Responding to the concern that the rights of unit owners in a Common Interest Development (CID) to rent their units should be protected, the California legislature has enacted Senate Bill 150. This new statute limits prohibitions on the rental of units in CID. The new law will go into effect on January 1, 2012.
A homeowners association (HOA) for a CID may generally impose reasonable restrictions on rental or leasing of units in the project, such as minimum lease periods, requiring that a copy of a lease be provided to an HOA, and requiring that a lease be subject to the project’s governing documents (such as CC&Rs, Bylaws and HOA Rules and Regulations). Some HOAs have also adopted prohibitions on renting units in a project, including imposing a cap on the number of units that may be rented at any given time, or an outright prohibition of rentals.
Many HOAs believe that such rental prohibitions ensure that residents have a stake in their community, promote maintenance of the property and preserve property values. Moreover, Fannie Mae, Federal Housing Administration (FHA), and some banks and insurance providers, may also look at projects with high percentages of rentals in a negative light. This may limit the ability to obtain mortgage financing for units in such projects or result in higher insurance rates.
On the other hand, rental prohibitions may create hardships for unit owners who desire to rent their units when faced with family illness or death, job relocation, military service or other exigent circumstances. In the current housing market, it may take time to sell a unit, requiring an owner to temporarily rent until the unit is sold. Rental prohibitions may also prevent investors from buying and renting units, even when such investor-owners may help HOAs financially struggling due to owner bankruptcies and high vacancies. SB 150 has been somewhat controversial, with legitimate concerns being expressed by HOAs, unit owners and other interested parties.
The New Rules
SB 150 adds Section 1360.2 and amends Section 1368 of the California Civil Code, part of the Davis-Stirling Common Interest Development Act. The key points of SB 150 are:
- An owner of a CID unit shall not be subject to a restriction in a governing document that prohibits rental or leasing of that owner’s unit, unless such restriction was effective before that owner purchased his or her unit. Such owner would be exempt from a rental prohibition that became effective after the owner purchased his or her unit.
- The exemption from such rental prohibition applies to an owner who purchased his or her unit before the restriction became effective. Once the owner sells his or her unit, the new unit owner would be subject to such restriction. However, certain transfers involving family members, probate, trusts and business entities would not cause an existing exemption to be lost.
- An owner who would otherwise not be subject to a rental prohibition may consent to be subject to the restriction.
- Owners are required to disclose the existence of any such rental prohibition to prospective purchasers before sale of a unit.
A rental prohibition that becomes effective after January 1, 2012 will not apply to existing owners who purchased their unit before the restriction become effective – as the restriction was not in effect when they purchased their unit. New owners purchasing after January 1, 2012 would be subject to such restriction – as the restriction was in effect when they purchased their unit.
Since the new law is not effective until January 1, 2012, an HOA could impose a restriction and avoid the impact of SB 150 by modifying the project’s governing documents, so long as the restriction becomes effective before January 1, 2012. The typical approach would an amendment to the project CC&Rs.
If you have questions or would like further information on SB 150, please contact Jay Drake.
Special thanks to law clerk Melinda Sarjapur for her research on this topic.
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, 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.
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