New Law Limits Rental Restrictions in Condo Projects

new law

A new law became effective on January1, 2021, that impacts common interest developments (“CIDs”) (including condo projects and planned developments) and homeowners associations (“HOAs”) in California.  Assembly Bill 3182 adds Civil Code Section 4741 to the Davis-Stirling Common Interest Development Act (“Davis-Stirling Act”), which is the primary body of law governing CIDs and HOAs in California.

The new law is controversial because it limits the right of HOAs to impose what many believe are reasonable and necessary restrictions on rentals in CIDs and requires HOAs to amend their governing documents to conform to the new law.

New Civil Code Section 4741 includes the following key provisions:

  • The governing documents of a CID shall not prohibit or unreasonably restrict the rental of a unit. The governing documents include the project declaration (“CC&Rs”), HOA bylaws, HOA rules and related documents.
  • The maximum number of rentals permitted in a CID cannot be capped at less than 25% of the units in the project. Rentals of accessory dwelling units (ADUs) are exempt from the cap.
  • Perhaps most significant is that minimum lease terms cannot be greater than 30 days. Typical minimum lease terms of 6 months or 1 year are no longer valid.  An HOA can only require a minimum lease term of 30 days or less.
  • HOAs are required to amend their CC&Rs and other governing documents to conform to the requirements of Section 4741 by December 31, 2021.
  • An HOA that willfully violates these rules shall be liable to the applicant or other party for actual damages and for civil penalties of up to $1,000.

Note that the new Civil Code Section 4741 modifies Civil Code Section 4740 enacted in 2012.  Pursuant to Section 4740, rental restrictions that were already in place when an owner took title to a condo unit remained enforceable.  Under the new Section 4741, even existing rental restrictions are invalid if they do not comply with the new law.

While this new law appears to be a well-intentioned change designed to increase affordable housing, there are potentially negative consequences for HOAs and condo owners.  Minimum lease terms of 6 months or 1 year are very common, increase stability in a project and are not considered to be an unreasonable restriction on renting.

Requiring HOAs to amend their governing documents to comply with the new law is unusual and imposes a heavy burden on HOAs.  The new law could have just declared non-compliant provisions in governing documents unenforceable.  Instead, an affirmative obligation has been imposed on HOAs to amend their governing documents to conform to the new law.  This typically involves amending a project’s CC&Rs, which is time consuming, costly, and can be difficult due to owner apathy.

HOAs should review their governing documents, in particular the CC&Rs, to confirm whether they comply with the new Section 4741.  If there are any rental restrictions that do not comply, then those documents must be amended by December 31, 2021.  Of particular concern are typical minimum lease terms of 6 months or 1 year.  As these provisions are rendered unenforceable, this could leave an HOA without any minimum term for rentals.  The CC&Rs may be amended to include a 30-day minimum lease term as permitted by the new law.

While the HOA board of directors can typically amend the HOA rules and regulations, amendment of the CC&Rs requires compliance with the Davis-Stirling Act, including voting by secret ballot and related procedures, which can take several months to accomplish.  The amendment process should be started soon so it may be completed by December 31, 2021.

Please contact Jay Drake for assistance with amending governing documents to comply with the new law.

 

Authored by Reuben, Junius & Rose, LLP Attorney Jay Drake.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Recent California Condo/HOA Laws

Homeowners Association

The Davis-Stirling Common Interest Development Act (“Davis-Stirling Act”) is the primary body of law governing condo projects and homeowners associations (“HOAs”) in California. The state legislature enacted several bills that went into effect in 2020 that affect common interest developments (CIDs) such as condominium projects. The following is a brief summary of some recent changes to the Davis-Stirling Act (California Civil Code Section 4000 et seq.).

Senate Bill 323 – HOA Elections

This bill amends Sections 5100, 5105, 5110, 5115, 5125, 5145, and 5200 of, and adds Section 5910.1 to, the California Civil Code, relating to CIDs. This bill adds significant new requirements to the HOA election process. A few highlights: The ability of an HOA to impose conditions on a member’s eligibility to vote are constrained; while an HOA can disqualify a candidate from running for the HOA board of directors if that person is not a member of the HOA and for other specified reasons, the allowable grounds for disqualification are limited; inspectors of elections and ballots must be independent third parties; members’ email addresses must be included in the HOA membership list (unless a member opts out in writing). HOAs must make changes to their election rules to implement the requirements of SB 323.

Senate Bill 326

Adds Sections 5551 and 5986 to, and amends Section 6150 of, the California Civil Code.

Section 5551 – Inspection of Balconies

This new law applies to condo buildings with three or more units. It requires HOAs to perform periodic inspections of all exterior elevated elements that are more than six feet off the ground and supported in substantial part by wood or wood-based products, such as balconies, decks, stairways and walkways. These inspections must be performed by a licensed structural engineer or architect, and be completed no later than 2025, and thereafter at least every nine years.

Sections 5986 and 6150 – Authority to Commence Legal Proceedings

These laws prohibit, with certain exceptions, an HOA’s governing documents from limiting an HOA board’s authority to commence legal proceedings against a declarant, developer, or builder of a CID. Members of an HOA must be provided with a notice specifying, among other things, that a meeting will take place to discuss problems that may lead to the filing of a civil action against a declarant, developer, or builder of a CID, which notice must inform members that the potential impacts of filing a civil action, including financial, to the HOA and its members will be discussed at the meeting.

Assembly Bill 670 – Accessory Dwelling Units

This bill adds Section 4751 to the California Civil Code. This law renders void any provision in an HOA’s governing documents that prohibits the construction or use of an “accessory dwelling unit” (ADU) on a single-family lot. An association may enact reasonable restrictions regulating ADUs so long as they do not effectively prohibit or unreasonably increase the cost to construct an ADU. This new law applies primarily to planned developments with single family lots that are separately owned, and is not applicable to most condo projects.

Senate Bill 652 – Display of Religious Items

This bill adds Sections 1940.45 and 4706 to the California Civil Code. Subject to specified exceptions, this law prohibits the governing documents of a CID from banning the display of religious items on the entry door or entry door frame of a member’s unit. A religious item must be displayed because of a sincerely held religious belief and may not, individually or in combination with any other displayed religious item, exceed the lessor of 36×12 square inches or the size of the door.

 

 

Authored by Reuben, Junius & Rose, LLP Attorney Jay Drake.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

New State Condo Law Protects HOAs from Financial Fraud and Embezzlement

Responding to reported cases of fraud and embezzlement against homeowners associations (“HOAs”), the California Legislature enacted Assembly Bill 2912 (“AB 2912”), which became effective on January 1, 2019.  AB 2912 amends the Davis-Stirling Common Interest Development Act by adding safeguards to protect HOAs for common interest developments by increasing HOA board of directors (“Board”) oversight over the HOA’s financial accounts, establishing tighter control over monetary transfers, and generally protecting HOAs from financial fraud.

The key provisions of AB 2912 are summarized below:

  • Civil Code Section 5380 has been amended to prohibit an HOA’s managing agent from making transfers of greater than Ten Thousand Dollars ($10,000) or five percent (5%) of an HOA’s total combined reserve and operating account deposits, whichever is lower, without prior written approval of the Board.
  • Civil Code Section 5500 now requires an HOA Board to review the HOA’s financial statements monthly (rather than quarterly under the prior law).  The Board’s review must now include more complete financial statements and HOA account records.
  • Civil Code Section 5806 requires that HOAs maintain fidelity bond insurance providing coverage for dishonest acts, including computer fraud and funds transfer fraud, by an HOA’s managing agent and their employees, in addition to the HOAs’ directors, officers and employees.  The coverage must be in an amount equal to or more than the combined amount of the reserves of the HOA and the total assessments of the HOA for three (3) months.

HOA Boards and managers should review their procedures to make sure they comply with the new legal requirements.  While AB 2912 may increase the burden on HOA Boards and HOA managers, the new rules will help to ensure that HOAs maintain control over their finances and protect the investments of home owners.

 

Authored by Reuben, Junius & Rose, LLP  Attorney Jay Drake

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Is the San Francisco Condo Lottery Dead?

Prior to 2013, the City of San Francisco (City) implemented an annual condo conversion lottery system for 2-6 unit residential and mixed-use properties. But with the lottery resulting in a backlog of applications extending well over a decade, the Board of Supervisors passed Ordinance No. 117-13, ushering in changes to Article 9 of the City’s Subdivision Code (San Francisco Subdivision Code, § 1300, et seq.) and temporarily supplanting the lottery system with an “Expedited Conversion” program (the ECP). The following summarizes the scope of the ECP, its current status, and what property owners hoping to accomplish a condo conversion should be prepared for in the coming years.

The ECP halted the conversion lottery program for a minimum of 10 years, and was intended to allow properties stuck in lottery purgatory to convert to condos over the course of a 7-year period. Under the ECP, the Department of Public Works was required to stop accepting and processing new condo conversion applications for properties that would otherwise be subject to the lottery. (Subdivision Code § 1396.5)

Controversially, the ECP also required applicants to offer binding, lifetime leases to all tenants who do not own the property in which they reside (“Tenants”), and included a poison pill that would essentially suspend the ECP in the event litigation were filed challenging the legality of the ECP. (Subdivision Code §§ 1396.4, 1396.5) In light of the lifetime lease provision, such a legal challenge was considered at the time to be a fait accompli.

Sure enough, in June 2017, a federal lawsuit was filed by San Francisco property owners against the City in the Northern District of California. The lawsuit, which challenges the constitutionality of the ECP’s lifetime lease provision, brought the vast majority of the ECP to an abrupt halt. This matter is now at the court of appeals, with no timeline for resolution.

As outlined by the Department of Public Works, the impacts of the ECP’s suspension for various categories of ECP applications are as follows:

Notably, 2-unit, owner-occupied residential buildings are not subject to the ECP and may bypass the lottery system altogether. With regard to such properties, when the separate owners of each unit have occupied the building for at least 1 year they may submit an application for condo conversion. More information for 2-unit, owner-occupied condo conversions can be found at the Department of Public Works’s website (Residential Condominium Conversion Application MaterialsTwo Unit Owner Occupied Conversions).

Barring further changes approved by the Board of Supervisors or court action, the Department of Public Works will not begin accepting new condo conversion applications, nor conduct a condo conversion lottery, until at least 2024. Yet again, local property owners are left to the mercy of the City and court system to determine their property rights.

 

Authored by Reuben, Junius & Rose, LLP  Attorney Michael Corbett

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.