Q: How can HOAs protect their community from becoming overrun with rentals?
Can CCRs be changed to include leasing prohibition or can it be amended to limit the number of rentals to a percentage of 30%? Can some communities enforce a 6-month to 2-year residency requirement after purchase, requiring the owner to live there? Or can a community require that the tenants be screened in advance? Is there a way to require transparency of ownership requirements to know who is purchasing homes – permanent residents or corporations. — G.R., Encinitas
A: There are many reasons why HOAs often wish to limit rentals. One reason is that FNMA and FHA lending guidelines do not approve loans in condominium HOAs with over 50% rentals. Another reason is the belief that tenants are less motivated to be good neighbors than resident owners.
The HOA world is at odds with the real estate profession on this issue. HOAs generally desire the ability to run their communities as they choose, while the California Association of Realtors has contended that HOAs have been too restrictive on rentals. CAR successfully sponsored two major additions to the Davis-Stirling Act in recent years, Civil Code Sections 4740 and 4741.
Civil Code 4740 requires that any ban on rentals only be applied to owners who take ownership after the date the ban is imposed, and requires that landlords promptly provide certain tenant information to the HOA.
Civil Code 4741 is much newer, banning “unreasonable” restrictions on rentals. It allows HOAs to impose a cap on rentals of no lower than 25% and allows the ban of rentals of 30 days or less. It prohibits governing document provisions that “prohibits, has the effect of prohibiting, or unreasonably restricts” rentals.
The problem is that we don’t have any definitions yet of what restrictions would be “unreasonable.” I expect that one test will be whether the primary purpose of a restriction is to discourage rentals.
So, for example, I don’t think a waiting period after purchase (in the past, typically one or two years) would pass muster because its purpose is to discourage investor buyers and favor owner-occupier buyers. On the other hand, a requirement that tenants sign a promise to obey the governing documents does not discourage rentals but encourages tenants to be good neighbors.
I don’t think HOAs could ban ownership of homes by entities. Many people use their family trusts or LLCs to own their property on their behalf. Perhaps your HOA’s legal counsel will have some other ideas.
As to screening of tenants, I am not aware of any law allowing HOA boards that power. Stock cooperatives often have approval powers over proposed shareholders, but not over who is the resident in the shareholder’s home.
G.R., the bottom line is that HOAs are allowed to adopt rules or restrictions that are intended to foster good neighborly behavior by tenants but may not adopt rules or restrictions designed to discourage rentals (other than the rental cap allowed by Civil Code 4741(b).
I wish I had more clear information to provide on this topic, but it will take a few more years for the courts to figure out the boundaries of “reasonableness.”
To read any California law, visit leginfo.legislature.ca.gov
Kelly G. Richardson CCAL is a Fellow of the College of Community Association Lawyers and Partner of Richardson Ober LLP, a California law firm known for community association advice. Send column questions to Kelly@roattorneys.com.
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