Types of Restrictions. Rent restrictions generally fall in to two categories:
- 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.
- Occupancy Requirement. This restriction discourages investors from buying up units in a development and renting them out by requiring that buyers of units must first reside in a unit for at least one year before the buyer can rent out the unit. Under this restriction, rentals can fluctuate with the economy but will fluctuate around a low percentage level (usually in the 3-7% range).
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 an 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 legal counsel on this issue.
Problems with Renters. Condominium and homeowners associations often find that:
- owners, as opposed to renters, tend to take better care of their property.
- owners are more compliant with rules such as parking restrictions, and it is easier to enforce such rules against them;
- renters are less likely to volunteer to assist the community whereas owners tend to be more involved in community activities;
- absentee owners have a higher delinquency rate than resident owners;
- a high rental rate impairs the willingness of mortgage lenders to make loans on units in a community;
- rentals are less stable and have more calls to the police department than owners;
- owner-occupants are more interested in the quality of the community whereas landlords are more interested in profit.
To read a case that describes the problems associated with renters, see Harrison v. Sierra Dawn Estates.
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 homeowners 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.
Restriction vs. Prohibition. A restriction that rentals cannot be less than 30 days is not a prohibition and has been deemed reasonable by the courts. (Mission Shores v. Pheil.)
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.” Howerver, 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.