Guest blog authored by James P. Hillman, Esq. of White & MacDonald LLP.  Mr. Hillman’s firm represents residential and commercial property owners, community associations, developers, contractors and corporations throughout California in real estate and construction law matters.

Can I rent my condo or townhouse?

With Bay Area housing prices and rents rising alike, many owners of condos, townhouses or single-family homes located within common interest communities subject to Covenants, Conditions & Restrictions (CC&Rs) want to know if they can lease their property because their friends tell them that the HOA may say no way! HOA rental restrictions can be very important as circumstances in our lives change and when purchasing a new property.

Simply put, HOAs can limit an owner’s right to lease his or her property, but there are limits to those limits. If you want to rent out your property that’s part of an HOA-governed community, do your research and know the rental rules and restrictions. Knowing why the rules were created, might also help you make sense of it all.

What types of rental restrictions can a HOA adopt?

There are three main types of HOA limits/rental restrictions:

1. A minimum length of time

First, it is important to understand that municipalities can enact and enforce their own rules and regulations with respect to online rentals.

• San Francisco, for one, has implemented significant regulations
• A ballot measure in South Lake Tahoe severely limiting Airbnb type rentals was the subject of a vote on November 6, 2018 that is still too close to call
• Pacific Grove just passed a new law (Measure M) to phase out short-term rentals in residential areas outside of the coastal zone within 18 months

In addition to those governmental rules and regulations, the majority of CC&Rs impose a baseline length of time for which a residence can be leased such as a minimum of 30, 60, 90 or 180 days.  These types of restrictions have been common for many years and are put in place to prevent hotel-length stays or to curtail Airbnb and VRBO rentals. By and large, if these restrictions are in place at the time you purchase your residence, they are fully enforceable.

2. Percentage of homes that can be tenant occupied

Many HOAs place limits on the maximum number of homes that can be leased within a common interest development at any one time; i.e., only 30% of residences can be leased at any one time. The reason for these restrictions includes pride in ownership, financing limitations, insurance costs and high property management costs as just a few examples.

Pride in ownership

In general, it is believed that owners tend to take better care of their property and the surrounding community than renters. Short-term guests won’t treat the property and common areas with the same level of care and respect as those that are in it for the long(er) haul.

Financing limitations

A high percentage of rentals can adversely affect financing options for properties within a common interest development. In 2016, the FHA did relax some of its rules around condo financing, lowering its owner-occupancy requirements on existing developments from 50% to 35% provided the project meets certain conditions. “It is FHA’s position that owner-occupants serve to stabilize the financial viability of the projects and are less likely to default on their obligations to homeowner associations than non-owner occupants.” Most lender questionnaires request the number of owner-occupied properties because it is important for their lending rules. Some lenders shy away from HOAs that have a high percentage of rentals, especially if the buyer is purchasing a property that will be used as a rental. Lenders may be more flexible in the percentage of rental units if the buyer is purchasing the home as an owner-occupied property.

Insurance costs

In addition, some insurance companies that provide coverage to homeowners have restrictions when the rental percentage for HOAs reaches 30-35%. Many preferred insurers use this percentage because claims histories have shown that associations with high rental populations have more claims. As a result, associations with excessive rental units are charged higher insurance premiums.

High property management costs

Some property managers report that they find themselves spending more time resolving CC&R violations in communities that have a high percentage of rentals. So, if an association reaches 40% rentals or more, it can cause problems that HOAs with high owner-occupancy ratios usually don’t have. A few examples include:

• overtaxing the volunteer HOA management board
• getting complaints from owners that they cannot sell their property because a loan fell through because of the high rental ratios

3. Minimum length of owner occupancy

Some CC&Rs have a minimum length of time that a new owner must reside in the home before the owner obtains the right to lease his or her home.

Do new owners really have to wait to rent? Often, HOAs will want to meet a new owner and make sure they are invested in the community before allowing them to lease their home.  HOAs also might want to dissuade investors from scooping up a house with no intention to ever live in it and become a part of the community by making these investor-buyer types live there for a period of time before acquiring the ability to become a landlord.  If the CC&Rs contain a rental restriction stating that you have to wait a year before gaining the “right” to rent out your home, it is probably enforceable.

Davis-Stirling Act

The California legislature enacted The Davis-Stirling Act to specifically regulate and govern HOAs.  It provides, among other things, that for any lease restriction adopted after January 1, 2012, persons who own a home on the date the restriction becomes effective shall be exempt from the restriction. Anyone who purchased a unit after the effective date of the restriction will (with some exceptions) be subject to the restriction. However, the law does not apply to lease restrictions which were effective before January 1, 2012; such restrictions applied to owners before the law was adopted and they will continue to apply to all owners.

Typically, HOAs will require an owner to provide the name and contact information for any tenant. California Civil Code Section 4740(d) requires that this information be provided for new leases or rentals. This requirement is sometimes ignored, especially if an owner is aware that he or she is violating the CC&Rs by leasing the residence.  Sometimes owners who purposely violate the CC&Rs, will claim that an occupant is a temporary guest, a roommate or a family member.  These tactics are not proper under the law. Cities like Miami Beach, Los Angeles and San Francisco are cracking down on these illegal rentals.

Airbnb: Unwelcome guests from CNBC.

Disclosure

Be careful! California law Civil Code Section 4525(a)(9) requires that one of the disclosures to be provided to potential buyers includes a notice that the governing documents prohibit or restrict the rental or leasing of units or lots within the property.  Know your CC&RS!

Reasonable restrictions

Under California law, provisions set forth in the governing documents must be “reasonable” so it is common for rental restrictions set forth in CC&Rs to also include exceptions such as allowing for exemptions based on extraordinary circumstances.

Rental List

Is my Homeowners Association required to keep a waiting list of people that want to rent out their home?  Your HOA is not required to keep a waiting list but many do so it is best to ask.

Am I “Grandfathered” in?

The Davis-Stirling Act rental restrictions law applies only to lease restrictions (or amendments to existing restrictions) which become effective after January 1, 2012; thus, all persons who own residences within an association by the date the restriction becomes effective are exempt from those lease restrictions.  Even if these owners have never rented their property in the past.  In other words, all current owners are grandfathered in under any new lease restriction.  Owners who purchase after the adoption of the restriction will (with some limited exceptions) be subject to the restriction.

How to transfer unit/lot to preserve grandfathered rights

The Davis-Stirling Act preserves the right to rent or lease under certain circumstances.  These include transferring the property into a trust, a transfer to a spouse or a transfer under a probate order.  Beyond that, many rental restriction provisions set forth in CC&Rs specify how a property can be sold or transferred without sacrificing your grandfathered rental rights.  Talk to a legal professional to see if you can transfer ownership in a manner that will retain rental rights.

Can I get an exception?

So after reviewing all the CC&Rs, it looks like your HOA has rental restrictions and they apply to you! Is there anything else that can be done? Possibly. Generally speaking, as mentioned above, the law requires HOAs to act reasonably.  In order to meet this reasonable standard, most HOA rental restrictions will allow the HOA to grant a waiver from those restrictions under certain circumstances.  To get a waiver, you will probably need to demonstrate that you are facing exceptional circumstances. Two examples include financial hardships or perhaps a family member in dire need of housing that would like to rent your home.  It can’t hurt to ask your HOA.  It is worth a try!

Read your CC&Rs carefully

As part of a homeowners association, you have to follow the HOA’s rules. Each community is different and there is not a one size fits all answer. As discussed here, your HOA may have rules and restrictions for rental units. We advise homeowners and buyers to seek expert counsel when reviewing CC&Rs to ensure there are no gotchas when considering renting your property.

The above posting is for informational and intellectual use only. The above information does not constitute legal advice and no attorney-client relationship shall be formed on its basis.

The laws and interpretations of them are constantly changing so the information contained herein may not always be definite, complete or current. You should not act or forgo action on the basis of information contained in the above blog post.  You should always seek, obtain and consider specific legal advice with respect to your matters.