Recent Developments in California Law Relating to Rental Restrictions in CC&Rs: Unanswered Questions and Lurking Suspicions

By Mary M. Howell, Esq.
Of Counsel, The Epsten Firm, APC

…To allow a declaration to be amended but limit its applicability to subsequent purchasers would make little sense. A requirement for upholding covenants and restrictions in common interest developments is that they be uniformly applied and burden or benefit all interests evenly. (See, e.g., Nahrstedt, supra, 8 Cal.4th at p. 368 [restrictions must be “uniformly enforced”]; Rest.3d Property, Servitudes, § 6.10, com. f, p. 200.) This requirement would be severely undermined if only one segment of the condominium development were bound by the restriction. It would also, in effect, delay the benefit of the restriction or the amelioration of the harm addressed by the restriction until every current homeowner opposed to the restriction sold his or her interest. This would undermine the stability of the community, rather than promote stability as covenants and restrictions are intended to do…

Subjecting owners to use restrictions in amended declarations promotes stability within common interest developments. As we observed in Nahrstedt, “[u]se restrictions are an inherent part of any common interest development and are crucial to the stable, planned environment of any shared ownership arrangement.” (Nahrstedt, supra, 8 Cal.4th at p. 372.) … A prospective homeowner who purchases property in a common interest development should be aware that new rules and regulations may be adopted by the homeowners association either through the board’s rulemaking power or through the association’s amendment powers. (See, e.g., Randolph, Changing the Rules: Should Courts Limit the Power of Common Interest Communities to Alter Unit Owners’ Privileges in the Face of Vested Expectations? (1998) 38 Santa Clara L.Rev. 1081, 1126 [“There is no basis to argue that purchasers of units within common interest communities have an expectation that there will be no changes at all.”].) (Villa De Las Palmas Homeowners Assn. v. Terifaj , supra at 83-84.

Recently, however, the legislature has retreated from the Terifaj concept, most notably in the arena of rental restrictions.

The classic rental control provisions in CC&Rs generally fall into the following categories:

A statement that the project shall be limited to “single family residential use”

A limitation on the minimum duration of a rental (usually “minimum of 30 days”)

A limitation on the number of units which may be rented (a “rental cap”)

An indirect form of control, e.g., use fees/move-in, move-out fees

 All of these types of rental provisions are affected by recent amendments to Civil Code 4740 and enactment of Section 4741[1].  These provisions undermine, or have a potential and as yet undetermined impact on, much of existing case law on these issues.[2]

Single Family Residential Use.   In Santa Barbara v. Adamson (1980) 27 Cal.3d 123, the California Supreme Court struck down a city ordinance which limited occupancy to “family” and further distinguished between large families, and smaller families, requiring larger families to be “related by blood, marriage or adoption…”  The court held such a provision violated California’s right of privacy, and relied in part on its earlier statement in White v. Davis (1975) 13 Cal.3d 757 that incursions into privacy ”must be justified by a compelling [public] interest.”  Ibid. at 131.    This leaves unanswered the questions of what definition of “family” might survive the “compelling state interest” argument for municipal ordinances, and whether similar language in restrictive covenants would be similarly disfavored given the recent enactment of Civil Code Sections 4740 and 4741.

In Colony Hill v. Ghamaty (2006) 143 Cal.App.4^th 1156, the CC&Rs limited use to “single family dwelling purposes only…”.  The Association sued an owner who lived in the dwelling but apparently rented out bedrooms within the home to a diverse group of individuals.  The defendant homeowner offered a definition of “single family” use taken from local zoning ordinances, which defined “family” as “two or more persons related through blood, marriage or legal adoption … or unrelated persons who jointly occupy and have equal access to all areas of a dwelling unit and who function together as an integrated economic unit.”    The appellate court found no definition of “integrated economic unit” in its own research, but concluded the term could not reasonably be said to include the homeowner’s rentals:  the court pointed out there was no evidence of a prior relationship with all but one of his tenants, nor of a prior relationship between those tenants.  They were located using newspaper ads, and they had separate, oral, month-to-month agreements. 

Since the court did not separately define “integrated economic unit” one is left to wonder how many of the cited factors would need to be present to establish such a unit: what if most of the tenants, but not all, knew each other before commencing the rental?  What if all tenants were on a single, written lease?  What if the landlord did not live on the premises (which has the flavor of a boarding house, which most ordinances describe as a commercial use)?   How detailed can the association’s conditions be, before they run afoul of the privacy concerns articulated in City of Santa Barbara v. Adamson, supra?

Moreover, the legislative drive toward increasing access to rental opportunities might well mean that each proposed interpretation should be strictly scrutinized to assure it did not arbitrarily or capriciously impair an owner’s right to lease his premises, in whole or in part, to persons in need of housing.  Noting that Nahrstedt condemned as unenforceable restrictions violative of public policy, (see, e.g., the prefatory remarks to AB3182[3], [the source of current Civil Code sections 4740 and 4741]): could it be that Ghamaty is no longer good law?  As noted in the Adamson case, supra, there are less intrusive ways to address the complaints about tenant behavior than outlawing the tenancy on bases repugnant to the California right of privacy, such as enforcing nuisance restrictions.

Short Term Rentals.  A limitation on “short term rentals” (usually defined as a rental less than 30 days) is particularly popular in resort areas.  Mission Shores Ass’n. v. Pheil (2008) 166 Cal.App.4^th 789 concerned a Coachella Valley association’s enactment first of a rule, and subsequently of a CC&R amendment, limiting rentals to 30 days or more.  Defendant Pheil and his wife had previously purchased a unit to use as a vacation home and occasional rental.  The association argued that the restriction was “to ensure the property would not become akin to a hotel” rather than a residential community.  The court noted the trend toward limiting STR’s was common throughout California, and included city ordinances as well as CC&R amendments.  The court held that the imposition of a 30-day minimum lease provision was not arbitrary or capricious, did not “violate[] the law or a fundamental public policy or impose[] an undue burden on property…”  and accordingly upheld the amendment (and its enforceability against an owner taking title before enactment of the amendment, though the retroactive application issue was not specifically raised in the decision [4])

Section 4741 would also permit such a STR prohibition, but Section 4740, and the recent decision in Brown v. Montage at Mission Hills (2021) 68 Cal.App.5^th 124 make it clear that such a prohibition would only be enforceable against owners taking title prior to the enactment of the prohibition.  Brown concerned an owner in the same position as Pheil; she had taken title prior to the association’s enactment of a STR ban.  The owner sued, and the association countered with an argument that the language of 4740 should not be read to preclude an STR ban, because the ban was not a complete prohibition on rentals, but a limitation on the types of rentals.  In other words, owner was free to rent her unit for minimum periods in excess of 30 days.    The appellate court, while noting the ambiguity occasioned by the legislature’s use of the word “prohibition” rather than “restriction”, concluded that a review of Section 4740’s legislative history compelled the conclusion that the statute was intended to be broadly construed as limiting the right of association’s to restrict rentals:  “…[T]he legislative history indicates that the Legislature’s intention was to ensure that owners maintained all the rental and leasing rights they had at the time of purchase [citing to Legislative sources iterating the court’s conclusion.]”

Interestingly, the court went further: “We do not address whether an association could enact a generally applicable limitation on occupants (such as a noise restriction) or impose certain generally applicable requirements such as a fee for using a common facility, or housekeeping rules) that affect rental but do not directly prohibit “the rental or leasing” of the property…”  Ibid. at 132.  This indicates some significant questions still remain: Suppose an association “clarifies” its restriction on single family use by adding that tenants must comprise an “integrated economic unit” after an owner takes title: is such a “clarification” applicable to an owner who took title when the restrictions did not contain that term?  What if an association addresses the problem of accelerated deterioration of common area facilities based on rentals of ADU’s and JADU’s by enacting use fees for common area elements?  

In Watts v. Oak Shores Community Association (2015) 235 Cal.App.4^th 466, the court upheld an association’s imposition of fees (such as trash collection fees and amenity use fees) on owners who used their homes for STR purposes: “That short-term renters cost the Association more than long-term renters or permanent residents is not only supported by the evidence but experience and common sense places the matter beyond debate…”   Nevertheless, in light of the owners’ further challenge to the amount of such fees, the court took pains to note that the association had provided evidence on the amount of cost occasioned by such intensive use, that the quantum of evidence required was “nothing more than a reasonable good faith estimate of the amount of the fee necessary to defray the cost for which it is levied.”   Ibid. at 476.  We must ask now, what is the effect of 4740 and 4741 (and Brown) on this conclusion?  Is the imposition of such fees an improper disincentive to rentals?  Would such fees, in light of Brown, be applicable only to owners who took title after the enactment of such fees?  Or would the exception noted in Brown for “generally applicable requirements…such as a fee for using a common facility…” operate to allow such fees?

Further, given Section 4741(d)’s statement that for purposes of this section, ADU’s/JADU’s “shall not be construed as a separate interest” and further at (e) that a separate interest “shall not be counted as occupied by a renter if the separate interest, or the accessory dwelling unit or junior accessory dwelling unit” is occupied by the owner.  Does this mean that the association may not impose such a fee on the basis of more intensive use than was contemplated in budgets based on a lower occupancy? 

Rental Caps. Finally, some communities place a limit on the number of units which may be rented at any given time.  This is particularly significant in housing for older persons (specifically, 55+ housing, where federal law mandates that at least 80% of the occupied units must be occupied by at least one person over the age of 55.)  Failure to maintain that percentage, and to document the ages of residents, have led to forfeiture of senior status.  See Massaro v. Mainlands Sections 1 & 2 Civic Ass’n. (11^th Cir. 1993) 3 F.3d 1472.  Some senior housing communities have adopted a provision requiring 100% of the dwellings to be occupied by at least one person 55 or older.  Others (to avoid the temptation of income-strapped senior owners to rent to non-seniors who desire to live in calm, safe senior communities), have required all units to be owner-occupied.  How do such provisions fare under Section 4741(b), which provides that an association may not enforce a provision “that restricts the rental or lease of separate interests to less than 25% of the units”?  The argument could be made that a requirement that all units, whether owner-occupied or not, be occupied by a specified class of occupants (seniors and, under state law, “qualified permanent residents”) is not, per se, a cap of rentals.  But a similar argument (viz., that a STR rental provision was not a prohibition but a restriction) fell on deaf judicial ears in Brown, supra. 

In summary, we are left to wonder which of various articulated public policies will win the day: the public policy favoring free rentability v. complete prohibition on rentals in a low-income housing development to avoid speculation (City of Oceanside v. McKenna (1989) 215 Cal.App.3d 1420)?  The policy favoring uniform applicability of restrictions (Terifaj, supra) v. the recently-iterated public policy favoring broad rights to rent to address rental shortages and outlawing retroactive enforceability of rental prohibitions (Civil Code sections 4740/4741)?  The privacy right articulated in City of Santa Barbara v. Adamson, supra (which served to strike an ordinance narrowly defining “family” for rental purposes) v. the right to control rentals to fulfil a traditional notion of “single family residential” use (Colony Hill v. Ghamaty, supra)? 
And what of the general statement in Section 4741(a) that “unreasonable” restrictions are unenforceable: where does that leave a community with infrastructure issues (water supply, emergency vehicle access, antiquated piping): if the association has a genuine business need to limit occupancy, can that serve as a legitimate basis for a limit on high-density occupancies?

 Stay tuned for interesting developments.                

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[1] 4740(a):  “An owner of a separate interest in a common interest development shall not be subject to a provision in a governing document or an amendment to a governing document that prohibits the rental or leasing of any amendment to a governing document that prohibits the rental or leasing of any of the separate interests in that common interest development to a renter, lessee, or tenant unless that governing document, or amendment thereto, was effective prior to the date the owner acquired title to their separate interest…”

4741(a): “An owner of a separate interest in a common interest development shall not be subject to a provision in a governing document or an amendment [thereto]..that prohibits, has the effect of prohibiting, or unreasonably restricts the rental or leasing of any of the separate interest, accessory dwelling units, or junior accessory dwelling units in that common interest development…”

Section 4741 goes on to allow amendments/provisions which cap rentals at 25% or less of the separate interests, and to allow provisions which prohibit transient or short-term rental of a separate interest for a period of 30 days or less, and to provide that for purposes of these limitations, ADU’s and JADU’s are to be considered part of the separate interest.

[2] A further distinction must be made between a city’s zoning ordinances (see, e.g., Protect Our Neighborhoods v. City of Palm Springs (2022) 73 Cal.App.5^th 667 [upholding a city ordinance defining STRs as consistent with single-family use], College Area Renters & Landlord Assoc. v. City of San Diego (1996) 43 Cal.App.4^th 677 [striking city ordinance imposing different density requirements for owner-occupied and non-owner-occupied properties as violative of the equal protection clause])[2] and the apparent right of the Coastal Commission to veto any CC&R amendment (such as a short-term rental (STR) prohibition) by communities within the Commission’s jurisdiction (see Greenfield v. Mandalay Shores Community Ass’n. (2018) 21 Cal.App.5^th 896.  Since associations (as of today’s date) are not municipal or governmental entities, the applicability of these cases to association enactments is limited, as is limited right of the Coastal Commission to weigh in on rental restrictions/prohibitions.

[3] “We must marshal all available resources to address the housing and homelessness crisis.  There are millions of homes across the state that have the potential to be rented to Californians in need housing but that are prohibited from being leased under outdated homeowners association (HOA) rules.  AB 3182 prohibits rental bans in HOAs to allow homeowners who want to rent out their homes.”  Author’s Statement.

[4] The court also considered and approved a portion of the amendment which allowed the association to directly terminate the tenancy of individuals found to be in violation of relevant portions of the governing documents.  Mission Shores, supra, at796-797.