HOA Rental Restrictions Laws and Best Practices

Homeowner associations may have a number of reasons for imposing leasing restrictions, which can have many benefits, but should understand the laws and management that these restrictions require. The Davis-Stirling Act defines clear rules on the enforcement and practice, and a board contemplating the adoption of a lease restriction needs to consider the burdens it will be taking on.

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Definition of a Lease Restriction

A restriction on the number of leased or rented units or lots permitted within a development is a common element of many modern governing documents (at least those which have been updated from the original developer prepared documents). There are two basic types of lease restrictions. One type limits the total number of leased residences within a development (e.g. no more than 20 residences can be leased at one time). The other type requires all new owners to live in the residence for a specified time (e. g. one year) before the residence can be rented. This second type limits the number of leased units since it discourages purchase by investors and most owners willing to occupy the residence will probably remain after the initial period has passed. Of course, there are variations on each type of type of restriction.

Why HOAs Restrict Rentals

A high rental percentage can have a direct, negative economic impact on an association: prospective buyers may have difficulty acquiring a loan to purchase a unit in the association and, in some cases, liability insurance rates can be higher. Other reasons for limiting the number of leased or rented dwellings include lender requirements for a minimum number of owner occupied units in the development (especially in condominium projects), concerns about increased rule violations and maintenance issues associated with a high tenant occupancy rate, frequent move-ins and move-outs with increased noise and traffic issues relating to tenant occupied dwellings, and the lack of “community spirit” on the part of many tenants who generally occupy the residences for a relatively short time compared to owner occupants. While many boards which have considered this issue have concluded that a limit on the number of tenant occupied residences is desirable, the same boards are often at a loss as to how to enforce such a restriction once it has been adopted.

California Law on Lease Restrictions

The Davis-Stirling Act (Civil Code Section 4740) provides, among other things, that for any lease restriction adopted after January 1, 2012, persons who own a unit or lot on the date the restriction becomes effective shall be exempt from the restriction. Persons who purchase a lot or unit after the effective date of the restriction will (with some exceptions) be subject to the restriction. However, the law does not apply to lease restrictions which were effective before January 1, 2012; such restrictions will continue to apply to all owners to the same extent as before the law was adopted.

Even in medium size communities (say, 50 residences or less) many people do not know their neighbors well. Therefore, whether an occupant is an owner or tenant may not be known. Generally, the association rules or other governing documents will require an owner to provide the name and contact information for any tenant (California Civil Code Section 4740(d) requires that this information be provided for new leases or rentals), but such a requirement is sometimes ignored, especially if an owner is aware that he or she is violating the governing documents by leasing the residence. Sometimes an owner who is leasing in violation of the governing documents will claim that an occupant is a temporary guest, a roommate or a family member.

Another problem often arises if the lease restriction contains a waiver provision, allowing the Board to waive the restriction in cases of extreme financial hardship. Many lease restriction contain such a provision. Owners attempt to fit themselves within this exception to the lease restriction by a variety of excuses, most of which boil down to the fact that it is in the owner’s economic interest to rent out the unit rather than occupy it or sell it.

Steps for Managing Lease Restrictions

Inform Potential Buyers of Restrictions

California law (Civil Code Section 4525(a)(9)) requires that one of the documents to be provided to prospective purchasers include a notice that the governing documents prohibit or restrict the rental or leasing of units or lots within the property. In addition, a stamp or cover page should be attached to CC&Rs provided to prospective purchasers stating the same thing. For example: “This document includes restrictions on your ability to rent or lease your property; review it carefully if you intend to rent or lease the property after purchase.” This will provide additional grounds for addressing any claim by an owner that he or she was not aware of any such restriction when the owner purchased the property.

Make a List of Authorized Owners

An essential element of any approach to enforcing a lease restriction is to assemble a list of those owners currently authorized to lease or rent their residence. The owners’ authorization to lease could come from written permission of the board or from being “grandfathered” under the provisions of the lease restriction itself (see discussion below relating to grandfathering). Assembling such a list is often difficult, since, as discussed above, it is not often easy for a board to identify those residences which are being leased or rented. (For lease restrictions put into place after January 1, 2012, it will be easy to identify authorized owners because all persons who owned their residence on the date the restriction became effective will be authorized to lease or rent their residences.)

One approach to assembling such a list is to require all owners to register their leased residence with the association within a specified period of time. Those owners who do not register their residences will be deemed to have represented that they are not currently leasing or renting the residence. If it is later discovered that the residence was leased or rented, the owner can be called to a disciplinary hearing for violation of the lease restriction.

Understand Grandfathering

Grandfathering refers to an exemption from the lease restriction granted to a specified group of owners at the time the lease restriction is adopted. For lease restrictions adopted prior to January 1, 2012, there was usually a provision stating that owners who were leasing their residences at the time the lease restriction became effective could continue to lease their units without regard to the limit on the total number of leased residences allowed under the restriction. These owners were “grandfathered” in under the lease restriction. When these owners sold or transferred their residences, the new owner lost the grandfather status and was required to comply with all provisions of the lease restriction and generally would have to apply to the board for authorization to lease his or her unit.

The lease restrictions law (which became effective on January 1, 2012), applies only to lease restrictions (or amendments to existing restrictions) which become effective after January 1, 2012, all persons who own residences within the association on the date the restriction becomes effective are exempt from the lease restriction. In other words, all current owners are grandfathered in under any new lease restriction. Owners who purchase after the adoption of the restriction will (with some exceptions) be subject to the restriction.

In compiling a list of residences currently authorized for leasing, persons entitled to be grandfathered in will need to be identified. The law requires persons seeking to lease their residence to provide proof of the date such person obtained title, so the association can determine whether the owner is entitled to take advantage of the grandfather status under the law.

Establish a Waiver Policy

Most lease restrictions provide that the board may grant a waiver of the restriction for a particular owner if enforcement of the restriction would result in an extreme financial or personal hardship. Such a waiver should rarely be granted. It is intended for only for those situations where unforeseen and unusual personal circumstances require an owner to temporarily lease his or her unit.

The board may want to adopt a written policy which establishes some guidelines as to when a board may consider a waiver, and when such a waiver would not be appropriate (e.g. lack of knowledge of the restriction due to failure to review the governing documents prior to purchase is not typically grounds for granting a waiver). Also, since granting a waiver is usually within the sole discretion of the board, conditions for the waiver can be imposed. For instance, a waiver could be granted for one year on condition that the owner either sell his or her residence or move back into it at the end of the one-year period.  

Prepare for Litigation

Unlike most enforcement actions by a board, enforcement of a lease restriction often involves significant economic factors for the owner seeking to lease. Lost revenue and/or a perceived reduction in market value of the property may encourage some owners to seek relief from the restriction through a court action. In the alternative, an owner may simply ignore the association’s demands that he or she stop the unauthorized leasing of the residence. Although it is fairly well settled that most properly drafted lease restrictions will be upheld by a court, some owners may threaten or proceed with litigation in the hopes of getting the association of give up on any attempt at enforcement. It is important that a board be prepared to meet such a challenge or if necessary, to initiate litigation to obtain compliance. First, of course, a board has a legal obligation to enforce all of the association’s governing documents. Secondly, once a blatant violation of a lease restriction is allowed to continue, the floodgates will be opened and additional violations will undoubtedly be the result.

The Benefits and Burdens of Lease Restrictions

The benefits of adopting a lease restriction are discussed at the beginning of this article. A board contemplating the adoption of a lease restriction needs to consider the burdens it will be taking on. These burdens are: (1) obtaining approval of the owners for the restriction; and (2) enforcing the restriction once it is in place. The second consideration will probably involve the most time and effort. Many boards have decided that the advantages of having a lease restriction in place outweigh the disadvantages. However, each board will have to decide this issue based on the circumstances of the particular association.

By Michael Hardy, Angius & Terry LLP.