Short-term rentals (STRs) are also called vacation rentals. It's a big business and a number of companies cater to this market and provide online rental services, such as Airbnb, VRBO (Vacation Rental By Owner), HomeAway, FlipKey, TurnKey, TripAdvisor, Booking.com, VacationRentals, 9Flats, HouseTrip, HotelTonight, One Fine Stay, Casamundo, and Homestay, to name more than a few. Short-term rentals are not addressed by the Davis-Stirling Act but associations have the authority to address problems created by STRs.
Burden on Associations. Homeowner associations suffer problems with transient renters such as security issues, rules enforcement problems, higher maintenance costs, and increased administrative expenses because they require greater supervision. To meet the challenge, the Oak Shores Association restricted short-term rentals and imposed a fee on landlords to offset the expenses they created. Homeowner/landlord Ken Watts challenged various rules adopted by the association, including:
- A minimum 7-day rental period
- Limits on the number of cars and boats renters could bring into the development
- A garbage collection fee
- Boat fees
- Transfer fees
- A $325 annual fee on landlords who rented their homes (for wear and tear on recreational facilities, roads ,and parking lots)
Right to Restrict. After a lengthy trial, the association prevailed. Mr. Watts appealed and lost. The court's rulings are significant: (i) associations have the right to restrict short-term rentals, (ii) boards can impose a reasonable fee to offset expenses associated with renters, and (iii) courts should defer to boards on decisions related to the maintenance, control and management of common areas. To read the court's decision, see Watts v. Oak Shores. (Also see Almanor Lakeside Villas v. Carson.)
30-Day Lease Term. A restriction that rentals cannot be less than 30 days is a limitation on usage, not a prohibition, and has been deemed reasonable by the courts. (Mission Shores v. Pheil.) If associations want to restrict or prohibit short-term rentals, they can do so in their rules without amending their CC&Rs. Most associations already have provisions in their CC&Rs that give them the authority they need, such as, members cannot use their separate interests for hotel-like operations. Another common restriction prohibits owners from running a business in the development.
Lease Terms Greater Than 30 Days. Beginning January 1, 2021, governing documents that require lease terms greater than 30 days may be unenforceable. (Civ. Code §4741(c).) Associations with longer lease terms will need to show they do not constitute an "unreasonable restriction" (Civ. Code §4741(b)) or will need to amend their governing documents to conform to the 30-day standard by no later than December 31, 2021. Failure to amend nonconforming documents by that date could result in a fine of $1,000. (Civ. Code §4741(f)&(g).)
Running a Business. The federal government does not consider a vacation renter a hirer of real property generating residential ‘rents.” Rather, the income is deemed business income. The IRS distinguishes traditional rentals between landlord and tenant from vacation rentals between licensor and licensee. While all homeowners who rent are required to report rental income on Schedule E, “Supplemental Income,” Schedule E itself directs homeowners who provide “significant services to the renter such as maid service” to Schedule C or C-EZ, “Profit or Loss From Business (Sole Proprietorship).” Most of these short term rentals have professional cleaning services, they keep a fully stocked kitchen, they provide complimentary cable and wireless, toiletries and paper goods; grilling equipment, information on local restaurants and attractions, and other amenities comparable to a hotel. “The occupant [of a vacation rental], in exchange for a fee, is given permission to use the property for a short duration. It is irrelevant whether the property is a large hotel or a three-bedroom two-bath house. If the occupant pays money in exchange for the ability to stay and sleep for a short duration of time, the occupant is a “transient” and the property is a “hotel.” (Harrington, Vacation Rentals: Commercial Activity Butting Heads with CC&Rs (2015) 51 Cal. Western L.Rev. 187, 202.)
Coastal Associations. There is a caveat for associations within the jurisdiction of California's Coastal Commission. Amending governing documents to restrict short-term rentals requires approval by the Coastal Commission. "The decision to ban or regulate short-term rentals must be made by the City and Coastal Commission, not a homeowner’s association." (Greenfield v. Mandalay Shores).
Recommendation: Associations wanting to restrict short-term rentals and/or impose fees on landlords should have legal counsel review their documents and make recommendations. The growing body of case law regarding short-term rentals must be taken into account when amending governing documents. For more information, see Rent Restrictions and Prohibitions.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.