Protecting residential properties from home business nuisances.

Many real estate professionals have seen in their markets the rising numbers of home-based for-profit enterprises. A leading trade group for such entrepreneurs, the American Association of Home-Based Businesses, estimates that the growing number of operations in North America exceeds 24 million

One can speculate on the causes for this boom. Internal and immigration population growth applies pressure to commercial property rents and construction costs and creates commuting gridlock that encourages people to work from home. Major corporation layoffs that were bothersome to the economy in the 1990s have turned ugly in a staggering economy by terrorism, driving laid-off employees to entrepreneurship. The Internet has downsized the world, shrinking the need for physical interaction between owners and their employees and customers.

As Big Business consolidates, small business is exploding and moving into convenient and relatively low cost residential properties. With the good news of increased demand comes the challenge of protecting these properties as primary if nor exclusive dwelling places. Those selling or leasing peace and quiet cannot prosper long term by tolerating the nuisances of excessive people and vehicle traffic, noise, litter, odors, and police calls.

Day Care Uses

The success of residential property managers, residential subdivision developers and neighborhood associations in limiting nuisance-creating home businesses depends on whether those uses are usually associated with family residences and whether they are favored in particular city and state laws and policies. A typical condominium or residential lot deed of transfer or townhouse/apartment lease restricts buyers and renters to only residential use of their properties. One might expect that this simple condition would end the most common of home businesses, home day care, as well as other professional, commercial and criminal uses. But as the need and public support for home day care grows, providers are increasingly defeating use restrictions by arguing that licensed, paid child care looks and sounds the same as large families and the critical social need for it outweighs agreements against it.

In a recent New York case, condominium management threatened a unit owner with a fine if she went ahead with her state permit to operate a group family day care home for up to 12 children aged 1 to 12. Despite the potentially high volume of noise and traffic of people and cars from that many children in a high-density condominium setting, the court allowed the use. New York has a state social services law that prevents its cities from targeting family day cares in welfare regulation. The court extended that law to accomodate care facilities throughout New York state. By that logic, developers, landlords, sellers and managers of residential properties in New York cannot prevent group family day care, period.

New York is not alone in its support for these services. Michigan's high court has decided several cases, most recently in 1999, that fee-generating family day care homes in residential subdivisions do not violate restrictive covenants specifically banning commercial uses. It also decided that its state law requiring day care home businesses to be considered residential uses in all county and township zoning codes shows that its legislature wanted to stop private properties from agreeing otherwise. The court bent the dictionary because 1996 and 1998 studies showed that available licensed day care in Michigan could handle only 80 percent of children needing it. Citing an ever-increasing public policy favoring child care, the judge seemed to conclude that no matter what limits Michigan developers or local zoning officials want to set, day care operations must be allowed in residential areas.

Condominium managers in states without such powerful legislative direction still win sometimes. Courts in Massachusetts and Illinois were persuaded

recently that day care for 5 and 8-10 children, respectively, did generate traffic and association liability insurance increases enough to enforce deed and bylaw bans on nonresidential use. Perhaps the complaints of closely spaced condo and apartment users carry more weight than those from free-standing homeowners.

But as our population continues to grow and the day care crisis worsens, we can expect that state policies supporting day care home businesses will continue to increasingly persuade judges to accept the noise, traffic and commotion caused by the comings and goings of young children and their parents as more akin to the activities of large families than of commercial enterprises. A key factor generally holding down nuisance levels is that for safety and care quality reasons most states limit the number of children cared for in family homes. Day care providers in every state can now make powerful arguments that they serve a critical public interest.

Professional Office Uses

Those same factors of home business size and compatibilities with family activities apply to white-collar office uses. A doctor who saw patients in his "dwelling apartment" in a 16-story building avoided eviction because his contact with them was "casual" and intermittent". The property manager saw hypodermic syringes in the incinerator on the doctor's floor, people sitting in his living room waiting for him, and people asking for directions to his room. Still, the court found his uses predominantly residential so he could stay.

Another doctor in "technical violation" of his apartment lease likewise resisted eviction even though a room and foyer in his 8-room ground floor apartment was decorated and clearly set aside as an office. His primary use of the unit as a residence with his wife and two children satisfied the "strictly private dwelling uses" requirement of his lease. These cases illustrate that, as with day care, the social value of medical services diminishes the effectiveness of use restrictions and nuisance impacts.

As the social value declines and the professional portion of the use increases, the less court tolerance for use violations. An apartment resident lost her lease when she established her entire counseling practice in her space. She built a floor to ceiling partition and saw 15-20 patients per week. Clearly, her use was not primarily residential.

Illegal Activities

At the other end of the spectrum of contract use violations are illegal activities that owners and managers of residential properties are empowered and often required to stop. The most common situation to reach the courts is tenant drug crimes. Landlords have been convicted for allowing a substantial marijuana growing operation in the basement of a house and have lost ownership of an entire six-story building for knowingly allowing drug activity in some units.

When managers do attempt to use their contractual rights to respond to illegal uses, they must be supported by lease or association language making residents responsible for guests. One landlord was unable to evict a tenant whose son the police caught selling illegal drugs in the building hallway and parking lot. The lease made the tenant liable only for his own unlawful uses and activities. Managers have direct legal authority only over parties who have signed contracts and the courts will back their rights only to that extent. Calling the police remains the best response, but eviction requires proof that residents themselves have committed contract violations.

Recommendations

* Background Checks and Testing. The most effective of all strategies to prevent residents from disrupting properties is screening. Lease and purchase application forms should specifically require full disclosure of any past or intended home businesses of buyers and tenants. The forms should broadly define home business to mean any for-profit enterprise whether or not traditionally conducted in residential areas. They should state in bold print and large font that the information is essential and managers are relying upon it in considering acceptance. Some reported or planned uses may be compatible with neighboring residents, but managers need the information to make decisions. If buyers or tenants hide past businesses or start them on-site after denying the intention, managers have gained solid misrepresentation grounds for eviction.

Managers may also consider following the emerging trend of requiring negative drug tests before contracts are signed. Some apartments in Chicago, Cleveland and Ft. Lauderdale require all residents to undergo initial--and in some places--annual drug tests. The cost ($25 in Chicago), even if done annually for large properties, compares very favorably with the gains in lowered criminal liability, enhanced eviction rights, and a positive drug-free reputation. Since constitutional rights such as privacy do not exist in the private sector, the only legal challenge could come under discrimination laws, which is avoided by treating all applicants the same.

Contract Drafting. Purchase and lease documents should contain wording to empower managers to effectively respond to uses that occur despite screening efforts. Contracts should make residents responsible for illegal activities of all their guests occurring in units or common areas. Residents should agree to that responsibility even if they have nor directly given their guests permission to enter the property nor have direct control over them. They are in better positions for prevention and control than managers.

Though they may seem identical, contract bans of all commercial uses are more legally effective than contract limits to residential uses. Unless public policy intervenes, judges are usually willing to stop business uses where agreements specifically prohibit for-profit activities. Where agreements allow only residential uses, however, judges sometimes interpret "residential" to include business activities commonly done in homes or done relatively infrequently compared to residential activities.

A final drafting tip is that in those cases where the economics of occupancy demand home business approvals, permitted use sections should very clearly describe activities and set limits on square footage, person and car traffic, hours of operation, and so on. All changes should be valid only if written and signed. One landlord gave a tenant "the privilege of using the apartment as a music studio between the hours of 9 a.m. and 9 p.m.," only to find the tenant regularly using four of the six rooms for lessons and practice time with 10-20 persons a day. The tenant's use was ruled a lease violation only because his rent was state subsidized under a program "primarily for residential purposes".

* Public Authority Enforcement. For problem users under contracts lacking these precautions, managers may be able to call on public resources for help. A simple call to the police about suspected drug activity or public nuisances can provide a defense against laws creating criminal offenses for allowing properties to be used in those ways.

Notifications to local zoning officials can accomplish much the same benefits on the civil side. Local land use controls often rescue those affected by nuisance uses. A Pennsylvania county zoning ordinance limiting a neighborhood to "single and two-family dwellings and essential services" allowed neighbors to stop a homeowner from using his garage for auto repair and body work. An Ohio neighborhood called on its city to stop another mechanic-homeowner who created noises and fumes by running an air compressor, using power tools, starting a dragster engine and delivering engine blocks between 8 a.m. and 11 p.m.

As with managers' contractual enforcement, the key issue in government intervention is the closeness of commercial uses to customary residential uses. An Ohio homeowner won the right to build and operate a for-profit kennel with 11 dog runs and the capacity to board 15 dogs as a business "customarily conducted on residential property." Apparently, dragsters don't belong in neighborhoods, but dogs do. The dogs must have been quiet breeds.

* Political Efforts. Political initiatives at the local or state level to sanction management protection of residents from nuisances would greatly help. In most states, courts define private nuisance as use of property in ways that unreasonably interfere with the rights of others to enjoy their own property. Most localities and stares also prohibit public nuisances similarly defined.

The problem with private nuisance law is that it gives legal rights to affected neighbors nor property managers, and the problem with public nuisance law is that the authorities can become involved only if the disturbance affects enough people to be considered a public problem. Managers need language in local ordinances and state land use statutes that establishes private nuisance abatement rights in those who are responsible for as well as affected by nuisance uses. That approach may carry more potential than one confronting policy preferences for child care and other socially desirable services that are politically popular.

Home-based business growth will likely continue and perhaps accelerate as consolidated business competition and economic pressures squeeze out mid-size companies and heighten motivation for entre-preneurship. In reacting to the resulting demand for lower cost commercial space, real estate professionals should recognize and manage the potential impact of profit-making nuisances on residential properties.

Bradley J. Sleeper and Robert J. Walter are professors of business law at St. Cloud State University in St. Could, Minnesota. They tech real estate and business law and have written published articles in the areas of property management liability and employment law.