Condo Owners Exempt from HOA Rental Prohibitions Adopted After Purchase, Court Rules

rental

The 4th District Court of Appeals has resolved an ambiguity in the intent and enforceability of Civil Code Section 4740, a statute within the Davis-Stirling Act (“Act”) placing limitations on rental prohibitions within common interest developments (“CID”) in California. The court’s ruling is a victory for owners of residential condominiums currently renting units in a manner that their homeowners association (“HOA”) seeks to prohibit through proposed changes to the CC&Rs, bylaws, rules, or related documents (collectively, the “Governing Documents”) of the HOA.

In Brown v. Montage at Mission Hills, Inc. (21 C.D.O.S. 8590), certified for publication on August 20, 2021, the court held that, pursuant to Section 4740(a), an HOA’s amendment to its Governing Documents prohibiting short-term rentals of less than 30 days (“STRs”) was unenforceable against an owner that had been using her unit for STRs the previous 16 years.

Civil Code section 4740(a) states that an owner of a property in a CID shall not be subject to a provision in its regulations “that prohibits the rental or leasing of any of the separate interests in that common interest development” un­less that provision “was effective prior to the date the owner acquired title to their separate interest.”

The trial court agreed with the HOA that Section 4740 precluded CIDs from imposing complete bans on renting, and that its prohibition on STRs was merely a restriction on rent­ing. The Court of Appeal reversed that ruling, finding the meaning of section 4740 to be unclear, ambiguous, and in need of closer scrutiny.

The ambiguity lied in two reasonable, but conflicting, interpretations of the statute’s meaning: on the one hand, if a regulation forbids a specific category of rentals, such as STRs, that regulation “prohibits” that type of rental, even if it does not prohibit all forms of rentals; on the other hand, Section 4740(a) could be read to forbid only outright “prohibitions” on leasing, but not “restrictions” on leasing that fall short of a complete ban on all leasing.

To resolve these conflicting interpretations, the court considered both the legislative history of Section 4740, as well as other provisions within the Act’s statutory scheme that imposed restrictions and/or prohibitions of certain actions or conduct.

While the court acknowledged that some statutes within the Act expressly created distinctions between “restrictions” and “prohibitions”, it also found that the legislative history of section 4740 indicated that the Legislature intended broad protection for owners against restrictions on renting, includ­ing restrictions against STRs. Further, the legislative history indicated that the Legisla­ture’s intention was to ensure that unit owners within CIDs maintained all of the rental rights they had at the time they purchased their unit.

In seeking guidance from both the entire statutory scheme of the Act and the legislative intent behind Section 4740, the court was required to “choose the construction that comports most closely with the Legislature’s apparent intent.” (Smith v. Superior Court (2006) 39 Cal.4th 77, 88) With this directive, the court determined the goal of Section 4740 is to exempt CID unit owners from any kind of rental prohibition or restric­tion that did not exist when the owner acquired title to the unit.

Notably, the court cited the opinion of the Legislative Counsel regarding section 4740’s effect on rental prohibitions in CIDs, including prohibitions against STRs, at the time of the statute’s enactment in 2012. The Legislative Counsel opined that a unit owner within a CID is subject to a provision of, or amendment to, Governing Documents that prohibits an owner from renting out their unit only if either (1) the prohibition took effect before the owner acquired title to his or her separate interest in that CID, or (2) the owner consented to the Governing Documents or amendment con­taining that provision.

In Brown, HOA respondent Montage nonetheless argued its STR prohibition was permissible due to “public policy considerations.” Montage observed that individual property owner’s rights must some­times give way to the public interest and the right of CIDs to decide their rules and restrictions. However, relying on the public policy considerations given priority by the Legislature when it adopted Section 4740, the court found the statute to have been enacted to protect “the rights of CID own­ers to rent or lease their properties, as the rights existed at the time they acquired them,” and that its goal was to ensure that “the right of an owner to rent or lease his or her separate interest [in a CID] shall be the same as when the owner purchased his or her separate interest throughout the life of ownership.” (Sen. Com. on Judiciary, Analysis of Sen. Bill No. 150 (2011-2012 Reg. Sess.) as amended Apr. 25, 2011.) (Italics added.)

In other words, a residential condominium owner will not be subject to amendments to Governing Documents prohibiting a specific form of leasing – including without limitation STRs – otherwise allowed at the time such owner first purchased their unit. An owner who acquired title prior to the HOA’s adoption of such a rental prohibition would be exempt from the same unless the owner waived this right by formally voting in favor of the proposed prohibition.

The Brown appeal was pending while the Legislature enacted Civil Code Section 4741, a statute that was the subject of an e-update by this firm earlier in the year.  Section 4741 allows an HOA to adopt and enforce a provision in its Governing Documents that prohibits transient or STRs of units within its CID for a period of 30 days or less. (Civ. Code, § 4741, subd. (c)). However, as pointed out by the Brown ruling, Section 4741 expressly provides that, in ac­cordance with Section 4740, Section 4741 does not change the right of an owner of a separate interest who acquired title to their separate interest before the effective date of this section to rent or lease their property. (Civ. Code, § 4741, subd. (h)).

 

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.

Proposed State Law Allows Term Limits for HOA Board of Directors

HOA

A homeowners association (“HOA”) is required to hold elections for its board of directors (“Board”) when a seat becomes available.  The Davis-Stirling Act specifies that HOA elections must conform to certain rules and procedures.  A Board can set qualifications for nominees running for the Board, but there are only a narrow set of reasons why a Board can disqualify a person from serving on the Board.  Reasons for disqualification include failure to pay HOA assessments, circumstances where a member of the individual’s household would be serving concurrently on the Board, and, in certain situations, the individual’s past criminal convictions.

Senate Bill 432 currently processing through the California State legislature, if enacted, would add another factor that would disqualify an HOA member from running for the Board:  if an individual has served the maximum number of terms or sequential terms permitted by the HOA.  An HOA is not required to impose term limits for the Board, but if the HOA has term limits, it can enforce them and disqualify a person from running for an additional term.

Senate Bill 432 would also make other technical changes to HOA election rules, including requirements for inspectors of elections, Board candidate requirements, requiring an HOA to maintain election materials for one year after the election, and noticing requirements.

We will follow Senate Bill 432 as it works its way through the State legislature and provide another update if it is finally passed and enacted.

 

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.

No Parking? No Problem. Property Owner Not Liable for Failure to Provide On-Site Parking

on-site

A case recently discussed a property owner’s duty to a third party visitor, more specifically a possible duty to a third party who incurs an off-property injury due to an alleged deficiency at the owner’s property itself.  In Issakhani v. Shadow Glen Homeowners Association, Inc. (“HOA”), the plaintiff tried to park at the property (owned by the HOA) but there was no more guest parking available (and likely too few guest parking spaces to begin with at the property), so she parked across the busy street at an off-site location.  63 Cal.App.5th 917 (2021).  Plaintiff jaywalked to cross the street to get to the property and was hit by a car and suffered severe injuries.  The Court of Appeal ultimately held that the property owner did not have a duty of care to protect the plaintiff from an accident that occurred as she travelled to the premises.

The Court analyzed the standards for negligence and duty of care.  Claims for negligence or premises liability for injury at a property rely on the same analysis – was there a duty of care?  Was there a breach of that duty?  If yes to the first two, was such breach the cause of the person’s injuries?  The Court referenced the common law that a property owner does have a duty to maintain the land in its possession and control in a reasonably safe condition as to avoid exposing others to an unreasonable risk of injury.  The Court elaborated that such duty of care can extend to a responsibility to avoid exposing persons to risks of injury that occurs off-site if the landowner’s property is maintained in such a manner as to expose persons to an unreasonable risk of injury off-site.

Here, the Court did state that a landowner has a duty of care not to maintain conditions on its property that exacerbated the dangers of invitees entering or exiting the property.  However, they rejected the theory that the absence of adequate on-site parking, by itself, amounted to a condition on the property that exacerbates the off-site danger to invitees and gives rise to an actionable duty.  They found that although there was a foreseeability of harm to the plaintiff with reasonable degree of certainty due to lack of sufficient parking and possible injury when coming to the property, there was not a closeness of connection between the defendant’s conduct and the injury suffered.  More specifically, they found that the plaintiff’s actions – selecting an off-site parking location on the far side of a busy street and then jaywalking – was more a product of plaintiff’s decisions rather than simply a lack of on-site parking at the HOA’s property.

In addition to the analysis of common law elements, the Court also relied on a prior case which directly held that a landowner does not have a duty to provide invitees with on-site parking in order to protect from the dangers of crossing nearby streets to get to the property.  Finally, they found that public policy guarded against finding for the plaintiff as a property owner is sometimes limited by a finite amount of parking and cannot necessarily always provide enough on-site parking for guests and invitees.

Issakhani reminds us that a landowner should be cognizant of possible unsafe conditions at their property which could expose them to liability.  The Court will analyze whether there was a duty and foreseeability of harm to the third party based on the maintenance of one’s own property and a close connection between the risk and injury suffered.  This could also include liability for injuries off the property if directly caused by an unreasonable risk at one’s own property.  However, this case highlights that one cannot cover each and every contingency and someone’s choice to make a riskier decision (here jaywalking across a busy street) will likely not be held against the property owner.

 

Authored by Reuben, Junius & Rose, LLP Attorney Lindsay Petrone.

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 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.