An Indiana court has considered whether a homeowner’s association enforcement of an anti-leasing covenant violated the federal Fair Housing Act (“Act’).

In 1996, Algie and Edna McGlothin (“Owners”) purchased a residence in a housing complex known as Villas West II of Willowridge (“Villas”). The Villas were originally managed by the Jim Bagley Construction Company (“Construction Company”), but the Construction Company turned over management of the development to the homeowner’s association (“Association”) in May 2000.

When the Owners purchased their unit, the purchase agreement contained a covenant which prohibited leasing within the Villas “for the protection of owners with regard to financially responsible residents”. In 1998, both of the Owners were placed in a nursing home. In August 1999, the Owners’ residence was leased and remains leased.

In 2002, the Association became aware that the Owners’ residence was being leased. The Association filed a lawsuit seeking injunctive relief against the Owners for violating the anti-leasing covenant. The Owners argued that the Association was not entitled to injunctive relief because the anti-leasing covenant violates the Act and also that the Association had waived its right to enforce the covenant by waiting three years to bring this challenge. The trial court ruled in favor of the Owners, and the Association appealed.

The Court of Appeals of Indiana affirmed the ruling of the trial court. The court first considered whether laches barred the Association from enforcing the anti-leasing covenant. “Laches” is an equitable doctrine which bars a party from bringing certain claims if they have waited too long to assert these claims. The Association argued that the Owners should not have been allowed to make their laches argument because the Owners had failed to raise this argument as an affirmative defense in their answer to the Association’s lawsuit. The court ruled that the Association had failed to make this argument before the trial court and so could not now raise this issue on appeal. Since the Association had not otherwise challenged the laches argument, the court affirmed the trial court’s ruling that the Association’s claims were barred by laches.

Next, the court considered whether the Association’s attempt to enforce the anti-leasing covenant violated the Act. The goal of the Act is to provide equal access to housing and prevent segregation. The Owners argued that the anti-leasing covenant had a “disparate impact” (or “discriminatory effect”) on the ability of different groups to enter the housing market. To bring a disparate impact claim, a party must show that a facially neutral policy has an “unequal impact on different subgroups in the housing market”. If such a showing is made, then the other party has the burden of demonstrating a legitimate justification for the housing action. If a legitimate justification is demonstrated, then the burden shifts back to the party bringing the lawsuit to show that there was a less discriminatory alternative available.

The court first considered whether the anti-leasing covenant had a discriminatory impact. Looking at the town where the Villas were located, the court found that 10.54% of the population was African American, 86.69% white. In contrast, 98.7% of the Villas are owned by whites, while only 1.3% are owned by African Americans. The statistics also showed that 56% of all racial minorities in the town leased their home, while 34% of whites leased their residence. Based on those numbers, the impact of the anti-leasing covenant had a greater impact on racial minorities than it did on the whites. Thus, the court concluded that the Owners had met their burden of showing that the anti-leasing covenant had a disparate impact on minorities.

The Association argued that the anti-leasing covenant served a legitimate purpose of maintaining property values within the Association. The Association offered evidence showing that such covenants are commonly used in condominium associations throughout the country. The court found that the evidence did show that leasing can have a negative effect on property values, and so the court ruled that the Association had offered a legitimate justification for the anti-leasing covenant and so the Owners now had the burden of showing that there were less discriminatory methods available for the Association to accomplish this purpose.

The Owners listed the numerous provisions in the Association’s bylaws designed to protect the quality of housing within the Association, such as landscaping rules, trash removal rules, and rules regulating noxious or offensive activities. The court found that these numerous provisions accomplished the Association’s stated goal of protecting the quality of Association units and so there was no need for the anti-leasing covenant. Thus, the court affirmed the trial court’s ruling that the anti-leasing covenant violated the Act. The court did note that not all anti-leasing covenants would violate the Act because such a finding would turn on a factual analysis of each case.

Villas West II of Willowridge v. McGlothin, 841 N.E.2d 584 (Ind. Ct. App. 2006).

Do you have area communities with similar restrictions? Are their guidelnes discriminatory? If yes, what's an appropriate next step?