When does the bill take effect? 1/1/2012.

Will it affect current restrictions? No, except maybe in practices (see more below).

When it takes effect, what changes? There are several changes that will occur after the effective date:  

1.  No owner in a common interest development will be subject to a rental restriction in a governing document that prohibits the rental or leasing unless that provision was effective prior to the date the owner acquired title, or the owner consents to the restriction. (Civil Code Section 1360.2 is added to the Davis Stirling Act.)

  2. When a lot or unit is sold, the lot owners will have to provide a statement describing the restriction that is in effect. (This is an addition to Civil Code Section 1368 which lists disclosures owners in CIDs have to make when they sell their property.) Since the owner has the right to ask the association to provide the 1368 disclosures, this will be a new requirement for associations as well.

  3. The right to lease free of restrictions any owner has will not be affected by any transfer of that property to another party that:  

does not result in reassessment by the County Tax Assessor (which include transfers to family trusts or family members including children, or businesses with same owners); or

is transferred through a probate proceeding (heirs); or

does not require a real estate TDS (including, as this referenced Code says) "Transfers made to a spouse, or to a person or persons in the lineal line of consanguinity of one or more of the transferors."

I will leave interpretation of that last line to those versed in wills and trusts, but believe it means the children and their offspring, and parents, of those who transfer the property.

Why was this new law passed?

The legislators were pressured by the California Association of Realtors to adopt this bill for a number of reasons, one of which was that such a restriction cuts the "investor pool" out of the "purchase pool". Another was that buyers were being caught unaware and getting into problems when they tried to rent the property. Of course, we all know that there is a strong tendency to NOT READ the documents when handed over so the provisions were often overlooked. The legislators of California apparently felt protection from the State was needed - they included an explanatory section in the Code, not something that happens with every law that is passed. This is what it says (will they ever say something simple?):

"SECTION 1. The Legislature finds and declares that the rights of owners of separate interests in a common interest development to rent or lease their properties, as the rights existed at the time the owners acquired them, should be protected by the State of California, and the rights of subsequent owners should be governed by the status of those rights at the time the subsequent owners acquired their rights."

What are some other things you should know?

There is a twist. Without going into the legal mumbo jumbo of the bill, there is another pending bill that if passed and chaptered, will add an additional disclosure that must be made upon sale. That would "a copy of the most recent 12 months of minutes of the regular meetings of the association's board of directors that were approved by the association's board of directors." Practically speaking, this won't make a difference in all cases because savvy realtors and prospective buyers have been asking for this already. However, if it becomes a "duty" to provide these minutes, the excuse "we don't have any" could get the Board into hot water in more ways than one. Boards have a fiduciary duty to have regular meetings (frequency usually specified in the bylaws) and keep minutes of meetings.

What does all this mean from a practical perspective?

As to those associations that have a rental restriction in place before the law takes effect on 1-1-2012 (meaning in the recorded CC&Rs or a legally approved amendment, other regulatory recorded document restricting leasing passed and recorded), for all owners in the development (including those who owned before or after it was recorded): They will all be subject to the lease restrictions whether or not they consent, and any owners that are "grandfathered" by the language in the amendment will lose that status when the recorded restriction says it will end. That might be when their current lease is up, when they stop leasing or when they transfer any or part of or the whole of the property to another party. If the restriction does not say, then in the "old days" (now) I believe a fair presumption would be when the property is transferred in whole to another party but in the "new days" (after this statute is effective), it seems conceivable that the interpretation of "grandfathering" without an end result specified might fall under the new statute even though the law is prospective. Where else would the court get guidance?

As to those who already own property in the development where the amendment is passed after January 1, 2012: It will apply only to those who "consent" to it, meaning there will be a new form required - because a secret ballot will not suffice as owner consent (it is not signed), and a secret ballot process is needed to amend the governing documents. So it might require a one or two-step process (1) take the vote and then get the consents signed or (2) send out the consent form at the same time as the ballot package used for voting. There would have to be separate instructions for returning the consent form. Consent cannot be determined by the receipt of a ballot package because although the association knows who voted from the return envelopes, it does not know how each person who returned a ballot voted because of the stuffing of the ballot into a blank envelope. One can anticipate there may be some "yes" voters that do not complete a consent form, and vice versa (as the voting is probably already complicated enough), but such is life. Owners who do not consent will not be subject to the restriction even if they say they voted in favor of it!

As to those who purchase after a lease restriction is in place (no matter the date), including amendments that have been approved and recorded (which owners would thereby have constructive notice of the restriction by virtue of its recording): All purchasers so described will be subject to the restriction, and if they do not have the right to lease the property or rent it, the effect of the successor language regarding their heirs, children and trusts, or businesses or successor owners won't protect the successors either. What one needs to pay attention to in this case is once anyone gains the right to lease their property - such as having satisfied a residency requirement first or because the percentage limitation is not reached, then it appears their successors will be protected as well, unless that right is limited by the recorded restriction or a proper legally sufficient agreement or regulation! If a hardship is granted, there has to be a start and end date contemplated or the same may occur - certain successors may be protected. Start thinking!

Yes, the handling of situations regarding this new law takes a lot of thought. Associations may want to jump on the bandwagon and get an amendment out to the members as soon as possible (how time flies when we're having fun, right?). But boards, you best fully understand the pros and cons and know how to temper the communications with members. Be honest, forthright, and follow legal requirements because if you don't, this legislation may support the unraveling of your restriction. Work with a knowledgeable professional. Don't write these restrictions yourselves!

Boards and owners, you can be proactive! Boards are generally in charge of putting these amendments out to members but members can petition boards asking that a rental restriction be offered to the members for voting. Really, though, it "takes a village" to get one of these amendments passed because of the board and members do not agree as to the benefits or propriety, it can be an uphill battle!

If you want to know more about rental restrictions, there is a free article here on my website. Click here Lease Limitation Restrictions - Are They Legal". There is also a $25 Primer all about Leasing Restrictions in the webstore See Publications. I write these publications for public information. And I write the restrictions for associations because they are important in protecting financing options like FHA and loans that are sold to FNMA and FHLMC - entities that have regulations discouraging or refusing loans in high percentage rental developments. I can send a proposal explaining a lot about the pros and cons and hurdles to getting these approved by members. Just send me an email request for an explanatory proposal to califcondoguru@aol.com. If you want to consider getting a restriction passed in your development, it is time to get started because it is a process, not an event! Many boards assume it will be an easy sell understanding the financing hurdles in high-percentage rental developments, but these days, in an economy where people want to keep all options open, it can be a challenge.

  As for next month - there is never a shortage of new restrictions. I will cover the new small claims court limits, the veto of the turf bill, and the results of the transfer fee and minutes disclosure bill and other legislation affecting HOAs and Condos. All bills should be on the Governor's desk by the first of September and we may know the results of most, if not all, of the pending bills. Also watch my blogs for interim information - they are accessible on the main page of this website. Get your friends on the list for the free E-News now! It's never too late.

By Beth A. Grimm, Attorney. A "service oriented" attorney and member of ECHO and CAI and various other industry organizations in California and nationally, host of the website www.californiacondoguru.com; two Blogs: California Condominium & HOA Law Blog, and Condolawguru.com Blog, and author of many helpful community association publications which can be found in the webstore on her site.