Types of Rent Restrictions
Beginning January 1, 2021, associations must amend their governing documents to conform to the following rental caps and lease terms. Failure to amend the governing documents to conform to these standards by July 1, 2022, could result in a $1,000 fine. (Civ. Code § 4741(f)&(g))
- Existing Rental Cap. This limits the number of units in a development that can be leased. For example, no more than 10% of the units in the development can be rented at any one time. Beginning January 1, 2021, rent caps that are more restrictive than 25% are unenforceable, such as 10%, 15%, or 20%. All associations with rent caps were required to amend their governing documents to conform to the 25% cap. (Civ. Code § 4741(b)) The board can adjust it to 25% to comply with the new rental requirements.
- Add a Rental Cap. If an association does not have a rental cap and wants to add one, section 4740 of the Civil Code applies. The restriction will only apply to owners who purchase after the restriction is recorded.
- Lease Term Requirement. Civil Code § 4741(c) expressly allows governing documents to prohibit transient or short-term rentals for 30 days or less. (This statute codifies the 2008 Mission Shores v. Pheil case, which held that a CC&R provision requiring rentals to be at least 30 days is reasonable.)
- Ownership Requirement. This restriction discourages investors from buying up units in a development and renting them out by requiring buyers of units to own/reside in their residence for a period of time (usually one, two, or three years) before they can rent it out. This restriction is no longer enforceable under Civil Code § 4741.
- Occupancy Restrictions. Associations can still impose occupancy restrictions.
- Room Rentals & Subleasing. Subleasing restrictions are unaffected, but room rental restrictions may be.
Lender, FHA & Fannie Mae Requirements. For lending purposes, Fannie Mae requires developments to have at least 51% owner occupancy. For reporting purposes, when it comes to companies or corporations that own units in a condominium development, there are different opinions on how to count them. Some argue that companies cannot occupy a unit; therefore, a unit owned by a limited liability company (LLC) or corporation should be counted as a rental. Others argue that a company can designate who can occupy the unit on its behalf without rent payments being involved. Accordingly, it depends on the arrangements the company has with the occupant. Boards should consult HOA legal counsel on this issue.
Insurance Carriers & Lenders. The insurance industry has also recognized the problems associated with renters and takes notice when the rental percentage reaches 30-35%. Many preferred carriers draw the line at this percentage because claims histories show that associations with high-rental populations have higher claim volumes. As a result, associations with excessive rentals are charged higher premiums. Lenders routinely ask for the percentage of rentals in a development since a high percentage depresses market values.
Power to Regulate. Courts have recognized that homeowner associations can regulate rentals. (Nahrstedt v. Lakeside Village (1994) 8 Cal.4th 361, 374, fn. 6, "The power to regulate pertains to a wide spectrum of activities, such as the volume of playing music, hours of social gatherings, use of patio furniture and barbecues, and rental of units"; Colony Hill v. Ghamaty (2006) 143 Cal.App.4th 1156, 1169 (association has power "to maintain its family character by prohibiting uses other than for single-family dwelling purposes."); City of Oceanside v. McKenna (1989) 215 Cal.App.3d 1420; Liebler v. Point Loma Tennis Club (1995) 40 Cal.App.4th 1600, 1611) Room rentals are included.
Adopting Rent Restrictions
If associations wish to adopt rental restrictions, they should do so by amending the CC&Rs, approved by the membership. Such restrictions are effective upon recordation and affect all future owners. Depending on the specific rule or regulation, the board of directors can adopt some rental regulations without a membership vote. Boards should consult with legal counsel before doing so.
Date of Ownership. Civil Code § 4740 exempts owners from rent prohibitions unless the prohibition was in effect before the owner bought into the development.
Coastal Associations. Coastal condominium associations that want to tighten restrictions on short-term rentals must consider the California Coastal Commission's requirements. The Mandalay Shores Association adopted a rule requiring rentals to be for at least 30 days. The Coastal Commission demanded that the association cease enforcement of its restriction, alleging that the requirement constituted a “development” that affected the density and intensity of use in the coastal area and required a coastal permit. The trial court disagreed and found that a 30-day minimum was not a “development.” However, the court of appeals unexpectedly reversed, stating, "The decision to ban or regulate STRs must be made by the City and Coastal Commission, not a homeowner’s association." (Greenfield v. Mandalay Shores) Accordingly, coastal associations should consult legal counsel when dealing with short-term rentals.
Disclose the Restriction. If an association has a restriction in the governing documents limiting the occupancy, residency, or use of a separate interest based on age, owners must, as soon as practicable before the transfer of title, provide notice of the restriction to the prospective purchaser. (Civ. Code § 4525(a)(2))
Lease Agreements
Notice of Renter. Before owners lease their units to tenants, they must provide the association with the tenants' names and contact information. (Civ. Code § 4740(c))
Tenant Defined. A tenant is not the same as a guest. Tenants have a specific status under the law and have the right to full possession and control of the unit they rent, subject to the terms of their lease or rental agreement. Guests have no possessory rights. Section 1940 of the Civil Code defines tenants as “persons who hire dwelling units...including tenants, lessees, boarders, lodgers, and others..." Civil Code § 1925 defines hiring as “a contract by which one gives to another the temporary possession and use of property, other than money, for reward, and the latter agrees to return the same to the former at a future time.”
Rent Defined. Rent is defined as consideration for the use or occupation of property. (Black's Law Dictionary.) Consideration can be money, goods, services, or other value. Accordingly, the gratitude of a relative or the affection of a mistress could qualify as rent, and the occupant is deemed a tenant. Civil Code § 1951 defines rent as “charges equivalent to rent.”
Copy of Lease. If an association's governing documents require that lease agreements be for a particular period (banning short-term rentals is common), the only way it can verify compliance is to require the landlord to provide a copy of the signed lease agreement. NOTE: See changes in allowable rent restrictions. To demonstrate compliance with the restriction, the only relevant information is an executed agreement bearing the names of the parties, the date, the lease term, and signatures. Accordingly, you can remove financial and personal information from the agreement before submitting it to the association.
Lease Addendums
Associations can adopt lease addendums (sometimes called supplemental lease agreements), which assign rent to the association if the landlord becomes delinquent. Whenever a unit is leased, the owner and tenant are required to sign the association's lease addendum that requires, among other things, (i) the lease be for the entire unit; (ii) no assignments or subleases are allowed; (iii) the lease is for not less than thirty (30) days; (iv) tenant agrees to comply with the association’s governing documents and be subject to its disciplinary procedures; (vi) owner assigns rents from his unit to the association in the event he becomes delinquent; and (vii) tenant agrees to pay the owner's assessments should he become delinquent.
Renter's Rights
See "Renter's Rights"
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