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When Should an HOA Be Able to Restrict an Owner's Right to Rent Out His Unit

Written by on Monday, 30 August 2010 7:00 pm

Is it fair for an HOA (Homeowner Association) to prohibit or restrict a unit owner from renting out his property? Should there be a law about this? In California, these issues are currently being argued in both the legislature and the courts. In some other states the issues may already be settled; in others the debate is no doubt going on.

There is little argument that a homeowner association, at its formation, has the right to adopt rules restricting the ability of its members to rent out their units. Indeed, buyers of units in a newly-built ocean front condominium might want assurances that units in the building cannot be rented on a short term "vacation rental" basis. Moreover, it is common for association rules to stipulate that leases of units must contain a provision requiring that the tenants will abide by the association's rules and regulations.

HOAs can be formed with pretty much whatever rules they (usually, the developer) choose. Prospective buyers can then decide if they want to live in a community that is subject to such rules. But what about an existing association that wants to change its rules - more frequently, to adopt rules concerning matters where no rules existed before?

The governing documents of HOAs contain procedures for changing or adding on to the rules and regulations. No one would suppose that amendments could never be necessary or desirable. Further, different associations may have different procedures for making changes. Some might require a 2/3 vote of members for certain kinds of issues. Others may delegate considerable power to the Board of Directors in the matter of modifying or adding to existing rules.

California law - as a result both of court cases and legislative action - provides that changes to association rules cannot be arbitrary. They must be reasonable. They must not violate public policy. They must bear a relationship to the association's goals. Importantly, there is a presumption of reasonableness to the rules, or changes to the rules, that are duly adopted by an HOA. If someone objects, the burden of proof falls on them to show that a new rule is unreasonable.

So, suppose you had purchased a unit in a common interest development as your residence. Suppose also that the HOA had no rules regarding the ability of an owner to rent out his property or properties. Over the years you acquire a few more units for the purpose of renting them. You might even purchase some in partnership with your children for the same purpose.

Then, members of the association become concerned that the number or rental units and the character of the renters are becoming a problem. A study group is formed and additional rules are proposed. An election is held and the proposed rules are adopted. According to these new rules, no more than a certain number of units in the development may be rented at any one time. No owner is allowed to own more than two rental units. Leases are subject to the approval of the HOA. No leases may be longer than one year. Existing leases will be honored, but, at the termination of the lease, if the owner has more than the allowed number of rentals, the unit cannot be re-rented.

Is this fair? Is it reasonable? Should the law allow it?

The scenario sketched above is, in abstract, similar to the case of Sierra Dawn Estates Homeowners' Association v. Isabelle Harrison et al., recently heard by California's Fourth Appellate District Court of Appeal. In an unpublished decision filed June 23, 2010, the court upheld the actions of the HOA. The plaintiff has filed an appeal with the state Supreme Court.

Directors of the California Association of Realtors® (CAR) were concerned that the rules adopted by Sierra Dawn went too far. CAR filed a friend of the court brief on behalf of the owner of the units. Basically, the brief argued that the right to lease one's property is a fundamental property right. "This fundamental right should not lightly be taken away from those who acquired real estate with those rights intact… Any attempt by a home owner association to take away the fundamental right to lease one's property without adequately accommodating existing owners' investment backed expectations should be considered unreasonable…"

The brief urged that, as is common with new ordinances adopted by local governments, it should at least be required that existing uses be "grandfathered in." If not, many owners of rental units would be forced to sell - a significantly negative option in a market such as this one. However, as noted, CAR's reasoning did not prevail at the appellate court.

On the legislative front, CAR introduced a bill, AB 2259 (Mullin) which would have provided that a no-rental rule adopted after Jan. 1, 2009 would not affect units that were purchased prior to the passage of such rule. The bill passed both houses of the state legislature, but was vetoed by Gov. Schwarzenegger. His message stated that such matters were best decided at the HOA level.

This year CAR is sponsoring AB 1927 (Knight). In original form it required that it would take a 2/3 vote of an association membership to impose rental prohibition rules. That has been amended to say that the vote must be according to an association's existing governing rules. The bill seems likely to pass. No one knows what the Governor will do with this one.

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  About the author, Bob Hunt

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.