The fallout from the Covid-19/Coronavirus pandemic has resulted in a significant shift in the working environments for those still employed. From the onset of the pandemic and the responsive efforts of our government and private industries, many working Americans are now finding themselves working from home. Whether people are working from home for the first time, or are working from home more often than before, this change has a potential impact on cooperatives with certain use restrictions, or “residential purposes only” provisions in governing documents.
It is not uncommon for housing cooperatives to have Bylaws and Occupancy Agreement that contain provisions restricting the use of the cooperative dwelling unit to that of “residential purposes only.” These provisions may not contain language or support for what happens wide-spread crisis, pandemics, or government restrictions, changes in industry, and the conditions in which general workforces perform their jobs and functions. This begs the question: How should a Cooperative approach enforcement of these use restrictions (i.e., “Residential Purposes Only” clauses)? Should these provisions be strictly enforced, or should they be relaxed due to the widespread change in the world we now find ourselves in? Will revisions or amendments to these restrictions and provisions provide relief?
These questions are just one aspect of how the change in times impacts the function and governance of housing cooperatives. Especially, how emerging and significant current events, such as all that has been brought on by the coronavirus pandemic, effects long-standing principles of cooperative living. This blog will focus on the specific “use restriction” noted above, a provision that restricts the “use” of the cooperative dwelling units for residential purposes only.
The short answer to these questions (should “Residential Purpose Only” use restrictions be strictly enforced against members/residents working from home during the pandemic and stay home orders?) is no. However, this does not suggest that these use restrictions be ignored. Rather, a case-by-case approach to enforcement is warranted. Neither is a complete or temporary cessation of enforcement of these restrictions recommended. Cooperatives should continue to assess these matters on a case-by-case basis, consulting its legal counsel when appropriate. In addition, now may be an appropriate time for Cooperatives to assess their policies to due to possible increases (whether temporary or long-standing) in members working from home.
One of the fundamental purposes behind the “Residential Purposes Only” use restrictions in housing cooperative governing documents goes to the foundational purpose of the cooperative corporation: to provide residential h
ousing for its members. Although many types of cooperative’s exist (i.e., farming cooperatives, workers cooperatives, banking cooperatives, etc.) housing cooperatives are unique. A housing cooperative’s Articles of Incorporation and Bylaws should state the intent, or purpose, in which the corporation was formed. Most commonly, these provisions state that the corporation’s purpose is to provide residential housing on a cooperative basis. The purpose of the corporation is a founding principle and building block of housing cooperatives, and should be lost or suffer due to economic changes from the coronavirus pandemic or changes in workforce industry standards.
With an understanding of the intent of the cooperative’s foundational and governing documents, the residential purpose of the cooperative corporation is furthered by certain use restrictions, commonly referred to as “Residential Purposes Only” clauses. These provisions bolster and support the corporation’s foundational intent. They are typically found in the Bylaws, Occupancy Agreements, and Policies, whereby additional covenants exist that prevent or prohibit members and authorized residents from using cooperative property and dwelling units for any reason other than residential purposes, such as running a business, or using the unit as one’s corporate address. Another reason for these restriction is tax related. The United States Internal Revenue Service “Tax Code” (see 26 U.S.C. § 1 et seq.) allows certain deductions for each member’s share of mortgage interest and/or real estate taxes. (see 26 U.S.C. § 216). The tax code’s allowable deduction distinctively applies to “cooperative housing corporations.”
As part of the I.R.S.’ definition of “cooperative housing corporation” the code states that “each of the stockholders of which is entitled, solely by reason
of his ownership of stock in the corporation, to occupy for dwelling purposes
a house, or an apartment in a building, owned or leased by such corporation.” 26 U.S.C. § 216(b)(1)(B). Therefore, even the tax code incorporates a residential purpose context into its definition of cooperative housing corporation. As explained herein, the residential “use restriction” is entwined with other areas of the law that impact housing cooperatives.
While these use restrictions exist for a reason, we do find ourselves in unprecedented times. Many people have been required to work from home during the pandemic, and some have chosen to work from home for health and safety reasons. Depending on the State you reside, there may have been, or still in effect, executive orders restricting travel, restricting business, trade and commerce, defining what is an “essential function” or “essential service.” These restrictions have affected how we regularly conduct and approach the performance and function of our employment, our work and our jobs. If a cooperative takes a “strict enforcement” approach to these cases (i.e., finding that working from home violates these use restrictions), when the matter eventually gets into a court of law, a judge or jury may find that such action goes against higher governmental orders, is against new public policy, or is unjust under the circumstances. While this approach may all but unearth an ugly but inherent conflict between the functions of our government and a private housing cooperative corporation’s (and its members ability) to lawfully self-govern themselves, govern and restrict, where deemed appropriate, the corporation’s property and its allowable uses, and the operation of the corporation, such strict enforcement is likely not the answer. Finding a member-resident in violation of a “Residential Purpose Only” use restriction for merely working from the confines of their cooperative unit, may not rise to a significant violation of the restriction. Under the current climate, such finding may not even rise to the level of a violation. Again, the main purpose of these use provisions is to maintain the purpose of the cooperative for “residential use” so as members and residents are not running a business out of their dwelling units.
With the considerations notes above, cooperatives should review these matters, both their current policies and any potential violations, on a case-by-case approach. These use restriction provisions may still be enforced where the intent and spirit of the use restriction is clearly being violated. For example, if a member of a cooperative housing corporation is using their dwelling unit as to run a yoga studio, to run a hair and nail salon, or to run a shop or store providing other goods or services, surely those uses would violate residential use restrictions, even absent covid-19/coronavirus pandemic issues. However, it would be unjust to punish a member-resident who is required to temporarily work from home, by no choice of their own, or due to current public health and safety reasons brough upon by the current pandemic.
Middle ground may also be found, in limited circumstances, where a cooperative wants to allow for limited home occupation of dwelling units in addition to residential use. However, any policy should focus on maintaining residential use as the predominate use so as not to allow any occupational use dominate or conflict with the corporation’s purpose. This may require, at a minimum, a policy, in which case the cooperative should consult with its attorneys to examine state and local law pertaining to any “occupational-use” of the cooperative property. Conceptually, policies of this nature would require consideration of many factors, including:
While these points do not constitute an exhaustive list of considerations that a cooperative would otherwise be required to consider when deciding on whether a limited “home occupation” use of the property may be extended to its members, it shows that there are many pieces to the puzzle. Every cooperative is different. Locations, areas of industry that may employ a large group of members (i.e., automotive, farming and agriculture, pharma, big tech, etc.), and state and local law all play into the equation.
Times like this also remind us why governing documents should be regularly reviewed for needed updates and amendments to make sure they are fluid with unforeseen circumstances and changing of the times. Given that the effects of the covid-19/coronavirus pandemic are likely to remain to be seen for time to come, it is very possible this event may re-shape the work environment of many industries and businesses. There very well may be a shift in the number and types of employees who will continue to work from home. The fallout of this pandemic remains to be seen. Therefore, cooperatives should look to creating well-thought of resolutions with the insight of their management and legal counsel. Cooperatives should consult with their legal counsel and assess whether amendments or revisions to the corporation’s governing documents (Bylaws, Occupancy Agreements and Policies) can lay the foundation for resolving these issues and disparities due to changes in industries, practices and environments. While the pandemic alone, may not be reason for a complete overhaul of changes to a cooperative’s use restrictions, it does serve as an excellent opportunity for the cooperative to show that it can adapt to the changing of times, and provide its members with a sense of ease, communal living and understanding.
Matthew T. Nicols
Attorney at Pentiuk, Couvreur & Kobiljak, P.C.
* Matthew T. Nicols is an associate attorney at the Pentiuk, Couvreur & Kobiljak, P.C., with offices in Wyandotte, Michigan and Chicago, Illinois. Mr. Nicols focuses his practice primarily in the areas of cooperative housing law, and other community and condominium association law. He is licensed to practice law in the states of Michigan and Illinois.