BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 1927 (Knight)
As Amended June 9, 2010
Hearing Date: June 29, 2010
Fiscal: No
Urgency: No
BCP:jd
SUBJECT
Real Property: Common Interest Developments
DESCRIPTION
This bill would provide that, unless approved by vote, any
provision that is added or included in a governing document
after January 1, 2011 that prohibits the rental or lease of a
separate interest in a common interest development is void.
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.
In response to those restrictions, AB 2259 (Mullin, 2008) sought
to protect homeowners' ability to rent their property by
(more)
AB 1927 (Knight)
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providing that those owners are not subject to a provision in a
governing document that prohibits the rental or leasing of their
unit, unless that provision was in effect prior to the date the
owner acquired title. That bill was approved unanimously by
this Committee, but subsequently vetoed. The Governor's veto
message expressed concern that:
[the] 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.
This bill, sponsored by the California Association of Realtors,
similarly seeks to protect a homeowner's ability to rent out
their separate interest while responding to the Governor's veto
message. Specifically, this bill would provide that any
provision of a governing document that is either added, or
included, after January 1, 2011, which prohibits the rental or
lease of a separate interest in a common interest development is
void unless approved by two-thirds of the owners.
CHANGES TO EXISTING LAW
1. Existing law , the Davis-Stirling Common Interest
Development Act, defines and regulates common interest
developments (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
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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, unless approved by a vote, as
specified, any provision that prohibits the rental or lease of
a separate interest in a common interest development and that
is added to a governing document on or after January 1, 2011,
or that is included in a governing document initially recorded
on or after January 1, 2011, is void.
This bill would state that, on or after January 1, 2011, if a
common interest development adopts a governing document or an
amendment to a governing document that prohibits the rental or
lease of a separate interest, that provision shall be approved
by a vote of the owners of separate interests with voting
power in the CID.
This bill would provide that the above vote shall be conducted
pursuant to the existing requirements that govern voting in a
CID. Except as specified, the prohibition of the rental or
lease of a separate interest shall be approved by not less
than two-thirds of the voting power of the owners of separate
interests.
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 additionally require a statement of any
provision in the governing documents that prohibits the rental
or leasing of all or any of the separate interests in the
common interest development to a renter, lessee, or tenant.
COMMENT
1. Stated need for the bill
According to the author:
AB 1927 (Knight)
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AB 1927 preserves the right of an owner of a separate
interest in a CID to rent his or her unit if personal or
financial conditions require such an action in order to
preserve the unit's ownership. It further addresses the
concerns expressed by the Governor in his Veto of AB 2259 in
2008 by establishing a voting process for CID owners if they
overwhelmingly decide they want to restrict the right of
owners in the subject CID to rent units therein. Amendments
taken in the Assembly Housing Committee also set up a
"grandfather" treatment of governance provisions, in place
when AB 1927 was introduced, for CIDs with a voting process
in place that, pursuant to a written ballot of homeowners,
had already enacted a rental restriction.
2. Prohibition modified in response to veto
Similar to AB 2259 (Mullin, 2008), this bill seeks to protect
the ability of homeowners in a CID to rent their property. The
California Association of Realtors, sponsor, asserts that
"[p]reservation of the right to rent one's home is particularly
important to individual homeowners in stressful real estate
markets such as the one Californians are currently experiencing.
If a CID owner is forced to relocate for employment or other
personal circumstances, his or her only option is to rent the
unit or sell it. If the association prohibits rentals, then he
or she must 'dump' the home (possibly at a loss) in a depressed
market or simply let it go to foreclosure."
To accomplish the goal of protecting the right of homeowners to
rent their property, AB 1927 would require any provision that
prohibits the rental or lease of a separate interest (home) that
is either added to a governing document on or after January 1,
2011, or that is included in a governing document initially
recorded on or after January 1, 2011, to be approved by a vote
of owners with voting power in the CID. Unless a contrary
requirement existed in the governing documents as of February
17, 2010 (the date this bill was introduced), the prohibition on
renting or leasing separate interests must be approved by not
less than two-thirds of the voting power of owners in the CID.
As a result, this bill has the effect of preventing a CID from
imposing a ban on renting unless it has been approved by
two-thirds of the owners. It should be noted that this bill
would not affect any prohibitions that were in effect prior to
the enactment.
Although the Governor vetoed a similar bill, AB 2259 (Mullin,
AB 1927 (Knight)
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2008), this bill seeks to address the Governor's veto message by
allowing a ban if it has been approved by two-thirds of the
owners in the CID (AB 2259 simply provided that owners are not
subject to rental restrictions). That response is based upon
the statement in the Governor's veto message that "It is best,
as current law allows, for the owner-members of the HOA to
determine what is best for their communities." Consistent with
that statement, this bill would leave the final decision up to
the owners (although it would impose a high standard of
two-thirds for approval).
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 one's home and
moving in with a family member is one practical way to generate
additional income to pay the mortgage and avoid a foreclosure.
This bill seeks to help protect that ability while responding to
prior concerns voiced by the Governor regarding a prohibition on
restrictions.
3. Opposition's concerns
The Executive Council of Homeowners (ECHO), in opposition,
states that they object to the requirement for a two-thirds vote
because they "adhere[] to the concept of self-governance in
making those decisions rather than state imposition of a
standard." Although this bill would impose a two-third vote
requirement in cases where such a requirement was not in place
as of the introduction of this bill, that high threshold appears
appropriate given the importance of preserving the ability to
rent one's property.
ECHO further expresses concern that this bill could have
negative consequences because "[o]wners who occupy their units
and who may want to sell their interest, refinance it or improve
it, and those who may want to purchase a separate interest in a
condominium development 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." Despite that contention, the
prohibition is not mandatory - if there is an overwhelming need
to limit rentals within a particular community, the two-thirds
vote requirement could likely be met in order to enact such a
prohibition. Furthermore, from a policy standpoint, it is
important to protect the availability of rental properties at
this time when many Californians are losing their homes in
foreclosure. The Western Center on Law & Poverty, in support,
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further notes that "rental housing continues to be in short
supply in the state [and that] restrictions on renting should be
held to a bare minimum."
4. 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 their 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 3 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
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.)
AB 1927 (Knight)
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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. The same criteria would
arguably be applied to any rental ban approved by the
requisite number of voting owners - thus, even if a ban is
enacted pursuant to this bill, that ban must still pass the
"reasonableness test."
5. 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
provision buried in the governing documents, the required
disclosure would flag any such restriction for their
consideration.
Support : California Apartment Association; California Rural
Legal Assistance; Western Center on Law & Poverty
Opposition : Executive Council of Homeowners
HISTORY
Source : California Association of Realtors
Related Pending Legislation : None Known
Prior Legislation : AB 2259 (Mullin, 2008) See Background.
Prior Vote :
Assembly Housing and Community Development Committee (Ayes 9,
AB 1927 (Knight)
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Noes 0)
Assembly Judiciary Committee (Ayes 9, Noes 0)
Assembly Floor (Ayes 73, Noes 0)
Senate Transportation and Housing Committee (Ayes 8, Noes 0)
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