the lobby, front desk and other administrative areas for the hotel operation.  The provisions of these restrictive covenants tend to be similar across most recent hotel condominium projects.  They usually state that, in effect, no strata lot can be rented to the public other than through a rental management or pooling arrangement operated by the manager that occupies and operates the front desk and pursuant to a management agreement between the owner of the strata lot and that manager.  The rental management agreement may provide for rental pooling, or individual rental management.  Either way, the intention of the restrictive covenant is to ensure that the original purchaser of each strata lot and each subsequent owner will be bound by the restrictions, thereby maintaining the integrity and viability of the building as a hotel operation.

In 585582 B.C. Ltd. v. Anderson, 214 BCSC 1363, such a restrictive covenant was registered against title to all of the strata lots in the Cove Lakeside Resort located in West Kelowna, British Columbia.  As the name implies, the property was operated as a hotel.  The defendant was one of a number of owners who had not participated in the optional rental pool for building but, when he was not successful in selling his strata lot, he decided to rent it out on his own in contravention of the provisions of the restrictive covenant.  In the context of a law suit brought by the owner of the lobby strata lot and the hotel manager to enforce the restrictive covenant in order to stop the owner from renting out his strata lot privately, he sought a declaration that the restrictive covenant was void.

The court reviewed the legal requirements for a restrictive covenant to “run with the land” and, thus, be enforceable against subsequent owners.  Essentially, a valid restrictive covenant must be negative in substance, constitute a burden on the property it encumbers and “touch and concern the land” in favour of which it was granted (that is, it must be imposed for the benefit or to enhance to value of the benefited land).

The defendant argued that the covenant in question was not negative in substance and that, rather than touching and concerning the lobby strata lot (which comprised the dominant tenement of the covenant), it simply benefitted the business conducted within the lobby strata lot.  He also argued that because the form of the required rental pool management agreement was not attached to the registered covenant, it was uncertain and, therefore, unenforceable.

All three arguments were rejected by the court.  First, it concluded that the covenant was restrictive, and thus negative, insofar as it prevented owners from renting their strata lots on their own and keeping all the money from doing so; in other words, because of the covenant, “what (would) otherwise be a normally-permitted use of privately owned property (was) absent”.

Second, the court found that the building was, by its nature, a hotel (despite the fact that, as the defendant argued, the zoning for the hotel did not require it to be operated as such) and the lobby strata lot was critical to the operation of the building as a hotel.  On this basis, the covenant sufficiently touched and concerned the land and was, therefore, not invalid on those grounds.

Lastly, with respect to legal certainty, the court determined that a prospective purchaser of a strata lot could see clearly from the registered covenant that he or she would not be permitted to rent the strata lot outside of the rental pool, and would be alerted to the fact that he or she would have to enter into a rental management agreement if the strata lot were to be rented.  Before deciding to purchase, the purchaser could examine the rental pool management agreement and make their decision.  Consequently, in the court’s opinion, the covenant could not be said to be uncertain.

Although the Anderson case could, potentially, be distinguished depending on the wording of the restrictive covenant for a particular building, the decision is important to developers and operators of condominium hotels because it confirms that arrangements to ensure a viable hotel operation by restricting private strata lot rentals can be enforceable.  Moreover, the language of the restrictive covenant considered and upheld in Anderson is substantively similar to the restrictive covenants registered for many existing condominium hotel developments in British Columbia; as a result, the case will likely be applicable to many such properties.