California Clears the Path for Rentals in Residential Common Interest Developments

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Best Best & Krieger LLP

However, AB 3182 Creates Ambiguity for Rental Restrictions in CIDs

Consistent with California’s trend of removing barriers to affordable housing, Assembly Bill 3182, which goes into effect on Jan. 1, further limits the ability of residential common interest developments to restrict rentals in their communities.

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:

  • Eliminates consent as an exception. A CID may no longer impose an after-purchase rental prohibition on consenting owners. Now, an after-purchase rental prohibition is unenforceable regardless of whether the owner consents.
  • Eliminates the Jan. 1, 2012 cutoff, thus broadening its protections to cover post-purchase rental restrictions regardless of what year they took effect.

The new section 4741:

  • Insulates an owner from a CC&R that “prohibits, has the effect of prohibiting, or unreasonably restricts” the rental or lease of the owner’s property, including an accessory dwelling unit or junior accessory dwelling unit.
  • Prohibits CIDs from adopting or enforcing CC&R provisions that restrict the rental or lease of property within the CID to “less than 25 percent” of the total properties. For example, an HOA may limit the percentage of units that may be rented to 25 percent. But ADUs and JADUs do not count toward the 25 percent threshold.
  • Allows CC&Rs to prohibit “short-term” rentals of 30 days or less.
  • Takes effect on Jan. 1, regardless of whether a CID has revised its CC&Rs.
  • Requires CIDs to amend their CC&Rs to conform to section 4741 by Dec. 31, 2021.
  • Makes CIDs that willfully violate section 4741 liable for actual damages and a civil penalty of up to $1,000.
  • Provides that, in accordance with section 4740, section 4741 does not change the rights of owners who acquired title to their property before section 4741’s effective date to rent or lease their property.

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.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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