BILL ANALYSIS Ó
SB 150
Page 1
Date of Hearing: June 21, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 150 (Correa) - As Amended: June 9, 2011
SENATE VOTE : 39-0
SUBJECT : Common interest developments: Leasing separate
interests
KEY ISSUE : Should the owner of a separate interest in a commON
interest development be permitted to lease his or her unit,
unless the community's governing documents prohibited leasing at
the time that the owner acquired title?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill provides that if the governing documents of a Common
Interest Development (CID) do not restrict an owner's ability to
lease his or her separate interest in the CID at the time that
the owner acquires that interest, then the owner cannot be
prevented from leasing the interest if the governing documents
are later changed to prohibit leasing. The owner may only be
prevented from leasing the interest if he or she consents to a
subsequent change in the governing documents. Previous attempts
to legislate on this matter have faltered on the conflict
between the right of an owner to lease his or her property, on
the one hand, and the right of a majority of the owners in a CID
to democratically enact rules and regulations that govern the
association. In the past, some stakeholders have argued that
the right to lease one's property is so fundamental that any
provision, whenever adopted, should be void. Others,
conversely, have argued that owners take their interest in a CID
subject to both existing and future regulations, so long at the
latter are reasonable and duly adopted. This bill navigates
these potentially roiling waters by preserving the CID's right
to adopt leasing restrictions, while at the same time ensuring
that the owner can only be so limited if the restrictions were
in place at the time the interest was acquired. This bill is
similar to two prior pieces of legislation, discussed in the
analysis, that were vetoed by Governor Schwarzenegger as either
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violating individual property rights or unnecessary, or both.
However, both of these earlier bills still faced opposition when
they reached the Governor's desk. This bill appears to have
removed most, but not all, opposition at the time of this
writing. The bill passed out of the Senate on a 39-0 vote and
more recently passed out of the Assembly Housing and Community
Development Committee on a 6-0 vote.
SUMMARY : Provides that the owner of a separate interest in a
common interest development (CID) shall not be subject to any
provisions in the CID's governing documents that prohibit the
owner from renting or leasing his or her interest, unless the
provision was effective prior to the date that the owner
acquired the interest, and makes other conforming changes.
Specifically, this bill :
1)Provides that an owner of a separate interest in a CID shall
not be subject to a provision in a governing document that
prohibits the renting or leasing of any of the separate
interests in the CID, unless the governing document was
effective prior to the date the owner acquired title to his or
her separate interest.
2)Provides that, notwithstanding the above, an owner of a
separate interest in a CID may consent to be subject to a
governing document that prohibits the rental or leasing of a
separate interest in the CID.
3)Specifies that the above provisions only apply to a provision
in a governing document or amendment to a governing document
that becomes effective on or after January 1, 2012.
4)Requires the seller of a separate interest in a CID to provide
any prospective buyer of that interest with a statement
describing any provisions in the governing documents that
prohibit the renting or leasing of the separate interest.
5)Incorporates chaptering amendments that become operative only
if both this bill and AB 771 are enacted, as specified.
EXISTING LAW :
1)Provides that any rule or regulation of an HOA that
arbitrarily or unreasonably restricts an owner's ability to
market his or her interest in a CID is void. Defines "market"
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to mean list, advertise, or obtain or provide access to show
the owner's interest in the development. (Civil Code Section
1368.1.)
2)Defines "governing documents" to mean the recorded 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 community
interest development or association. (Civil Code Section 1351
(j).)
3)Establishes the mechanisms by which the governing documents
may be amended. Permits the HOA, once the developer has
completed construction and marketing, to amend the governing
documents. Requires the HOA board of directors to provide all
owners with advance notice of a proposed amendment and
requires the board to deliberate on the proposed amendments in
an open meeting. Provides that the board may not amend the
governing documents unless it is approved by a majority vote
of the owners at a meeting or election, as specified. Permits
the HOA to adopt operating rules on certain subjects without
an election so long as the rules are consistent with the
governing documents and law; however, five percent or more of
the owners may call a meeting to have a rule change reversed
by majority vote. (Civil Code Sections 1355, 1355.5, 1357.100
through 1357.150.)
COMMENTS : The nearly 50,000 common interest developments (CIDs)
in California vary in size and structure, but are generally
multi-unit communities characterized by the following: (1)
separate ownership of individual residential units coupled with
an undivided interest in common property; (2) covenants,
conditions, and restrictions (CC&Rs) that limit the use of both
separate interests and common property; and (3) management of
common property and enforcement of restrictions by a home
owner's association (HOA). Within the parameters of the
California's Davis-Stirling Act, which sets forth general rules
governing CIDs, each individual CID is subject to rules and
regulations set forth by the HOA's "governing documents" - which
Davis-Stirling defines to include the recorded declaration and
any other documents, such as bylaws, operating rules of the
association, or articles of incorporation that govern the
operation of the association. Prohibitions on leasing are among
the many rules and regulations that one might find in these
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governing documents. In some cases, the governing documents may
prohibit leasing a unit entirely, although apparently absolute
prohibitions are relatively rare. More commonly, such
restrictions take the form of a limit on the percentage of the
total units in the CID that may be rentals, or a limit to the
number of units that any individual member may own and rent.
Such restrictions appear to be rooted in an assumption - whether
valid or invalid - that renters do not have a vested interest in
the CID and therefore may not adequately care for the
properties.
CID Governing Documents May Legally Prohibit Leasing : Existing
law prohibits the governing documents from "unreasonably"
limiting an owner's right to "market" his or her separate
interest, but the courts have generally construed this to mean
marketing for purposes of sale as opposed to marketing for
purposes for lease. Nothing in the Davis-Stirling Act expressly
prohibits an HOA from adopting a prohibition against leasing;
and the courts have generally upheld lease restrictions, as well
as other restrictions on transferring a separate interest, so
long as the restrictions are non-arbitrary and rationally
related to the declared purposes of the HOA. (Laguna Royale
Owners Association v. Darger (1981) 119 Cal. App. 3d 670.) More
recently, an unpublished opinion by California's 4th District
Court of Appeal upheld leasing restrictions, even when those
restrictions were adopted by a majority vote of the owners after
the plaintiffs had acquired their interests. (Harrison v.
Sierra Dawn Estates Homeowners Association (2010 Cal. App.
Unpub. LEXIS 4736.) Although this case was ordered not to be
published, it seems consistent with several rulings that have
upheld the right of associations to restrict the property rights
of individual owners so long as those restrictions are
non-arbitrary, reasonable, and duly adopted. (See e.g.
Nahrstedt v. Lakeside Village Condominium Association (1994) 8
Cal. 4th 361, 372-274.) In short, it appears that only express
legislative language will protect an owner's right to lease his
or her property from leasing restrictions that may be adopted by
CID members subsequent to purchase.
Prior (Bi-Partisan) Legislative Efforts : This is not the first
time the Legislature has attempted to protect owners from
leasing prohibitions that are enacted subsequent to purchase.
AB 2259 (Mullin) of 2008, which was very similar to the present
measure, would have prohibited a CID from restricting the right
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of an owner to rent his or her separate interest if the owner
had that right at the time of purchase, unless the owner waives
the right to lease or rent. AB 2259 was vetoed by the prior
governor, who 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.
More recently, AB 1927 (Knight) of 2010 tried another approach.
That bill would have prohibited a CID from adopting or amending
governing documents that prohibit leasing a separate interest in
the CID, unless that prohibition is approved by a vote of
two-thirds of the owners. In short, that bill would have
permitted a CID to restrict an owner's right to lease, even if
the restriction was adopted after the owner acquired the
property, but only if such prohibitions were approved by a
super-majority of the owners. This approach, however, met the
same fate as the previous effort, albeit for seemingly different
reasons. The prior governor's veto message 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.
ARGUMENTS IN SUPPORT : According to the bill's sponsor, the
California Association of Realtors (CAR), this bill will
"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
revisions of the governance provisions effecting the right to
rent." CAR believes that the right to rent is a "fundamental
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right" of ownership, and this bill protects that fundamental
right. CAR contends that this bill is particularly necessary
in light of the current depressed real estate market, noting
that the only option for an owner who is forced to relocate
for employment or other extenuating reasons might be to sell
the unit at a loss. CAR points out that this measure will
not prevent an HOA from revising its rental policies; it only
says that a revision of those rights cannot be retroactive.
CAR concedes that CID owners agree to be subject to the
association's rules and regulations and know that those rules
may be changed by a majority vote of the owners, but observes
that "the fundamental right to rent one's home does not fit
into the category of restrictions such as front yard
landscaping or parking authority."
The Center for California Homeowner Association Law (CCHAL)
supports this bill because, it contends, a variety of
circumstances can make renting a rational choice than
selling, especially when "the market is flooded with unsold
inventory." CCHAL argues that this bill will ensure that "if
the governing documents entitled the homeowner to rent out
their CID homes when they purchased the home, then this right
is one that cannot be arbitrarily taken away from them by the
fiat of the board or property manager or even by amending the
governing documents."
Some Concerns Apparently Addressed by Amendments : The
Executive Council of Homeowners (ECHO) original took a
"support if amended" position on this bill. ECHO writes that
it "strongly supports" the ability of CIDs to self-govern,
but it "also agrees that if an owner had the right to rent or
lease Ýhis or her] separate interest at the time of purchase,
then that right should be 'grandfathered' if any change to
the governing documents that would restrict that right should
occur." However, ECHO expressed concern that an earlier
version of the bill did not "explicitly state that the
provisions of the bill will be prospective." This concern
was apparently addressed by the May 17 amendment stating that
this bill "shall only apply to a provision in a governing
document or a provision in an amendment to a governing
document that becomes effective on or after January 1, 2012."
ÝSee subdivision (f) on page 3, lines 24-26 of the June 9
version of the bill.]
ARGUMENTS IN OPPOSITION : The Community Associations
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Institute (CAI) opposes this bill because it believes that an
HOA's ability to make "reasonable rules and regulations,
including renter restrictions, must be fluid and change with
conditions imposed by the mortgage market or personal needs."
Yet CAI maintains that this bill "would prohibit any HOA
from making modifications, despite merit." More generally,
CAI contends that "renter 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." Finally, CAI
notes that existing law ensures that all changes are made in
an open process, and while proponents stress the fundamental
right of the owner to lease a separate interest, CAI counters
that owners also "expect to be active participants Ýin]
making changes to their HOA's uniform and reasonable
restrictions. This bill removes that fundamental right and
expectation."
Notwithstanding the arguments that it makes above, CAI
believes that if this bill must become law (and that would
appear to be the direction it is headed given the votes thus
far), then it should be amended to "permit homeowner
associations to make adjustments to their reasonable rules
limiting renters depending on the needs of homeowners that
MUST RENT instead of being forced to sell their homes." CAI
has informed the Committee that it has in mind certain
exigent circumstances, such as a temporary job-related move
or a military deployment, such that the owner would be forced
to sell even though he or she had no intent to permanently
relocate. While this is a legitimate concern, it could just
as easily be framed as an argument in favor of the bill;
indeed, it might even support a stronger bill that would
prohibit any limitation on the right to lease. Moreover,
there does not appear to be anything in existing law, or in
this bill, that would prevent a CID from, in the future,
amending its leasing restrictions, if it has them, to account
for such exigencies. However, CAI's argument appears to be
that CIDs should generally be free to adopt rules that
reasonably restrict an owner's right to lease, so long as
those rules create an exception for exigent circumstances.
REGISTERED SUPPORT / OPPOSITION :
Support
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California Association of Realtors (sponsor)
Center for California Homeowner Association Law
Executive Council of Homeowners (ECHO)
Opposition
Community Associations Institute
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334