Pandharipande v. FSD Corp.

679 S.W.3d 610

Pratik PANDHARIPANDE, M.D.

v.FSD CORPORATION

Supreme Court of Tennessee, AT NASHVILLE.

February 22, 2023 Session

FILED October 17, 2023

Appeal by Permission from the Court of Appeals, Chancery Court for DeKalb County, No. 2019-CV-60, Jonathan L. Young, Judge

Benjamin M. Rose, Brentwood, Tennessee, for the appellant, Pratik Pandharipande, M.D.

Gerald C. Wigger and Emmie Kinnard, Nashville, Tennessee, for the appellee, FSD Corporation.

OPINION

Sarah K. Campbell, J., delivered the opinion of the court, in which Holly Kirby, C.J., and Sharon G. Lee, Jeffrey S. Bivins, and Roger A. Page, JJ., joined.

This case arises from a dispute between a property owner and his homeowners’ association. The property owner, Pratik Pandharipande, purchased a home in a vacation community on a Tennessee lake, intending to use it as a short-term rental. At the time of the purchase, the property was subject to covenants requiring that the home be used for "residential and no other purposes." The covenants were amended several years later to allow leases with minimum lease terms of thirty days. Pandharipande contends that neither the original covenants nor the amendments prohibit him from leasing his property for short terms of two to twenty-eight days. His homeowners’ association disagrees on both scores. We agree with Pandharipande that the original covenants requiring residential use of the property do not bar his short-term rentals, but we agree with the homeowners’ association that the amendments do, The trial court granted summary judgment in favor of the homeowners’ association based on both the original covenants and the amendments. The Court of Appeals affirmed. We affirm the Court of Appeals in part, reverse in part, and remand for further proceedings consistent with this opinion.

I.

A.

Four Seasons is a housing development on Center Hill Lake in DeKalb County, Tennessee. FSD Corporation—or FSD for short—operates the Four Seasons home-owners’ association and previously owned the properties that compose Four Seasons.

In 1984, FSD executed a Declaration of Covenants, Conditions, and Restrictions to "impose … mutually beneficial restrictions under a general plan of improvement for the benefit of all owners of residential property within Four Seasons development." The declaration provides that the restrictions are to "run with and bind" all of the properties listed on an exhibit attached to the declaration.¹ The declaration further states that FSD was "the owner of the real property" described in that exhibit as of the date of the declaration’s execution.

Article XII of the declaration imposes use restrictions on the properties. Section 1, subsection (a) of that article provides that "each Lot shall be used for residential and no other purposes." Subsection (j) further provides that "no gainful profession, occupation, trade or other nonresidential use shall be conducted in any Lot." Those subsections read in full as follows:

(a) … Except as otherwise provided in this Declaration, each Lot shall be used for residential and no other purposes. There shall not be constructed or maintained upon any Lot [any] duplex or multi-unit structure. Except as otherwise provided in [this] Declaration, the Common Area shall be used for recreational … and other purposes directly related to the single-family use [of] the lots authorized hereunder.

….

(j) … [N]o gainful profession, occupation, trade or other nonresidential use shall be conducted in any Lot or upon the Common Area of any portion thereof, provided that this restriction shall not prohibit consultations, conferences, or the transaction of business by telephone or other electronic devices.

The term "Lot" is defined in article I to mean "a portion or portions of the Properties made subject to the terms and conditions of this Declaration and intended for any type of independent ownership for construction and use as a residence by a single family."

Article XIII, section 4 governs delegation of use of the properties. It provides that "[a]ny owner may delegate, in accordance with the By-Laws of the Corporation, his or her right of enjoyment to the Common Area and facilities to the members of his or her family, tenants, and social invitees, subject to such rules and regulations as the Board may establish."

The declaration also establishes a process to amend the covenants and provides that amendments "may, but [are] not required to, impose … additional restrictions … on the land." Article XIII, section 2 states that amendments must be approved "by the affirmative vote (in person or by proxy) of a majority of the Class ‘A’ Stockholders." Class A stockholders include all record owners of any lot subject to the declaration, with the number of shares corresponding to the number of units owned. Amendments "must be recorded" with the DeKalb County Register of Deeds and "shall be effective when recorded."

The initial term of the covenants was thirty years from their recording date. After the initial term, the covenants are "automatically extended" for successive ten-year periods unless a majority of shareholders agree in writing to terminate them.

The parties dispute exactly when the 1984 covenants were recorded with the DeKalb County Register of Deeds, but they agree recording had occurred at least by 2000.² Neither Pandharipande nor FSD contends that the covenants have been terminated.

Pandharipande did not purchase his property in Four Seasons until 2015. The property was conveyed to him via warranty deed.³ Pandharipande admitted both in his complaint and during summary judgment proceedings that, "assuming they are valid," the 1984 covenants "applied to [his] [p]roperty on the date [he] acquired [it]." He purchased the property "with the intent to lease [it] on a short-term basis" and soon began doing just that. With the assistance of a property-management company, Pandharipande leased his property to third parties for rental terms ranging from two to twenty-eight days.

In 2018, a majority of FSD’s shareholders voted to amend the covenants. In relevant part, the 2018 amendments provide that shareholders "shall be allowed" to lease their properties but also impose certain requirements and restrictions on any leases. One of those restrictions is that "[t]he length of [a] lease must be for a minimum of [thirty] consecutive days." The amendments contain a grandfather clause that allows "[a]ny owner engaged in leasing or subleasing activities as of the date of th[e] amendment … to continue leasing or subleasing activities until the expiration of the term of said lease or said lot is sold or conveyed to a third party." FSD recorded the amendments with the Dekalb County Register of Deeds on July 24, 2018.

B.

Notwithstanding the amendments, Pandharipande continued to lease his property for terms of fewer than thirty days. In March 2019, FSD’s counsel sent Pandharipande a letter notifying him that he was violating the 2018 amendments.

Pandharipande responded by suing FSD in June 2019. His complaint sought a declaratory judgment that the 2018 amendments did not prohibit him from using his property as a short-term rental. He also sought an injunction prohibiting FSD from "taking any other action implying or expressly conveying" that Pandharipande was in violation of the 2018 amendments or "any other restrictive covenant."

FSD counterclaimed for declaratory and injunctive relief. The counterclaim sought a judgment declaring that Pandharipande’s short-term rentals violated Four Seasons’ governing documents and an injunction prohibiting him from continuing to lease his property on a short-term basis. FSD asserted that Pandharipande’s short-term leases violated the 2018 amendments, but it did not argue at that time that they also violated the original 1984 covenants. In fact, in its answer to Pandharipande’s complaint, FSD admitted "[u]pon information and belief … that no restrictive covenants prevented [Pandharipande] from leasing his property on a short-term basis at the time he purchased it."

In October 2019, while discovery was ongoing, Pandharipande moved for summary judgment. He argued that the 2018 amendments did not prohibit his short-term rentals for two reasons. First, he claimed that his short-term leases were allowed under the grandfather clause. Second, he contended that Tennessee law prohibits retroactive amendments that place additional restrictions on property rights. Although FSD’s counterclaim had alleged only that Pandharipande’s short-term rentals violated the 2018 amendments, FSD asserted in response to the motion for summary judgment that the rentals violated the 1984 covenants as well. In support of this argument, FSD cited the Court of Appeals’ decision in Shields Mountain Property Owners Ass’n v. Teffeteller, No. E2005-00871-COA-R3-CV, 2006 WL 408050 (Tenn. Ct. App. Feb. 22, 2006), which held that a covenant containing a residential-use restriction prohibited short-term rentals.

The trial court denied Pandharipande’s motion for summary judgment at the hearing but reserved its ruling for forty-five days to allow FSD to move for summary judgment, which FSD did in April 2020. FSD again relied on Teffeteller in arguing that the residential-use requirement in the 1984 covenants prohibited Pandharipande from using his property as a short-term rental. FSD additionally argued that short-term rentals violate the 2018 amendments. In response, Pandharipande sought to distinguish Teffeteller and further contended that Teffeteller’s reasoning had been rejected by courts in other States. He also asserted that FSD should be estopped from relying on Teffeteller both because FSD’s counterclaim alleges only a violation of the 2018 amendments and because FSD had allowed short-term rentals in the past. As for the 2018 amendments, Pandharipande reiterated the arguments he made in support of his own motion for summary judgment.

The trial court granted FSD’s motion for summary judgment. Citing T...