BILL ANALYSIS
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: AB 1927
SENATOR ALAN LOWENTHAL, CHAIRMAN AUTHOR: Knight
VERSION: 6/9/10
Analysis by: Mark Stivers FISCAL: no
Hearing date: June 15, 2010
SUBJECT:
Renting units in common interest developments
DESCRIPTION:
This bill establishes specific procedures for a common interest
development to follow when initially recording or amending
governing documents on or after January 1, 2011 in a manner that
prohibits the rental or lease of individual units.
ANALYSIS:
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 common area property.
Condominiums, planned unit developments, stock cooperatives,
community apartments, and many resident-owned mobilehome parks
all fall under the umbrella of common interest developments.
CIDs are governed by a homeowner's association (HOA).
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,
collectively referred to as the governing documents. The
Davis-Stirling Act is silent on the issue of renting units
within a CID. As a result, the governing documents of any
particular CID may allow or restrict the rental of units within
the development, and the members of a CID may amend their
governing documents to alter these rules at any time.
The Davis-Stirling Act requires the seller of a unit within a
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CID to provide a purchaser, as soon as practicable before
transfer of title, with various disclosures, including the
governing documents, the HOA's budget, and information on
regular and special assessments.
The Davis-Stirling Act also establishes standards for CID
elections. A CID must conduct any election, including a vote to
amend governing documents, by secret written ballot and appoint
one or three election inspectors to tabulate and report the
results.
This bill establishes specific procedures for a CID to follow
when initially recording or amending governing documents on or
after January 1, 2011 that prohibit the rental or lease of a
separate interest. Specifically, the bill:
Requires the members of a CID when adopting or amending
governing documents on or after January 1, 2011, to vote to
approve any prohibition on the rental or lease of a separate
interest within the development. This election must be
conducted in accordance with the existing election
requirements of the Davis-Stirling Act.
Requires the CID, unless the governing documents in effect as
of February 17, 2010 require a different percentage, to
approve the prohibition on the rental or lease of a separate
interest with a two-thirds vote.
Provides that any provision added to an existing governing
document or included in a new governing document after January
1, 2011 that prohibits the rental or lease of a separate
interest in a common interest development and that is not
approved by a vote of the members according to this bill is
void.
Requires the seller of a unit within a CID to provide a
purchaser, as soon as practicable before transfer of title,
with a statement describing any prohibition on the rental or
leasing of all or any of the separate interests within the
development to a renter, lessee, or tenant.
COMMENTS:
1.Purpose of the bill . This bill is intended to help protect
the property right of a CID owner to rent his or her unit if
such a right existed at the time he or she purchased the unit.
An owner may have purchased a unit with the expectation of
being able to rent it out. Changing the rules after the fact
may cause the owner significant financial impacts and may
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result in the displacement of existing tenants. In addition,
a prohibition on renting out units can create a hardship for a
homeowner who must move because of a change in employment or a
change in family status, especially if the owner is not in a
position to sell. While this bill does not outlaw
prohibitions on renting outright, it does establish additional
procedural requirements intended to make it more difficult for
a CID to adopt such a prohibition. The bill requires that
members of the CID, as opposed to just the board, to approve
the prohibition via a standard election, including a secret
ballot. The bill also establishes a two-thirds vote threshold
to approve such a prohibition unless governing documents in
effect prior to February 17, 2010 established a different
threshold.
2.The vote threshold . This bill establishes a two-thirds vote
threshold to approve a prohibition on renting unless governing
documents in effect prior to February 17, 2010 established a
different threshold. The bill is vague as to whether or not
the different threshold contained in pre-2010 governing
documents must be specific to the rental of units, but the
sponsor maintains that the different threshold need not be
specific to renting. In other words, if prior to February 17,
2010 a CID's governing documents set any threshold for
amending the governing documents generally, then this
threshold will continue to apply in the event of a vote on
prohibiting the rental of units.
3.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), the Fourth District Court of Appeal provided
the following criteria to be used in this test:
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).
AB 1927 (KNIGHT) Page 4
Neither the supporters nor opponents of this bill have
contended that the bill either upholds or violates any part of
the Laguna 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.
4.Previous legislation . In 2008, Assemblymember Mullin authored
AB 2259, which would have provided that an owner of a unit in
a CID is not subject to a provision in a governing document
adopted after January 1, 2009 that prohibits the rental or
leasing a unit unless the prohibition was in effect prior to
the date the owner acquired his or her unit. Governor
Schwarzenegger vetoed AB 2259. The veto message read:
This bill would allow a homeowner in a common interest
development (CID) to retain the right to rent or lease his
or her unit, if the right existed at the time of ownership
unless the owner relinquishes those rights in writing.
The supporters of this bill stress that the bill will
protect the property rights of the owners of property
within a CID governed by a home owner association (HOA) by
preserving the conditions under which the property was
purchased. This view stresses that these conditions are
essentially a contract between the buyer and the HOA.
However, the converse of this argument is that owners have
their property rights limited when they are prevented from
renting or leasing their property when they are restricted
by this law and the subsequent actions taken by HOAs.
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
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law allows, for the owner-members of the HOA to determine
what is best for their communities.
5.Arguments in opposition . Opponents believe that the members
of a CID and its duly-elected board, as opposed to the
Legislature, should be able to determine the process and
appropriate vote threshold for rules relating to the rental of
units. In addition, opponents believe that this bill will
have negative consequences by leading to additional losses in
property value and possibly making it more difficult for
buyers to obtain financing.
6.Double-referral . The Senate Rules Committee has referred this
bill both to this committee and to the Judiciary Committee.
Assembly Votes:
Floor: 73-0
Judic: 9-0
HCD: 9-0
POSITIONS: (Communicated to the Committee before noon on
Wednesday,
June 9, 2010)
SUPPORT: California Association of Realtors (sponsor)
California Apartment Association
California Rural Legal Assistance Foundation
Orange County Association of Realtors
Western Center on Law and Poverty
OPPOSED: Executive Council of Homeowners