Types of Restrictions. Beginning January 1, 2021, associations are required to amend their governing documents to conform to the following rental caps and lease terms. Failure to amend governing documents to conform to these standards by July 1, 2022 could result in a fine of $1,000. (Civ. Code § 4741(f)&(g).)
- Rental Cap. This limits the total 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 more restrictive than 25% are unenforceable and all associations with rent caps were required to amend their governing documents to conform to 25%. (Civ. Code § 4741(b).)
- 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 and the restriction would only apply to owners who purchase after the restriction is recorded.
- Revise an Existing Cap. If an association has an existing rental cap that is more restrictive than 25%, such as 10%, 15% or 20%, the board can adjust it to 25% to conform to new rental requirements.
- Lease Term Requirement.Beginning January 1, 2021, Civ. Code § 4741(c) expressly allows governing documents to prohibit transient or short-term rentals for a period of 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.) Unfortunately, the statute is silent on the validity of governing documents that prohibit transient or short-term rentals for a period of more than 30 days. Some HOA attorneys believe that the prohibition for a period of more than 30 days is always prohibited. Other HOA attorneys believe that such provisions are not automatically unenforceable, but that the burden is on the association to establish that such "greater than 30-day minimum lease term" is reasonable in the context of that particular development. Until there is clarifying legislation or an appellate decision addressing rental prohibitions for a period of more than 30 days, we recommend that boards consult with the association's legal counsel for advice on this issue.
- Ownership Requirement. This restriction discourages investors from buying up units in a development and renting them out by requiring buyers of units must own/reside in their residence for a period of time (usually one, two, or three years) before he/she can rent it out. This restriction is no longer enforceable under Civil Code § 4741.
- Occupancy Restrictions. Occupancy restrictions are not affected by Civil Code § 4741.
- Room Rentals & Subleasing. Subleasing restrictions are not affected by Civil Code § 4741 but room rental restrictions could be.
Lender, FHA & Fannie Mae Requirements. For lending purposes developments must have a minimum percentage of owner occupancy. For reporting purposes, HOAs must make a good faith estimate of that percentage. When it comes to companies or corporations that own units in a condominium development, there is a difference of opinion on how to count them. Some argue that companies cannot occupy a unit and, 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 behalf of the company 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.
Problems with Renters. Not all renters are bad. Nonetheless, homeowner associations often experience the following problems with renters:
- renters tend to violate association rules more often than owners,
- renters have more calls to the police than owners,
- renters & landlords are less inclined to invest in the upkeep of their property,
- short-term leases create high turn-over with increased security issues,
- landlords are less likely to volunteer to assist the community,
- landlords have a higher delinquency rate,
- a high percentage of renters depresses property values,
- lenders recognize the problems associated with renters and are less inclined to loan or will lend at a higher interest rate in communities with a high percentage of renters.
To read a case that describes the problems associated with renters, see Harrison v. Sierra Dawn.
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 have shown that associations with high rental populations have more claims. 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 barbecued, 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. See case law supporting rental restrictions.
CAR Interference. Although the courts support the proposition that a duly adopted restriction may be applied to existing owners as well as subsequent purchasers (Villa de Las Palmas v. Terifaj), the California Association of Realtors (CAR) inserted itself in community associations and sponsored SB 150, legislation that became Civil Code § 4740 which exempts owners in a common interest development from rent prohibitions unless the prohibition was in effect prior to the date the owner bought into the development. This ill-conceived statute took effect January 1, 2012.
Adopting Restrictions. If associations wish to adopt rental restrictions, it should be done via an amendment to the CC&Rs approved by the membership. Such restrictions are effective upon recordation and affect all future owners. Some rental regulations, depending on the specific rule or regulation, can be adopted by the board of directors without a membership vote. Boards should consult with legal counsel before doing so.
Disclosure of Restriction. In the event an association has a restriction in the governing documents limiting the occupancy, residency, or use of a separate interest on the basis of age, owners must, as soon as practicable before transfer of title, provide notice of the restriction to the prospective purchaser. (Civ. Code § 4525(a)(2).)
Coastal Associations. Condominium associations along the coast that want to tighten their restrictions on short-term rentals must consider California Coastal Commission requirements. The Mandalay Shores Association adopted a rule requiring rentals be for a minimum of 30 days. The Coastal Commission demanded the association cease enforcement of its restriction alleging the requirement constituted a “development” affecting the density and intensity of the use of the coastal area, which required a coastal permit. The trial court properly disagreed and found that a 30-day minimum was not a “development.” However, the court of appeal 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.
ASSISTANCE: Despite the problems created by the California Association of Realtors, properly worded rent restrictions can still be adopted that will minimize the negative impact of renters. Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.