BILL ANALYSIS
AB 1927
Page 1
Date of Hearing: April 27, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1927 (Knight) - As Amended: April 20, 2010
SUBJECT : REAL PROPERTY: COMMON INTEREST DEVELOPMENTS
KEY ISSUE : SHOULD A COMMON INTEREST DEVELOPMENT BE PROHIBITED
FROM ADOPTING OR AMENDING GOVERNING DOCUMENTS THAT PROHIBIT THE
RENTAL OF A SEPARATE INTEREST IN THE COMMON INTEREST
DEVELOPMENT, UNLESS THAT PROHIBITION IS APPROVED BY A VOTE OF
TWO-THIRDS OF THE OWNERS OF SEPARATE INTERESTS WITH VOTING
POWER?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
Common interest developments (CID) are characterized by a
separate ownership of dwelling space coupled with an undivided
interest in a common property, restricted by covenants and
conditions that limit the use of common area, and the separate
ownership interests and the management of common property and
enforcement of restrictions by a CID association (often referred
to as a "homeowners' association" (HOA).) This bill, sponsored
by the California Association of REALTORS, prohibits a CID
association from adopting or amending governing documents that
prohibit the rental of a separate interest in the common
interest development, unless that prohibition is approved by a
vote of two-thirds of the owners of separate interests with
voting power. According to the author, the objective of the
bill is to protect an individual owner's ability to rent his
separate interest, if such a right existed at the time ownership
commenced, because the right to rent is fundamental to owning
property and should not be taken away from a homeowner absent
the owner's consent, or an overwhelming desire of all fellow
homeowners in a CID to restrict such a right. Supporters of the
bill, including the California Apartment Association and Western
Center on Law and Poverty, contend that the ability to rent
property has become even more important due to the poor economy
and depressed housing market in California, and that current law
does not adequately protect the right of an owner of a CID unit
to rent the unit, even if such a right existed at the time
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ownership of the unit commenced.
This bill would require a two-thirds majority vote of the owners
to approve a no-rental policy in the CID governing documents,
while other changes would require approval using the voting
standard specified by the CID's bylaws or governing documents
(typically a 51% majority standard.) The Committee has not
received any formal opposition to the current version of the
bill in print. However, opponents to the previous version of
the bill expressed concern that, by imposing a two-thirds voting
standard on any decision to approve a no-rental policy, this
bill would unfairly override a CID's governing documents that
specify a different voting standard. To address this concern,
the author recently amended the bill to allow a CID whose
governing documents require approval by a different percentage
to employ that voting standard instead of the two-thirds
standard, provided certain conditions are met. Specifically,
this bill will grandfather an alternative voting standard that
existed before February 17, 2010, the day this bill was
introduced, for any change to governing documents that affects
an owner's ability to rent his or her separate interest. In
addition, the bill still requires that, in all cases, the change
to the governing documents be made by the member owners through
the written ballot procedure provided for by existing law. It
is not known if the author's recent amendments have removed any
or all opposition to this bill. This bill was recently passed
by the Assembly Housing and Community Development Committee by a
vote of 9-0.
SUMMARY : Seeks to prohibit no-rental policies in common
interest developments (CID) unless two-thirds of CID association
members approve a no-rental policy through a written ballot.
Specifically, this bill :
1)Makes Legislative findings and declarations that, among other
things, the rights of common interest development owners to
rent or lease their property should be protected by the State,
and that owners of units within a common interest development
should, through the exercise of a democratic decision-making
process, determine what is best for their communities.
2)Provides that a governing document of a common interest
development that is amended, adopted, or recorded on or after
January 1, 2011, shall not prohibit the rental or lease of a
separate interest in the CID, unless that prohibition is
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approved by a vote of the owners of separate interests with
voting power in the CID.
3)Requires that, notwithstanding any conflict with the governing
documents, a vote to establish any prohibition on renting of a
separate interest shall be by means of a written ballot and,
unless the governing documents in effect as of February 17,
2010 require a different percentage, shall be approved by not
less than two-thirds of the voting power of the owners of
separate interests in the common interest development.
4)Requires the owner of a separate interest to provide to a
prospective purchaser a statement describing any provision
contained in the governing documents that prohibits the rental
or lease of all or any of the separate interests in the CID,
as well as the applicability of such a provision.
EXISTING LAW , the Davis-Stirling Common Interest Development
Act,
1)Defines "association" to mean a nonprofit corporation or
unincorporated association created for the purpose of managing
a common interest development. (Civil Code Section 1351(a).
All further references are to this Code unless otherwise
noted.)
2)Defines "governing documents" 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. (Section
1351(j).)
3)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 CID that are intended to be enforceable
equitable servitudes. (Section 1353(a)(1).)
4)Provides that 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 interests in the CID. (Section 1354(a).)
5)Provides that any rule or regulation of an association that
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arbitrarily or unreasonably restricts an owner's ability to
market his or her interest in a common interest development is
void. (Section 1368.1(a).)
6)Requires the owner of a separate interest to provide specified
disclosures to a prospective purchaser as soon as practicable
before transfer of title to, or execution of a real property
sales contract for, the separate interest. These disclosures
include, but are not limited to, copies of the governing
documents; articles of incorporation; information about the
association's assessments and fees; and identification of
certain restrictions in the governing documents, if they
exist. (Section 1368.)
COMMENTS : This bill, sponsored by the California Association of
Realtors (CAR), seeks to ensure that owners of separate
interests in a common interest development (CID) may rent or
lease their separate interests unless two-thirds of CID
association members approve a no-rental policy through a written
ballot.
Need for the bill. According to supporters, this bill is needed
to "protect the basic right of an owner of a separate interest
in a common interest development to rent his or her property if
financial or personal circumstances require such action in order
for the owner to preserve ownership of the interest." CAR
explains that in recent years, its member Realtors, often
representing buyers and sellers of CID units, report that
homeowners associations (HOAs) have been imposing rental
restrictions on CID residential communities, irrespective of the
ownership rights vested at time of ownership. The author
contends that, given tough economic times and the depressed real
estate market in California, preservation of the right to rent
one's home is particularly important to the increasing number of
homeowners who own property in common interest developments.
The author elaborates:
If a CID owner is forced to relocate for employment or
other personal circumstances, his or her only options
are to rent the unit or sell it. If the (homeowners')
association prohibits the owner from renting the unit,
then the owner likely must "dump" it (possibly at a
loss) in a depressed market, or simply let the unit go
into foreclosure. AB 1972 protects the basic property
right of an individual homeowner to rent his or her
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home if such a right was in place when it was
purchased. The bill helps prevent that right from
being extinguished on the whim of a homeowners'
association.
Although a homeowner would normally be free to rent the home
without restriction, those who own homes in a CID may be subject
to additional restrictions, including a prohibition on renting
the unit, enforced by the homeowner's association and contained
in the CID's governing documents.
Background on Common Interest Developments : There are over
41,000 CIDs in the state that range in size from three to 27,000
units. CIDs make up over four million total housing units which
represents approximately one quarter of the state's housing
stock. CIDs are characterized by a separate ownership of
dwelling space coupled with an undivided interest in a common
property, restricted by covenants and conditions that limit the
use of common area, and the separate ownership interests and the
management of common property and enforcement of restrictions by
a CID association (often simply referred to as a "homeowners'
association" (HOA).) Civil Code Section 1351 defines and
describes four distinct categories of common interest
developments: (1) condominiums; (2) community apartment
projects; (3) planned developments; and (4) stock cooperatives.
CIDs must abide by the governing documents of the CID
association, including its bylaws, declarations, and operating
rules, as well as provisions of the Davis-Stirling Act
(commencing with Section 1350 of the Civil Code). CIDs are run
by volunteer boards of directors who are elected by the members
of the HOA and are responsible for interpreting the governing
documents and state law. Except when CIDs are first developed,
no state agency provides ongoing oversight of these communities.
In order to amend the governing documents a HOA must follow the
procedures outlined in the governing documents, or if the
governing documents are silent, the process provided in state
law. State law and most governing documents require that a
majority of members vote to approve an amendment to the
governing documents.
Some CIDs have restrictions on rentals which take a variety of
forms including: limiting the total number of rentals in a CID
to a set percentage, requiring a minimum amount of time for
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leases, prohibiting rental of a unit until the unit has been
owner occupied for at least a year or prohibiting renting or
leasing outright. Additionally, in some cases HOAs adopt rules
which do not flatly deny rentals, but require owners renting
their separate interest to follow specific policies. For
example, a HOA may require owners who rent their separate
interest to include a clause in their lease agreement requiring
renters to abide by the rules of the HOA as a condition of
residence.
Protection of the Right to Rent. This bill provides that a
governing document of a common interest development that is
amended, adopted, or recorded on or after January 1, 2011, shall
not prohibit the rental or lease of a separate interest in the
CID, unless that prohibition is approved following written
ballot procedures (under existing law) and by a two-thirds
majority of owners of separate interests with voting power in
the CID. According to the author, the objective of the bill is
to protect an individual owner's ability to rent his separate
interest, if such a right existed at the time ownership
commenced.
The author further explains, stating, "The right to rent is
fundamental to owning property and it should not be taken away
from a homeowner absent the owner's consent, or an overwhelming
desire of all fellow homeowners in a CID to restrict such a
right. A CID association should have to weigh carefully the
property rights of its membership before acting to restrict or
eliminate any such rights."
In short, upon its enactment, this bill would require a
two-thirds majority vote of the owners to approve a no-rental
policy in the CID governing documents, while other changes would
require approval using the voting standard specified by the
CID's bylaws or governing documents (typically a 51% majority
standard.)
An Alternative Voting Standard That Existed Before This Bill Was
Introduced Will Be Grandfathered. Opponents of the bill have
expressed concern that, in imposing a two-thirds voting standard
on any decision to approve a no-rental policy, this bill
unfairly would override a CID's governing documents that specify
a different voting standard. To address this concern, the
author recently amended this bill to allow a CID whose governing
documents require approval by a different percentage to employ
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that voting standard instead of the two-thirds standard,
provided certain conditions are met. Specifically, this bill
will grandfather an alternative voting standard that existed
before February 17, 2010, the day this bill was introduced, for
any change to governing documents that affects an owner's
ability to rent his or her separate interest. In addition, the
bill still requires that the change to the governing documents
be made by the member owners through the written ballot
procedure provided for by Section 1363.04, regardless of the
threshold proportion of votes needed for approval. The
operative grandfathering date of February 17, 2010 is intended
to grandfather only those CID governing documents that truly
specified a different voting standard (other than 2/3) prior to
introduction of this bill, but not any governing documents that
may have been modified after introduction of this bill but
before the date it would become effective, if at all.
Related Court Decisions on CID Restrictions on the Ability to
Rent . The California Court of Appeal has previously considered
the legality of CID no-rental policies and formulated certain
criteria for testing the reasonableness of an exercise of power
by an HOA to deny a homeowner the ability to rent his or her
unit. In Laguna Royale Owners Association v. Darger (1981) 119
Cal.App.3d 670, the Fourth District Court of Appeal provided the
following criteria to be used in this test:
(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.)
Laguna Royale involved an homeowners' 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.
Neither the supporters nor opponents of this bill have contended
that the bill either upholds or violates any part of the Laguna
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Royale decision, because the central issue here is not whether a
denial of the right to rent meets the "reasonableness test", but
rather, whether adoption of a no-rental policy into governing
documents should require two-thirds approval of member owners,
or some other proportion. Assuming a CID established a
no-rental policy in its governing documents by approval of the
requisite percentage of members, enforcement of that policy by
the association must still pass the "reasonableness test"
pursuant to Laguna Royale.
Nevertheless, it may be useful to note that the problem that
this bill attempts to address, namely the unfair consequences
arising from denial of the ability to rent one's separate
interest in a CID, would seem to be a factor that a court may
use in considering the severity of consequences contemplated in
Laguna Royale. A property owner may face a severe devaluation
of his or her property interest if that person originally
purchased the property believing he or she had the right to rent
the property free of subsequent restrictions by a homeowner's
association. If enacted, this bill might encourage HOAs to
consider such factors before pursuing adoption or enforcement of
a no-rental policy.
Disclosure requirement from AB 2259 . CIDs are required to
provide prospective buyers with disclosure documents before
purchase. These disclosure documents include a statement of any
restriction that limits residency on the basis of age. This
bill would add to the list of disclosures by requiring a CID to
give a prospective buyer a statement describing any restriction
in the governing documents on rentals. According to the author,
this requirement will allow prospective buyers to make an
informed decision before finalizing the purchase of a home.
ARGUMENTS IN SUPPORT : The California Apartment Association, a
large statewide rental housing trade association, supports this
bill, stating, "Restricting the rights of property owners is not
prudent in these tough economic times. The protections provided
in this bill are particularly important for those families who
have been forced to rent their homes due to financial hardship
or due to employment relocation."
In a rare display of ideological unity, this bill is also
supported by tenants' advocates, including the Western Center on
Law and Poverty (WCLP) and California Rural Legal Assistance
Foundation (CRLA), citing similar reasons as follows:
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"Homeowners, be they part of an association or residents in a
mobilehome park, should not face restrictions on renting out
their homes if a sudden job change or loss, or a medical
condition, affects their ability to owner-occupy their home.
This bill will provide homeowners with more options when they
are forced to be absent from their homes. Rental income can
help keep mortgages current."
ARGUMENTS IN OPPOSITION : In its letter of opposition to the
previous version of the bill, the Community Associations
Institute stated that it was opposed to the bill unless amended
to provide that approval of a no-rental policy need not be by a
two-thirds majority if the governing documents specify that a
lesser vote is required. In arguing that the governing
documents should control where they specify a voting threshold,
the CAI wrote: "Today, every purchaser of a home in a HOA knows
he or she will be subject to certain restrictions (which may
change by action of the owners) and a certain lifestyle.
Sometimes a restriction, such as a renter restriction, may not
be in the HOA governing documents when a household acquires a
home, but through the course of time and an open democratic
process the restrictions are amended to respond to the owners'
needs." The author subsequently amended the bill to respect an
alternative voting threshold specified in any governing
documents that were in effect prior to February 17, 2010. It is
not known if this amendment has removed CAI's opposition to the
bill.
The Executive Council of Homeowners (ECHO), representing over
1,550 member community associations, also is opposed to the
previous version of the bill, stating:
ECHO strongly holds that decisions regarding a common
interest development should be made by that development's
duly elected board of directors, and amendments to the
community's governing documents which are voted on by the
separate interests. ECHO opposes legislation that
reduces or redefines those powers . . . and adheres to
the concept of self-governance in making those decisions
rather than state imposition of a standard.
Given the current foreclosure crisis and restrictions by
mortgage insurers and lenders on the number of separate
interests that can be rentals within a condominium
development, ECHO believes this bill may have negative
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consequences (because some persons) may not be able to
secure a loan if the number of rentals within the
development exceeds the lender's or the insurer's
threshold.
ECHO's latter concern about the potential inability of some
persons to secure a loan under this legislation arises only if
lenders limit loans to potential borrowers seeking to finance
purchase of a separate interest based on some threshold number
of rentals within a CID. It does not explain why such a
threshold should be a factor in that determination, or why
public policy should defer to that practice by lenders. On the
other hand, ECHO clearly explains its opposition in principle to
any legislation that reduces powers of self-governance. It is
not known if the author's recent amendments have removed ECHO's
opposition to this bill.
Prior Related Legislation : AB 2259 (Mullin) of 2008 would have
prohibited a CID from restricting the right 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 Governor, whose veto message
read in part:
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.
According to the author, recent amendments that require, in all
cases, the use of written ballot procedures, and that
grandfather any alternative voting threshold predating this bill
are intended to address the governor's concerns expressed above.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Realtors (sponsor)
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California Apartment Association
California Rural Legal Assistance Foundation
Orange County Association of Realtors
Western Center on Law and Poverty
Opposition
Community Associations Institute
Executive Council of Homeowners
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334