Rental Restrictions in the Governing Documents
Some Practical Tips
Daniel E. Angius, Esq. and Bradley J. Epstein, Esq.,ANGIUS & TERRY LLP
June 1998
The Problem
A dilemma that has confronted homeowners associations over the years relates to the perceived need to eliminate or limit the number of rental units in a given development. These concerns are often triggered by the perception that an increased number of renters has adverse implications with respect to the market value of the units, increased common area maintenance costs and, among other things, enforcement of association rules. Further, many lending institutions routinely inquire as to the percentage of rental units in a development when acting on a loan application submitted by a member of the association or a prospective purchaser of a unit in the development.
As a result of the foregoing considerations, a common question that is posed to management by Board members relates to whether the Association's governing documents can effectively be amended so as to eliminate or limit the number of rental units in the development. Predictably, the law is not entirely clear on this issue.
The Law
An association may be barred from enforcing a rental restriction if the restriction constitutes an unreasonable restraint on alienation. See, Civil Code Section 711. The rental restriction will be enforced by the courts unless it is found to be unreasonable. Civil Code Section 1354(a). In determining whether a restriction on leasing is an unreasonable restraint on alienation, courts must weigh the justification for the restraint against the restriction's impact on the owner's property rights. City of Oceanside v. McKenna (1989) 215 Cal.App.3d 1420.
To avoid being characterized as an unreasonable restraint on alienation, an association's enforcement of a rental restriction must be rationally related to the protection, preservation, and proper operation of the property and the purposes of the association as set forth in its governing instruments. See City of Oceanside v. McKenna (1989) 215 Cal.App.3d 1420 (Court concluded prohibition on leasing contained in the governing documents of a condominium development was reasonably related to the purposes for which the development was constructed.)
With respect to the foregoing, it is important to recognize that the Courts will generally uphold rental restrictions in circumstances in which such restrictions are included in the association's original governing documents. City of Oceanside v. McKenna (1989) 215 Cal.App.3d 1420. Because of this holding, among other things, rental restrictions are rarely challenged when they are included in the association's original governing documents.
Instead, legal challenges are typically asserted in circumstances in which the association seeks to enforce a rental restriction that is embodied in an amendment to the CC&R's that has been recorded after all of the homes in the development have been sold. Unfortunately, the court decisions that have addressed the validity of such rental restriction amendments are somewhat inconsistent and do not offer the clear road map that would otherwise be desirable.
For instance, the court in Ritchey v. Villa Nueva Condominium Assn. (1978) 81 Cal.App.3d 688, held that the association could enforce an amendment to the governing documents enacted subsequent to a would-be lessor's purchase which restricted leasing to persons 18 years of age and older. Ritchey, 81 Cal.App.3d at 695. In order to determine whether the association was permitted to enforce the leasing restriction, the court had to, and did, determine that the restriction was reasonable. Id. at 695-96. The court noted that at the time of the subject purchase, the governing documents "specifically provided that the bylaws could be amended, and that the owners would be subject to any reasonable amendment that was properly adopted. Id. at 696.
Conversely, the court in Rancho Santa Paula Mobilhome Park, Ltd. v. Evans (1994) 26 Cal.App.4th 1139 held that a rule prohibiting all subleasing imposed by a mobile home park owner was not enforceable. Rancho Santa Paula, 26 Cal.App.4th at 1141. Again, and in order to determine whether the mobile home park would be permitted to enforce the subleasing restriction, the court had to determine whether the restriction was reasonable. Id. at 1142. The court found that the subleasing restriction was unreasonable. Id. at 1141. In so holding, the court noted that the Ritchey court held a similar restriction to be "retroactively enforceable against a condominium owner." Id. at 1144. However, the Rancho Santa Paula court found Ritchey differed in three ways. Id. at 1144-45. First, the restriction in Ritchey was less restrictive, since it prohibited only residency by children rather than prohibiting all leasing. Id. at 1144. Second, the restriction was adopted by a vote of more than "75 percent of the ownership based on total value of all the units in the project." Id. The court distinguished the decision making process in an association from that in a mobile home park: In an association, an owner must submit to the future wishes of a community of which the owner is a part, and in which the owner shares a general community of interest. In contrast, in a mobile home park, an owner is subject to future regulations imposed by a park owner that may or may not have goals in accord with the homeowners. Id. The court found the third factor most important. Id. The restriction in Ritchey was actually only a right of first refusal, so it "was of no economic significance to the homeowner." Id.
Recommendations
Set forth below are certain recommendations that the Board of Directors should consider when attempting to formulate an amendment to the governing documents which purports to eliminate or limit the number of rental units in the development. Adoption of certain or all of these recommendations should increase the likelihood that the amendment, if challenged, will pass the test prescribed by the courts in City of Oceanside v. McKenna, Ritchey and Rancho Santa Paula.
* The amendment should have prospective application only. The rights of current landlords and tenants should not be affected.
* Consider drafting the amendment so that the rental restriction will only affect persons who become members of the association after the recordation of such amendment.
* The amendment should specifically set forth the purposes behind the rental restriction. For example, in upholding the rental restrictions in the governing documents, the court in City of Oceanside noted that the governing documents specifically provided that the purpose of the leasing restriction was "to achieve a stabilized community of owner-occupied dwelling units, to avoid artificial inflation of prices caused by resales by speculators and to prevent scarcity caused by vacant homes awaiting resale by speculators." City of Oceanside v. McKenna, 215 Cal.App.3d at 1425. Other legitimate purposes militating in favor of imposition of rental restrictions are above set forth.
* The amendment should prescribe a noncontroversial method of limiting the number of rental units. For example, and to the extent continued rental of units will be permitted, the amendment should prescribe a minimum lease term period (i.e., one year). In certain circumstances, it may be advisable to have the minimum lease term provisions comply with FNMA, FHA and/or VA guidelines.
* The amendment should contain an escape or hardship clause. Such clause would serve to give the Board of Directors grounds to make an exception to the rental restriction in cases of extreme hardship.
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