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.

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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).)

1. 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. Beginning January 1, 2021, rent caps 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).)
   1. 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 and the restriction would only apply to owners who purchase after the restriction is recorded.
   2. 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.
2. Lease Term Requirement. Beginning January 1, 2021, provisions in governing documents requiring lease terms longer than 30 days are unenforceable. (Civ. Code § 4741(c).) 
3. Ownership Requirement. This restriction discourages investors from buying up units in a development and renting them out by requiring buyers of units must own/reside in their residence for a period of time (usually one, two, or three years) before he/she can rent it out. This restriction is no longer enforceable under Civil Code § 4741.
4. Occupancy Restrictions. Occupancy restrictions are not affected by Civil Code § 4741.
5. Room Rentals & Subleasing. Subleasing restrictions are not affected by Civil Code § 4741 but room rental restrictions could be.

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:

• renters tend to violate association rules more often than owners,
• renters have more calls to the police than owners,
• renters & landlords are less inclined to invest in the upkeep of their property,
• short-term leases create high turn-over with increased security issues,
• landlords are less likely to volunteer to assist the community,
• landlords have a higher delinquency rate,
• a high percentage of renters depresses property values,
• lenders recognize the problems associated with renters and are less inclined to loan or will lend at a higher interest rate in communities with a high percentage of 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).)

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.” 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.

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.