BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 150 (Correa)
As Amended April 25, 2011
Hearing Date: May 10, 2011
Fiscal: No
Urgency: No
BCP
SUBJECT
Common Interest Developments
DESCRIPTION
This bill would provide that an owner of a separate interest in
a common interest development shall not be subject to a
provision in a governing document that prohibits the rental or
leasing of his or her unit, unless that provision was effective
prior to the date the owner acquired title.
BACKGROUND
A common interest development (CID) is a form of real estate
where each homeowner has an exclusive interest in a unit or lot
and a shared or undivided interest in a common area property.
The Davis-Stirling Common Interest Development Act provides the
legal framework under which common interest developments are
established and operate. In addition to the requirements of the
Act, each CID is governed according to the recorded
declarations, bylaws, and operating rules of the association.
These documents are referred to collectively as the governing
documents of the association.
Some CIDs have restrictions on renting out units. These
restrictions can take various forms, including limiting the
total number of rentals in the development to a set percentage,
requiring a minimum amount of time for leases, prohibiting
rental until a unit has been owner-occupied for at least a year,
and prohibiting renting outright.
(more)
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This bill, sponsored by the California Association of Realtors,
would respond to those restrictions by providing that an owner
of a separate interest in a common interest development shall
not be subject to a provision in a governing document that
prohibits the rental or leasing of his or her unit unless that
provision was effective prior to the date the owner acquired
title. This bill is nearly identical to AB 2259 (Mullin, 2008)
and similar to AB 1927 (Knight, 2010)<1>; both of those bills
were vetoed by Governor Schwarzenegger.
CHANGES TO EXISTING LAW
1. Existing law , the Davis-Stirling Common Interest
Development Act, defines and regulates CIDs, including the
association's governing documents. (Civ. Code Sec. 1350 et
seq.) "Governing documents" are defined as the declaration and
any other documents, such as bylaws, operating rules of the
association, articles of incorporation, or articles of
association, which govern the operation of the CID or
association. (Civ. Code Sec. 1351(j).)
Existing law requires a declaration, recorded on or after
January 1, 1986, to contain a legal description of the common
interest development, a specified statement, the name of the
association, and the restrictions on the use or enjoyment of
any portion of the common interest development that are
intended to be enforceable equitable servitudes. (Civ. Code
Sec. 1353(a)(1).)
Existing law provides that the covenants and restrictions in
the declaration shall be enforceable equitable servitudes,
unless unreasonable. (Civ. Code Sec. 1354(a).)
Existing law provides that any rule or regulation of an
association that arbitrarily or unreasonably restricts an
owner's ability to market his or her interest in a common
interest development is void. (Civ. Code Sec. 1368.1(a).)
This bill would provide that an owner of a separate interest
in a CID shall not be subject to a provision in a governing
document, or a provision in an amendment to a governing
document, that prohibits the rental or leasing of all or any
--------------------------
<1> AB 1927 sought to address the issue of rental restrictions
by providing that those restrictions are void unless approved by
a vote of the owners.
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of the separate interests in that CID to a renter, lessee, or
tenant unless that governing document, or amendment thereto,
was effective prior to the date the owner acquired title to
his or her separate interest.
This bill would allow an owner to expressly consent to a
governing document or an amendment to a governing document
that prohibits the rental or leasing of all or any of the
separate interests in the CID to a renter, lessee, or tenant.
This bill would provide that a separate interest of an owner
shall not be deemed to have terminated if the transfer by the
owner of all or part of the interest meets one or more of the
following: (1) the transfer is exempt from reassessment by the
county tax collector, as specified; or (2) the transfer is
exempt from the requirements to prepare and deliver a Real
Estate Transfer Disclosure Statement, as specified.
This bill would require an owner, prior to renting or leasing
his or her separate interest, to provide the association
verification of the date the owner acquired title to the
separate interest and the name and contact information of the
prospective tenant or the prospective tenant's representative.
This bill would state that the bill shall not be deemed to
revise, alter, or otherwise affect the voting process by which
a CID amends its governing documents.
This bill would find and declare that the rights of CID owners
to rent or lease their properties, as the rights existed at
the time they acquired them, should be protected by the State
of California, and the rights of subsequent owners should be
governed by the status of those rights at the time those
owners acquired their rights.
2. Existing law requires the owner of a separate interest to
provide specified disclosures to a prospective purchaser as
soon as practicable before transfer of title to a separate
interest. (Civ. Code Sec. 1368.)
This bill would state that if the governing documents contain
a provision that prohibits the rental or leasing of all or any
of the separate interests in the CID to a renter, lessee, or
tenant, the disclosure must contain a statement describing the
prohibition and its applicability.
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This bill would provide that the provisions of this bill do
not apply to a CID that is limited to industrial or commercial
uses by zoning or by a declaration of covenants, conditions,
and restrictions that has been recorded in the official
records of each county in which the CID is located.
COMMENT
1. Stated need for the bill
According to the author:
ÝSB 150] is intended to ensure that if an owner of a unit in
a common interest development (CID) has the right to rent
that unit at the time he or she purchases it, that
expectation is preserved as long as he or she owns the unit,
irrespective of any subsequent revision of governance
provisions effecting the right to rent. The central theme of
the bill is to protect the legitimate expectation of a
homeowner, which existed at the time he or she purchased a
dwelling in a CID, that he or she could rent the unit/home
in the future if economic or personal financial conditions
necessitated such a move to prevent the home from going into
foreclosure because it could not be sold or refinanced.
2. Protecting right to rent property
Similar to AB 2259 (Mullin, 2008), this bill would provide that
the owner of a separate interest (home or condominium) in a CID
is not subject to a provision in a government document that
prohibits the rental or leasing of that unit, unless that
provision was effective prior to the date the owner acquired
title. The California Association of Realtors, in support,
maintains that the bill "is intended to protect the right of
Common Interest Development Unit Owners to rent their unit if
such a right existed at the time they purchased it. . . .
Personal or financial challenges may be encountered that require
Ýowners] to re-locate at a time not of their choosing, and a
sale of his or her home is not possible in such a housing
environment. Renting the home may be the only alternative they
have to retain ownership."
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From a policy standpoint, the ability to rent one's home is a
key component of property ownership. For those homeowners who
are facing difficult economic times, renting their home and
moving in with a family member is one practical way to generate
additional income to pay the mortgage and avoid a foreclosure.
Rental of the home may also be preferable to a short sale (or
foreclosure) for owners who are required to relocate and owe
more on their home than the property is worth. In that
circumstance, a short sale could expose the owner to additional
liability and a reduction in credit score, while renting the
home could generate enough income to pay the mortgage and allow
the family to continue to own the property (and hopefully pay
down a sufficient amount of the mortgage so that there is equity
at some point in the future).
It should be noted that availability of rental housing is also
extremely important at a time when foreclosures have displaced
large numbers of California residents. If CIDs elect to
prohibit the rental of units in the near future, that
prohibition would reduce the amount of available housing for
displaced families. That prohibition could also lead to greater
foreclosures within the CID because no rental income will be
available to help pay mortgages - that greater number of
foreclosures could place an even greater strain on the resources
of CIDs throughout the state.
3. Opposition's concerns
The Community Associations Institute (CAI), in opposition,
contends that the rules and regulations of a homeowner's
association must be fluid, and that "Ýr]enter restrictions
should always be subject to review, debate and approval by all
owners. Owners should decide on imposing a restriction based on
their individual association needs and practices." CAI also
maintains that "Ýr]enter restrictions are a property right that
periodically should be uniformly changed based on market and
hardship conditions."
Despite those concerns, it is unclear why there would be an
objection to having tenants, as opposed to the property owner,
live in a particular home. If the concern is based upon a
belief that it is better for the neighborhood for the owner to
occupy the property, that belief overlooks the fact that many
families do live in the same community for a lifetime but are
unable (for various reasons) to purchase a home. In light of
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the high number of foreclosures and the previous popularity of
"flipping" homes, the fact that a neighborhood is full of
property owners does not mean that those same individuals will
own those homes for years to come. Embracing a policy that
furthers the belief that renters do not maintain a certain level
of life-quality would unjustly discriminate against a large
number of California residents who choose to rent their home,
are contributing members not only to their neighborhoods but
their communities, and who do, in fact, have personal ties to
the area in which they live. Furthermore, it would appear to be
a preferable outcome to have someone living in a property as
opposed to having the property go to foreclosure and potentially
be vacant for months.
4. Federal Housing Administration (FHA) financing limitations
To qualify for FHA financing, at least 50 percent of the units
in a CID must be owner-occupied, or sold to owners who intend to
occupy the unit. It is unclear how many CIDs approach or exceed
that amount, and whether this bill could cause some CIDs to
exceed that threshold. It should be noted that FHA recently
waived certain leasing restrictions, and that it is arguably
possible that the 50 percent restriction will be eliminated as
well in the near future.
5. Relevant court cases
There are two relevant cases on the issue of rental
restrictions. The second case, Laguna Royale Owners
Asssociation v. Darger, sets forth the criteria that would
arguably be used to test the ability of an association to deny
an owner the ability to rent his or her home.
a. Harrison v. Sierra Dawn Estates
The first case, Harrison v. Sierra Dawn Estates involved rent
restrictions approved by the affirmative vote of 55 percent of
the lots in Sierra Dawn Estates (a common interest development
in Hemet, CA). Those restrictions provided that no owner
could rent more than three homes in Sierra Dawn at a given
time, that an owner wishing to rent a home would have to
reside in the home or keep it vacant for a year after purchase
before renting it, and that no more than 20 percent of all
homes within the community could be rented at any given time
(although more than 20 percent could be rented if the hardship
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of the owner required it). The Riverside Superior Court
upheld those restrictions in a judgment dated January 9, 2008.
b. Laguna Royale Owners Association v. Darger
The second case, Laguna Royale Owners Association v. Darger
(1981) 119 Cal.App.3d 670, formulated the criteria for testing
the reasonableness of an exercise of power by an association
to deny a homeowner the ability to rent their unit. The
criteria formulated by the Fourth District Court of Appeal
are:
(1) whether the reason for withholding approval 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. Another consideration might be
the nature and severity of the consequences of
application of the restriction (e.g., transfer declared
void, estate forfeited, action for damages). (Id. at
684, citations omitted.)
That case involved an association denying several condominium
owners permission to transfer their property interests to a
third party (citing the occupancy agreement). The court
applied the above criteria and found that the association
unreasonably refused the transfer.
6. Amendment required to conform to AB 2259 as it was approved
by the Legislature
The author's office notes that the April 25, 2011 amendments
sought to "revise the initial version of SB 150 to the version
of AB 2259 that passed the Senate in 2008." Staff notes that
while the SB 150 is nearly identical to that version of AB 2259,
a substantive amendment regarding retroactivity that was
accepted in this Committee was omitted. Specifically, this
Committee's analysis noted:
The author's office states that their intent is to only apply
the bill to restrictions that are imposed on or after the date
of enactment of this bill. As the bill currently could be
read to invalidate restrictions imposed prior to the date of
enactment, the following amendment is required to conform the
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bill to the author's intent:
. . .
That amendment ensures no interference with any subsequent
appeal in Sierra Dawn, and would prevent the invalidation of
existing restrictions within an association.
Consistent with the author's intent to mirror AB 2259, as
approved by the Senate and Assembly, and to ensure that this
bill is applied prospectively, the following amendment is
suggested:
Suggested amendment:
On page 3, line 26, insert:
(f) This section shall apply only to provision in a governing
document, or provision in an amendment to a governing
document, that becomes effective on or after January 1, 2012.
It should be noted that the Executive Council of Homeowners
(ECHO), in a support if amended position, "agrees that if an
owner had the right to rent or lease their separate interest at
the time of purchase, that right should be 'grandfathered' if
any change to the governing documents that would restrict that
right should occur," but notes concern that "the current
language of the bill does not explicitly state that the
provisions of the bill will be prospective." The above suggested
amendment regarding retroactivity would appear to address ECHO's
concern.
7. Specific disclosure of rental restriction to be given
before transfer of title
Under existing law, purchasers of separate interests within a
CID must receive copies of the governing documents, certain
financial reports, amount of the association's current regular
and special assessments and fees, unresolved notices of
violation, and other related information. Those disclosures
must be delivered as soon as practicable before transfer of
title or the execution of a real property sales contract.
This bill would augment those disclosures by requiring a
statement describing any prohibition on rental or leasing of a
separate interest if such a prohibition is contained within the
governing documents. While a purchaser may overlook such a
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provision buried in the governing documents, the required
disclosure would flag any such restriction for his or her
consideration.
8. Veto of AB 2259 (Mullin, 2008) and AB 1927 (Knight, 2010)
As noted above, this bill is nearly identical to AB 2259
(Mullin, 2008). The Governor's veto message for AB 2259 stated:
This bill alters the basic tenets under which CIDs and HOAs
are formed and operated. While my support of property
rights is unwavering, the CID creates a unique community
model that is unlike the standard single family home in a
traditional neighborhood. Property owners and residents that
purchase and live in a CID governed by an HOA have agreed to
live under a common set of rules and guidelines governed by
a democratic process. It is best, as current law allows,
for the owner-members of the HOA to determine what is best
for their communities.
In response to the veto of AB 2259, AB 1927 sought to address
the issue of rental restrictions by providing those restrictions
are void unless approved by a vote of the owners. The
Governor's veto message of AB 1927 stated:
The right to rent or lease a unit is an important right for
a homeowner. However, there is insufficient evidence to
indicate that rental restrictions are currently a growing
or widespread problem to justify such a wide-ranging rule
change. Furthermore, current provisions in law provide for
an amendment process for HOAs to make rule changes.
Therefore, I believe this bill is unnecessary at this time.
Support : None Known
Opposition : Community Associations Institute
HISTORY
Source : California Association of Realtors
Related Pending Legislation : None Known
Prior Legislation :
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AB 2259 (Mullin, 2008), See Comment 7.
AB 1927 (Knight, 2010), See Comment 7.
Prior Vote : Senate Committee on Transportation and Housing
(Ayes 8, Noes 0)
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