“Limiting Rental Restrictions: How AB 3182 Will Affect Your Association”

LHC NEWSLETTER, VOL. 11, NO. 3

“Limiting Rental Restrictions: How AB 3182 Will Affect Your Association”

Written by: Robert D. Hillshafer

Loewenthal, Hillshafer & Carter, LLP

As you are undoubtedly aware, Governor Newsom recently signed into law, effective January 1, 2021, Assembly Bill 3182, which among other things, amends Civil Code Section 4740 and creates Civil Code Section 4741, relative to any Association’s attempts to regulate leasing or rentals within Common Interest Developments.  While the stated policy reason for these new laws was to promote affordable housing in California by limiting restrictions on leasing in Common Interest Developments, in reality they  simply continue to erode the abilities of Associations, with the consent of their members, to effectuate provisions impacting the quality of life and the quiet use and enjoyment of property which we all know is often substantially impaired by rentals, tenants and landlord owners who fail to take appropriate action to control their tenants or maintain their rental properties.  These new laws directly impact rental quotas, minimum lease term provisions and regulation of Accessory Dwelling Units.

This is a brief review and highlighted analysis of the major points in the new laws that you should be aware of with regard to enforcement of your current documents and the obligation of the Associations to undertake amendment of their governing documents which conflict with the statutes by the end of 2021.

Amended Civil Code Section 4740 provides:

4740.

(a) An owner of a separate interest in a common interest development shall not be subject to a provision in a governing document or an amendment to a governing document that prohibits the rental or leasing of any of the separate interests in that common interest development to a renter, lessee, or tenant unless that governing document, or amendment thereto, was effective prior to the date the owner acquired title to their separate interest.

(b) For purposes of this section, the right to rent or lease the separate interest of an owner shall not be deemed to have terminated if the transfer by the owner of all or part of the separate interest meets at least one of the following conditions:

(1) Pursuant to Section 62 or 480.3 of the Revenue and Taxation Code, the transfer is exempt, for purposes of reassessment by the county tax assessor.

(2) Pursuant to subdivision (b) of, solely with respect to probate transfers, or subdivision (e), (f), or (g) of, Section 1102.2, the transfer is exempt from the requirements to prepare and deliver a Real Estate Transfer Disclosure Statement, as set forth in Section 1102.6.

(c) Prior to renting or leasing their separate interest as provided by this section, an owner shall 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 lessee or the prospective tenant’s or lessee’s representative.

(d) Nothing in this section shall be deemed to revise, alter, or otherwise affect the voting process by which a common interest development adopts or amends its governing documents.

New Civil Code Section 4741 provides:

4741.

(a) An owner of a separate interest in a common interest development shall not be subject to a provision in a governing document or an amendment to a governing document that prohibits, has the effect of prohibiting, or unreasonably restricts the rental or leasing of any of the separate interests, accessory dwelling units, or junior accessory dwelling units in that common interest development to a renter, lessee, or tenant.

(b) A common interest development shall not adopt or enforce a provision in a governing document or amendment to a governing document that restricts the rental or lease of separate interests within a common interest to less than 25 percent of the separate interests. Nothing in this subdivision prohibits a common interest development from adopting or enforcing a provision authorizing a higher percentage of separate interests to be rented or leased.

(c) This section does not prohibit a common interest development from adopting and enforcing a provision in a governing document that prohibits transient or short-term rental of a separate property interest for a period of 30 days or less.

(d) For purposes of this section, an accessory dwelling unit or junior accessory dwelling unit shall not be construed as a separate interest.

(e) For purposes of this section, a separate interest shall not be counted as occupied by a renter if the separate interest, or the accessory dwelling unit or junior accessory dwelling unit of the separate interest, is occupied by the owner.

(f) A common interest development shall comply with the prohibition on rental restrictions specified in this section on and after January 1, 2021, regardless of whether the common interest development has revised their governing documents to comply with this section. However, a common interest development shall amend their governing documents to conform to the requirements of this section no later than December 31, 2021.

(g) A common interest development that willfully violates this section shall be liable to the applicant or other party for actual damages, and shall pay a civil penalty to the applicant or other party in an amount not to exceed one thousand dollars ($1,000).

(h) In accordance with Section 4740, this section does not change the right of an owner of a separate interest who acquired title to their separate interest before the effective date of this section to rent or lease their property.

The most notable change to amended Section 4740 is that it deletes former subdivision (f) which made it  applicable only to governing documents prohibiting rentals that became effective on or after January 1, 2012. The Amended Section 4740 also eliminates an Owner’s ability to vote for, or expressly consent  to the application of a rental quota or rental prohibition.  As many of you will recall, back in 2011 there was a rush by Associations to amend their CCRs to implement a provision that established a maximum number of rental units allowed within a project because as of January 1, 2012, any prospective amendment would only apply to owners that purchased a separate interest after that date.  That statutory provision effectively created two classes of members in every association, those that were not subject to the quota and newcomers that were subject to the rental quota, which was not a particularly good solution to anything and created uncertainty and feelings of disparate treatment.

The Amended Section 4740, as modified and noted above, fundamentally means that except as provided in new Section 4741, rental quotas and minimum lease terms are invalid and unenforceable even though the requisite percentage of members voted or may want to vote on the restrictions or expressly consent[ed]to be bound by these restrictions.  It may also invalidate restrictions in place which comply with these statutes as to the quota percentage.

Section 4741 goes on to create new and different problems and standards with which the Association’s will have to comply.  Whereas prior Section 4740 addressed provisions that “prohibited” the rental of separate interests within a Common Interest Development, new Section 4741 adds an additional twist of uncertainty by adding to the mix the vague and ambiguous language that: “governing document or an amendment to a governing document that prohibits, has the effect of prohibiting, or unreasonably restricts the rental or leasing of any of the separate interests.”  The inclusion of the additional criteria opens up a veritable Pandora’s box of disputes and arguments about the meaning of “has the effect of prohibiting” or what  “unreasonably restricts the rental” in the context of general rental restrictions in CCRs or Rules.  When language such as “unreasonably restricts” is injected into the discussion it generally means that a Court of law will be forced to determine what is reasonable or not, which should be unnecessary in this context.

However, at least Section 4741 provides some guidance as to the meaning of those phrases in subdivision (b) and (c).  (b) indicates that a rental quota of greater  or equal to 25% of the separate interests may be rented out at any one time, which means that the legislature has deemed that to be “reasonable.”  The applicability of this  25% quota as being reasonable as to a particular owner appears to turn on whether the separate interest was purchased prior to the end of 2020. .  Subdivision (h) of Section 4741 appears to indicate that if an Owner purchased prior to January 1, 2021 his rights to rent a separate interest would not be changed by a quota previously adopted even if the quota is 25% or greater.    There is some ambiguity concerning whether an existing quota of 25% or greater will comply with the statute only if adopted prospectively because Section 4741 (b) indicates that “nothing in this subdivision prohibits a common interest development from adopting or enforcing a provision authorizing a higher percentage of separate interests to be rented or leased.”  This can be construed to imply prospective adoption rather than relative to an existing set of CCRs.

Another rental restriction which falls victim to this new statute is a minimum lease terms in the governing documents greater than 30 days in length.  Because original Section 4740 didn’t address rental terms, many Association’s amended CCRs to provide for a minimum lease term of six months or a year in recognition that the longer the lease term the more cooperative the tenant will be.  New Section 4741 (c) invalidates those longer lease term requirements and will force the Association to amend the documents accordingly by the end of 2021 or be subject to a fine of $1000.00.  Regardless of the date of amendment of the governing documents, commencing January 1, 2021 all Associations must comply with this limitation regarding quotas and lease terms.

One of the most glaring flaws in these new laws is that it forces the Association to undertake amendments to eliminate quotas of less than 25% and lease terms of greater than 30 days.  It does not permit the Board to “correct” the provisions to reflect the change in statute to those levels, it mandates replacement of the invalid provision with a new provision compliant with the law.  Aside from the disruption in the day to day operation of the association in this context, the process of amendment of governing documents is complicated, expensive and time-consuming because of the election requirements and the presence of supermajorities to pass such amendments.

Another relevant aspect of AB 3182 relates to ADU/JADU issues.  We are all aware that if an Owner obtains approval/permitting of an ADU the Association may not reject or prevent the construction of same upon an Owner’s submission of the governmental approval for the ADU which is required by the local government, but may require an architectural application be submitted and may require aesthetic conformity with architectural guidelines.  However, in the amendment to Government Code Section 65852.2 (a)(3) there is a provision that: “If the local agency has not acted upon the completed application within 60 days, the application shall be deemed approved.”

The obvious problem with this provision is that the Association will not have any official approval on which to rely in addressing ADU architectural applications and may lead to disputes with Owners over their “right” to construct an ADU.  In light of this provision, the ADU policies implemented should contain a provision which obligates the submitting Owner to establish with written evidence that their ADU application to the local agency has been “deemed approved” under this statute and that the Owner’s word is not sufficient.

This article is an effort to give all a “heads-up” concerning the impact of the new law so that we can be ready to comply as of January 2021 and amend if necessary by the end of 2021.  We know how problematic implementation of the new election laws has been since January of 2020 and anticipate similar issues concerning this.  It would be advisable for each Association to have their governing documents reviewed to determine whether they may violate Section 4741 such that an amendment is necessary.  If you would like us to perform that review please let us know and we will be happy to provide a recommendation and quote for the cost of the amendment process.