Common Interest Developments
CIDs are widespread throughout California and include various types of housing, such as condominiums, community apartment projects and planned developments. As provided under the Davis–Stirling Common Interest Development Act, CIDs are a form of real estate ownership in which each owner has an exclusive interest in a property (e.g., a unit or lot) as well as a shared or undivided interest in common-area property. Covenants, conditions and restrictions, known as CC&Rs, adopted by the CID, among other things, contain regulations that property owners within the CID must adhere to. Common CC&R provisions include parking restrictions and common-area rules, as well as rules governing long-term guests and property rentals. CC&Rs are generally enforced by a homeowners’ association and individual property owners within the CID.
CID Rental Restrictions Before AB 3182
Under California Civil Code section 4740, an HOA cannot enforce CC&R restrictions that prohibit owners from renting out their exclusive property unless the restriction was in effect before the owner acquired his or her property. That hasn’t changed.
Before AB 3182, however, section 4740’s reach was limited in two ways. First, section 4740 only applied to rental prohibitions that became effective on or after Jan. 1, 2012. Thus, a CID could enforce a restriction on rentals by amendment to the CC&Rs in 2008 against an owner who purchased a condominium in 2007, because the restriction was not imposed in or after 2012. Second, section 4740 allowed CIDs to enforce an after-purchase rental prohibition if an owner agreed to be bound by such a restriction.
CC&R Rental Restrictions After AB 3182
AB 3182 both amends Civil Code section 4740 and adds a new section 4741.
The amendments to section 4740:
The new section 4741:
The interplay between Civil Code sections 4740 (as amended by AB 3182) and 4741 is almost certain to cause confusion due to, among other things, the fact that provisions of sections 4740 and 4741 overlap. For example, section 4740 allows CC&Rs to prohibit rentals if the prohibition was in effect before the owner purchased the property. Section 4741, on the other hand, provides that owners “shall not be subject to a provision” in the CC&Rs that “prohibits, has the effect of prohibiting, or unreasonably restricts” the rental or lease of the owner’s property. Given the broad wording of section 4741, some may argue that it overrides section 4740’s allowance for pre-purchase rental restrictions (at least to the extent that such restrictions are “unreasonable”).
Similarly, section 4741 provides that CIDs cannot “adopt or enforce” CC&R provisions that restrict the rental or lease of property to “less than 25 percent” of the total properties (not counting ADUs or JADUs). This provision may raise questions in CIDs where the CC&Rs contain rental prohibitions that were in effect before all of the owners acquired their properties. Under section 4740, a general rental prohibition in that situation is allowed and enforceable. However, some may argue that section 4741 overrides section 4740 to now allow at least 25 percent of the properties within the CID to be rented. In the wake of AB 3182, CIDs and their HOAs across California will need to review and amend their CC&Rs. Some revisions will be straightforward and clear, such as the elimination of a CID’s ability to adopt after-purchase rental restrictions on consenting owners. However, due to the ambiguity and overlapping nature of sections 4740 and 4741, other revisions will be less straightforward. Until the courts weigh in or additional legislation is adopted, CIDs will face an uncertain landscape as they reconcile their owners’ desire to restrict rentals with the extent of their authority to do so under sections 4740 and 4741.
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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).)
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 legal counsel on this issue.
Problems with Renters. Not all renters are bad. Nonetheless, homeowner associations often experience the following problems with 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.
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).)
