By Christopher Young, partner
It is common for the developers of resort hotel and condominium developments to seek to control future rentals of condominium apartments within the resort that are to be sold to third party owners. Typically, control may be exercised through a requirement that any apartment rental should be through a single management company designated by the developer. There may also be restrictions placed on the ability of owners of apartments to offer them for short term rentals, especially where to do so may risk competition with the hotel at the resort or be potentially disruptive of the enjoyment of other owners of apartments who may have purchased them for long term private occupation. The objective is generally to ensure that all rentals and management are conducted in a coordinated manner so as to facilitate the maintenance of the desired overall standard of the resort. This may be particularly significant where the resort enjoys the benefits of branding, as is the case with the Ritz Carlton Resort in Grand Cayman.
Also, where a condominium complex does not include a hotel but simply comprises private residential apartments the owners may collectively wish, in the interests of their own quiet enjoyment and the general amenity of the complex, to restrict the terms on which any one of their number may rent an apartment to short-term vacationers.
A judgment delivered in June 2014 by the Grand Court of the Cayman Islands in Foith and Others v The Proprietors, Strata Plan 436 and Others(Cause No. 358 of 2013) , which concerned the Ritz Carlton Resort, casts doubt generally on the validity of by-law restrictions on the rentals of apartments comprised in condominium complexes, and is therefore very significant for what has hitherto been a common practice.
There are 73 third party owned condominiums in the South Tower and the North Tower of the hotel complex at the Ritz Carlton. As is typical in the Cayman Islands and certain other jurisdictions, the condominiums are held on strata title. There are separate strata corporations for each of the North and the South Towers but the strata by-laws are in materially the same form for each. In Foith a few owners challenged the legality of by-law provisions that required any rental to be through a designated management company and which prohibited rentals for less than 30 days that were not with the consent of the executive committee of the strata corporation. The plaintiff owners had purchased with full knowledge of the by-laws. The contracts of sale and purchase under which they had acquired the condominium apartments contained terms to like effect. They also challenged the enforceability of those contractual terms.
The basis of the plaintiffs’ challenge in Foith was section 21 (4) of the Strata Titles Registration Law (the “STRL”) which provides that “No bye-law shall operate to prohibit or restrict the devolution of strata lots or any dealing therewith or to destroy or modify any easement implied or created by this Law” . The issue before the Grand Court was the meaning of “dealing” in this section and whether it referred only to selling and charging or extended also to renting. The Court heard argument that the STRL does contemplate an ability to control rentals of strata lots as section 21 (1) of the STRL states that the control, management, administration, use and enjoyment of strata lots and the common property shall be regulated by by-laws. There were also submissions on the proper construction of this sub-section in the light of policy considerations and evidence concerning the custom and practice of strata corporations including resort developments in the Cayman Islands.
On the basis of a strictly textual analysis of certain provisions of the STRL and of the Registered Land Law, the Grand Court held that rentals were a “dealing” for the purpose of section 21 (4) of the STRL and that the relevant by-laws were invalid in that they restricted rentals. In the judgment, Justice Henderson stated:
“13. …I accept that a restriction on leasing could be viewed as a component of a regulatory scheme for the control, use and enjoyment of the strata lot. On balance, though, I am satisfied that the textual analysis provided above dictates how the statute is to be construed: a bye-law may not prohibit or restrict a strata lot owner’s right to rent or lease his unit.”
In relation to the provisions in the plaintiffs’ contracts of purchase which were in like terms to the relevant bye-laws, it was argued by the plaintiffs that the contractual provisions were void for reasons of public policy as they represented an attempt to contract out of a statutory protection (section 21 (4) of the STRL) for purchasers of strata lots. The plaintiffs relied upon a number of authorities including the Privy Council decision in Kok Hoong v Leong Cheang Kweng Mines Ltd  1 All ER 300 for their public policy argument. Justice Henderson rejected this argument:
“18. If there is a common theme to these decisions (and I am not sure there is), it is to be found in the court’s desire to protect the members of a vulnerable group–gold miners, borrowers, and liquidation creditors–from giving up important rights because of pressure or simple ignorance. Purchasers of strata lots are a different case. A strata lot owner is already protected from prohibitions and restrictions on his right to lease which might be imposed against his will by a majority vote; section 21 (4) does that. There is no compelling reason to extend the same protection to prospective purchasers. Such purchasers have complete freedom to agree to restrictions on leasing or to look elsewhere for a strata lot. There is no question of public interest which prevents a purchaser from agreeing on leasing restrictions even though the other owners could not impose such restrictions on him by majority vote. As a consequence, I find that clause 10 of the Purchase Schedule and clause 2 of the Covenants Schedule are valid and enforceable contractual provisions.”
The plaintiffs in Foith were all original purchasers so the Court did not need to consider whether such provisions in an original contract of purchase were restrictive covenants that would run with the land and be enforceable also as against any subsequent transferee who was not a party to the original contract of purchase.
The effect of the judgment in Foith is to restrict not only developers, who may henceforth have to ensure that any desired controls on rentals are contained in the contracts under which they sell the strata lots (and then there may be an issue as to whether subsequent transferees would be bound) rather than in the by-laws. Very significantly, the Court’s interpretation of section 21 (4) of the STRL also means that if the owners within any complex do not want short term holidaymakers in their complex they may simply be unable to adopt by-laws for their strata corporations that impose any rental restrictions they may consider to be desirable. There are many strata corporations up and down Grand Cayman’s famous Seven Mile Beach whose longstanding by-law provisions regarding rentals may now be invalid.
The plaintiffs in Foith have filed an appeal against the decision that they are bound by the rental restrictions in their contracts of purchase. As for the decision on section 21 (4), it remains to be seen whether it will cause the Legislature to enact any amendments to the STRL.