101 Metro Drive, Suite 250  |  San Jose, CA  95110     Telephone: (408) 441-7800     Email: Jeffrey@hoa-law.com
The Case for Rental Restrictions

By Jeffrey A. Barnett, Esq.

Background

Can CC&Rs legally prohibit rentals in a private condominium project? California law is not totally settled on this point. There are compelling reasons why restrictions in the declaration of a common interest development prohibiting or restricting rentals should be upheld as reasonable and enforceable.

Directors, managers and attorneys who deal with homeowner associations on a daily basis know that in many ways rental use is incompatible with the operation of condominiums and planned developments.

For example, frequent move-ins and move-outs result in noise and property damage and create an atmosphere of impermanence and of a transitory lifestyle. Homeowners who are exposed to constant weekend moving vans do not feel they are living in a stable community.

Furthermore, property managers report a higher incidence of rule violations by tenants, including noise disturbances, unlawful storage, illegal parking and overburdening of the Association recreational facilities. These rule violations result from ignorance of the CC&RS, Bylaws and Association rules, or from an attitude of disrespect, borne of a lack of commitment to the success of the community. The report of S. Barton and C. Silverman entitled "Common Interest Homeowners' Associations Management Study" (1987) found on the basis of a statistical study that an increase in the percentage of rentals and the overall percentage of rentals in the subdivision correlated with a higher number of violations of the Association rules.

Rental occupancies are generally shorter than owner occupancies and do not allow for the development of long term personal relationships among neighbors. This is important in common interest developments where housing is dense, walls and entryways are shared, and the requirement for cooperation among neighbors is greater.

Although most exterior maintenance functions in common interest developments are performed by the homeowners association, exclusive use common areas are generally required to be maintained by the owner. See Civil Code Section 1364. Resident owners are more likely to carefully maintain exclusive use common areas than are tenants. In many subdivisions, exclusive use common areas are visible from other units or from the common area. Well maintained patios, decks and garages undoubtedly have an effect on the overall quality and appearance of a subdivision. Improper maintenance of these areas also can increase the Association's repair and replacement responsibilities for adjacent common area and can decrease property values.

Homeowners associations are dependent on a pool of qualified volunteers to staff the board of directors, officer positions and the committees of the association. Tenants are often ineligible to serve as directors and officers, so an increase in tenant occupancy diminishes the opportunity for able volunteers to perform these vital functions. While landlords can generally serve as directors and officers, their interest in the community is often secondary to their primary interest in an uninterrupted rental income stream, and the maintenance services supplied by the Association. This economic reality is demonstrated in those frequent instances where landlords side with their tenants against the Association in rule violation disputes. Put simply, resident owners generally are more likely to contribute to the success of the community by participating in Association affairs.

There is an implicit recognition of the differences between resident and non-resident occupants in the regulations with the Department of Real Estate. Those regulations require an on-site manager for apartments with more than 16 units. See 25 Cal. Admin. Code §66. A common interest development, can have far more rental units, and yet have no on-site or off-site manager.

The need for restrictions on rentals derives not only from a need to maintain the single-family residential character of the project, to reduce rule violations and to increase the pool of needed volunteers. Lenders providing funds for buyers and for refinancing owners routinely require disclosure of the number of non-owner occupied residences in the subdivision as part of their underwriting procedures, and the tenant population in the development is used as a basis for determining whether such financing will be provided, the amount of the cash deposit required and the cost of the funds. Liability and casualty insurance carriers for homeowner associations also require disclosure of the tenant population as part of their underwriting procedures, and presumably charge higher premiums or refuse to provide coverage for the Association as the tenant population increases.

Finally, restricting rentals in a common interest development increases the available stock of housing for first-time home buyers. Homeowners who are entering into the housing market must compete with investors who are speculating on market conditions to increase their capital, and are not personally in need of housing. Although restricting rentals in subdivision may flatten or depress property values by excluding investors, this economic cost must be balanced against the long-term interest of the owners in a stable, well-maintained community of homeowners. Restrictions on rentals in condominiums and planned developments are not founded on an arbitrary and irrational prejudice against tenants, but rather on a recognition of the very practical ways in which homeownership is beneficial to a community association and rentals are inimical to this unique form of housing.

The need for lease limitations in a common interest developments is necessary although there undoubtedly are many tenants who are respectful of association rules and of the rights of their neighbors. It is also obvious that homeownership as such is not a guarantee of responsible behavior. Yet, these possibilities do not make restrictions against leasing unreasonable. The success of condominiums and planned developments as a form of housing is still to be determined. The overriding interest of society in a more intense use of land for housing should predominate, and reasonable rules relating to rentals, including restrictions on the number of rentals or an outright ban on leasing should, in the author's view, be found reasonable and therefore enforceable.


The Reasonableness Test

Restrictions against leasing in a common interest development must be shown to be reasonable in order to be enforceable. The requirement of reasonableness derives from California Civil Code Sections 711 and 1354. Civil Code Section 711 provides:

Conditions restraining alienation, when repugnant to the interest created are void.

This statute has long been interpreted to invalidate only unreasonable restraints on the use of land.

Civil Code Section 1354(a) provides:

The covenants and restrictions in the declaration shall be enforceable equitable servitudes, unless unreasonable, and shall inure to the benefit of and bind all owners of separate interest in the development. Unless the declaration states otherwise, the servitudes may be enforced by any owner of a separate interest or by the Association, or by both.

In the case of City of Oceanside v. McKenna (1989) 215 CA3d, the California Court of Appeal (4th District) considered whether the covenants, conditions and restrictions of a publicly subsidized condominium project validly can require owner-occupancy and forbid the leasing of units. The project in question, Sea Village, was a condominium project that was developed as part of the City of Oceanside's Residential Waterfront Housing portion of the Downtown Redevelopment Project. The redevelopment project demolished residential dwelling units occupied by persons of low and moderate income and the condominium project was constructed by a private developer as replacement dwellings under the City's housing plan and pursuant to a Government Code statute which mandates replacement dwelling units for persons of low and moderate income to be constructed, if feasible. The City's Community Development Concision sold the property to the developer at below fair market value and made off site improvements and relocated a business. As part of the property sale, the developer agreed to CC&Rs that restricted the property for ten (10) years to owner occupancy and prohibited renting or leasing the property at any time, for any reason. The CC&Rs also included eligibility requirements for initial and subsequent purchasers of the units and contained provisions for prescreening of prospective purchasers by the Community Development Commission. The CC&Rs were designed to assure continued affordability of the condominiums and to foster an owner occupied environment in the redevelopment area.

The defendant in the Oceanside case, McKenna, purchased a unit in Sea Village, and subsequently attempted to rent his unit when faced with an employment transfer. The City of Oceanside and Community Development Commission filed suit to prohibit leasing by McKenna. The appeal followed a summary judgment which was entered in favor of the City and Community Development Commission. The Court of Appeal found that the summary judgment was properly granted to the City and Commission because the homeowner had not raised a triable issue of fact as to the reasonableness of the restriction prohibiting renting or leasing. The court found the restriction reasonable and therefore consistent with Civil Code Section 711, noting that in determining whether a restraint on alienation is unreasonable, the trial court must balance the reason for the restriction against the quantum of the restraint, and further holding that the greater the restraint, the stronger the justification must be to support it. Id. at p. 1427 citing Wellenkamp v. Bank of America (1978) 21 C3d 943, 948.

The Oceanside court found that the justification offered by the City and Commission was that the restriction prohibiting leasing would foster the redevelopment goals of providing a stabilized community of owner-occupied units for low and moderate income persons. The court took judicial notice of the fact that over the preceding two decades, at least, real estate prices in California had been rising rapidly and the market had attracted a wide range of investments. The court further noted that the provision of housing for low and moderate-income persons was in keeping with the public policy of the State.

The Oceanside court distinguished two prior cases involving private condominium projects, Laguna Royale Owners Assn. v. Darger (1981) 119 CA3d 670 and Bernardo Village Management Corp. v. Black (1980) 190 CA3d 153. The Laguna Royale court upheld the right of a private condominium homeowners association to impose reasonable transfer restrictions, but concluded under the facts of that case that the approval was unreasonably withheld. The Oceanside court noted that the restriction against rentals would be reasonable even under the test articulated in Laguna Royale for determining the reasonableness of restrictions in private condominium projects, namely: (1) whether the reason for the restriction is rationally related to the protection, preservation or proper operation of the property and the purposes of the Association as set forth in its governing instruments, and (2) whether the power was exercised in a fair and nondiscriminatory manner. An additional consideration according to Laguna Royale is the nature and severity of the consequences of application of the restriction (e.g., transfer declared void, estate forfeited, action for damages). Id. p. 1428.

The Oceanside court further recognized the rule articulated in the Laguna Royale decision, that condominium owners, as a group, have the authority to reasonably regulate the use of condominiums and that such control is essential to successful condominium living and the maintenance of the value of the property.

McKenna further challenged the restriction on the grounds that the prohibition against leasing did not have uniform and objective standards for its enforcement. The Oceanside court found that there was no evidence of anything arbitrary about the City's method of enforcement, which basically involved an initial attempt to contact the violator by the City's Housing Division and subsequently by the City Attorney.

Significantly, the Oceanside court noted in its Footnote I that the judiciary has recognized the unique problems of condominium living and the resulting need for more control over and limitations upon the right of the individual owner than in more traditional forms of property ownership.

The rationale of the Oceanside case upholding CC&Rs that prohibited leasing is equally applicable to private condominium projects. The policy interest of the State of California in promoting home ownership is pertinent to private housing as well as to housing that is subsidized with public funds. Restrictions against leasing are rationally related to the protection, preservation and proper operation of the property and purposes of the Association including the avoidance of frequent move-outs by neighbors in close proximity, the preservation of a pool of volunteers for Association service, the reduction of rule violations, facilitation of insurance and loan underwriting, and good property maintenance.


Forms of Restrictions

Homeowner associations have adopted a wide range of restraints, restrictions and controls on rentals and leasing. These include:

(1) Registration of tenants and their vehicles.

(2) Minimum lease terms, e.g. six (6) months.

(3) Mandatory lease provisions obligating the residents to comply with the governing documents and granting the Association the power to evict tenants for violations.

(4) Association discretionary approval or disapproval of prospective tenants, sometimes coupled with a "right of first refusal" to provide a substitute tenant on the same financial terms.

(5) A maximum percentage of rentals in the subdivision sometimes accompanied by a waiting list or lottery procedure and a "hardship" exception.

(6) A prohibition against a unit being leased out more than once by each owner.

(7) Complete prohibition of leases and rentals.


Conclusion

Restrictions on rentals in private condominium and planned development projects should be found reasonable. The restrictions must be consistent with other terms of the CC&RS. Courts have struck down lease restrictions when in conflict with other provisions of the CC&Rs stating that the terms are equally applicable to all members and uniform in their application and effect. The purposes of the restrictions should be as stated either in the CC&Rs or in the ballot materials presented to the members. A "grandfather clause" excluding application of the rental restrictions to existing owners improves the likelihood for passage of amendments restricting tenants and enhances the enforceability of the restriction. Restrictions on leasing or renting units must be enforced in a uniform and nondiscriminatory manner. Associations contemplating CC&R amendments to control rentals should consult with the Association's legal counsel regarding the advantage and disadvantage of various restraints.

Jeffrey A. Barnett is an attorney practicing in San Jose, California who specializes in representation of homeowner associations in both transactional and litigation matters.


Jeffrey A. Barnett, APC practices in the following cities and counties: San Jose, Santa Clara, Sunnyvale, Mountain View, Palo Alto, San Mateo, Foster City, Redwood City, Menlo Park, South San Francisco, Fremont, Milpitas, Santa Cruz, Scotts Valley, Los Gatos, Capitola, Watsonville, Monterey, Carmel, San Carlos, Alameda, San Mateo, San Benito, Stanislaus, and El Dorado.