RENT RESTRICTIONS, VACATION RENTALS & ROOM RENTALS

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 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 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, 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. The restriction will 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. 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. Occupancy restrictions are not affected by Civil Code § 4741.
• Room Rentals & Subleasing. Civil Code § 4741 does not affect subleasing restrictions, but room rental restrictions could be affected.

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 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 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.

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.

Adopting Rent Restrictions

If associations wish to adopt rental restrictions, they should do so via an amendment to 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.

Disclosure of 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).)

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. 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 to be for a minimum of 30 days. The Coastal Commission demanded the association cease enforcement of its restriction, alleging the requirement constituted a “development” that affected the density and intensity of the use of the coastal area, which required a coastal permit. The trial court 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.

Lease Agreements

Notice of Renter. Before owners lease their units to a tenant, they must provide the association with the name and contact information of the tenant. (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 a mistress's affection 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 show compliance with the restriction, the only relevant information is an executed agreement bearing the names of the parties, the date of the agreement, the lease term, and signatures. Accordingly, you can redact 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.

Short-Term Rentals Impact on Associations

Short-term rentals (STRs) are also called vacation rentals. STRs are a big business, and several 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 a few. 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 costs 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 STRs

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' inability to 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(f).) Associations with longer lease terms will need to show they do not constitute an "unreasonable restriction" (Civ. Code § 4741(a)) 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.” Instead, 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 permitted to use the property for a short duration. Whether the property is a large hotel or a three-bedroom, two-bath house is irrelevant. If the occupant pays money in exchange for the ability to stay and sleep for a short 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.)

Proof of Lease Term. Associations can require evidence that lease terms are at least 30 days or more. To show compliance with the restriction, the only relevant information is an executed agreement bearing the names of the parties, the date of the agreement, the lease term, and signatures. The landlord can redact financial and personal information from the agreement before submitting it to the association.

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).

Room Rental Business

Owners cannot use the broad definition of "family" as an excuse to engage in room rental commercial activity. Colony Hill is a planned development near San Diego where defendant Masood Ghamaty bought a four-bedroom, three-bath house. Ghamaty moved into the house and rented the remaining rooms to six persons at various times for two months up to two years. Owners voiced concerns to the board about parking issues, renters, and a loud party at Ghamaty's home. They complained that Ghamaty ran a commercial enterprise prohibited by the CC&Rs. The board met with Ghamaty and demanded that he immediately return the property to a private single-family dwelling status. Ghamaty denied that he was violating the CC&Rs because he considered the renters to be his family. The association filed suit.

At trial, Ghamaty relied on the San Diego Municipal Code's definition of "family" as "unrelated persons who jointly occupy and have equal access to all areas of a dwelling unit and who function together as an integrated economic unit." The court found that "family" could not reasonably be interpreted to include Ghamaty and his renters. Ghamaty provided no evidence he had any prior relationship with five of the renters or that any of the renters had any previous relationship with each other. He produced no evidence that he shared meals with or had any relationship with the renters.

Ghamaty argued that the permanent injunction issued by the trial court violated his right to privacy under the California Constitution, i.e., "the State may not utilize its power to interfere with a person's choice of cohabitants." The court noted that the Constitution restricts the State, not private developers. Moreover, a prior Supreme Court decision made it clear that CC&Rs can limit activities in the confines of the home itself. The court ruled that Ghamaty was engaged in commercial activity prohibited by the CC&Rs, and the injunction was rationally related to the association's right to maintain its family character by prohibiting uses other than single-family dwelling purposes. (See Colony Hill v. Ghamaty.)

Family Defined. Older documents sometimes have restrictions that limit occupancy to persons related by blood, adoption, or marriage. Such restrictions are no longer enforceable. (City of Chula Vista v. Pagard (1981) 115 Cal.App.3d 785.) Many municipalities broadly define "family" to include unrelated persons. For example, San Diego defines a family as: "Two or more persons related through blood, marriage or legal adoption... or unrelated persons who jointly occupy and have equal access to all areas of a dwelling unit and who function together as an integrated economic unit.' (San Diego Mun. Code, § 113.0103.) In addition, a number of California cases have struck down attempts to limit the number of unrelated people from living together as one household. [See City of San a Barbara v. Adamson (1980) 27 Cal.3d 123.] If limitations on occupancy are based on the number of occupants rather than the definition of family, they are generally enforceable. [City of Edmonds v. Oxford House, Inc. (1995) 514 US 725.]

Recommendation: The January 1, 2021, addition of Civil Code § 4741 to the Davis-Stirling Act may have impacted the ruling in this case by contemplating owner-occupied rentals in subsection (e). Boards of direct rs should consult legal counsel when drafting rental and leasing provisions. For related issues, see rental restrictions. To amend your CC Rs, contact us.

Occupancy Restrictions

Restricting density is important because overcrowding strains an association's parking, drives up utility costs, overloads recreational facilities, disrupts residents' quiet enjoyment, and depresses property values. An association has the authority to impose reasonable restrictions upon the occupancy of condominium units. (Ritchey v. Villa Nueva.) Restrictions can be imposed, provided they are not discriminatory.

Discrimination. The Federal Fair Housing Act prohibits restrictions on occupancy that discriminate based on race, color, religion, national origin, sex, familial status, or handicap. In particular, occupancy restrictions cannot be an excuse to discriminate against families with children. The Department of Housing and Urban Development (HUD) has stated that, in appropriate circumstances, owners and managers may develop and implement reasonable occupancy requirements based on factors such as the number and size of sleeping areas or bedrooms and the overall size of the dwelling unit. (Fair Housing Oc upancy Standards.)

Two Plus One Formula. While opposed to discrimination, California's Civil Rights Department has allowed restrictions using a "two-plus-one" formula, i.e., two persons per bedroom plus one additional person for the household. For example, a 1-bedroom unit could have three people, a 2-bedroom could have five persons, and so on.  The formula is based on a 1998 adoption of the "Keating Memo" by the U.S. Department of Housing and Urban Development. It creates a presumption that 2 + 1 is reasonable but is subject to rebuttal based on factors such as:

• the size of each bedroom,
• the size and configuration of the residence,
• other physical limitations, such as the capacity of the building systems,
• the age of the children, and state and local laws

Other Formulas. The Uniform Housing Code and California's Health & Safety Code restrict the number of persons in a unit using a formula based on bedroom square footage. In addition, many cities and counties will issue their housing occupancy standards.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.