any people ask me for information about the pros and cons of limiting the number of rentals in any given California HOA development, or imposing restrictions like requiring purchasers to reside in the property› (or at least refraining from renting it to another) for a year or more before they have a right to lease it to another. A Board may be interested in looking a lease limiting provision believing it to be a benefit the owners in the Association. An owner who works in a lending institution and sees the problems encountered in high rental percentage developments may bring the request to the Board. Anyone attempting to enforce governing documents may read about such a provision and believe it is important to restrict rentals, because of common problems associated with rentals.

The goal of a lease or rental limitation is to get and keep the percentage of rentals low so as to eliminate or at least minimize the problems that can arise as to financing and to alleviate problems commonly associated with high percentage rental complexes. The following information speaks to the practical and legal ramifications (and pros and cons) of a lease/rental limiting provision. Many associations want to look at proposing these type of regulations to the members. It is good to have the benefit of knowing what issues can arise and how to minimize the risk of a challenge to such a clause.›

THE REALITIES

Properties become more difficult to finance if the rental percentage gets too high. Generally, 30-40% is considered high by lenders (and considered unacceptable by the secondary mortgage market providers like FNMA and FHLMC). Percentages like this adversely affect some financing options, and certainly if your association ever gets to 50% rentals, you can anticipate problems with available financing. That› kind of rental percentage eliminates the option of loans that are generally sold to the secondary mortgage market (which is a substantial percentage of home loans). This high rental percentage requires potential buyers and owners who want to refinance to look for private financing because most banks and savings and loans sell to the secondary market.

Most Boards that look at these provisions have also experienced considerable difficulty with tenants. In many cases, Owners have not placed responsible tenants, Owners have not responded to the Board's communications about problems, or the tenants have ignored the Association rules. Sometimes tenants simply thumb their noses at the Board. Of course I recognize this can also happen with owners but there are no reasonable controls available to exclude such types of Owners.

These all seem to be common problems, and it seems in talking with Boards of Associations all over California, the more rentals, the more problems and bad experiences there seem to be. Many associations experience problems with rentals that do not occur as often as with owners, and boards believe that renters have a different focus and less interest generally with regard to the property. Studies done by the Department of Real Estate in California actually show that developments with a high percentage of rentals tend to have more problems than those with lower percentages so this thinking is not far-fetched.

THE LEGAL QUESTIONS

The following is information about the legality and the more general discussions on lease limitation provisions in California. I always suggest to a Board that this information should be provided to the owners in the development so that they may comment before proposing any amendment that would limit rentals in the development. Boards tend to trust that the members will be concerned about rentals. My experience is that owners do not see things from the Board's perspective all of the time.

A survey is included with this article that is designed specifically so that homeowners can provide input to the board. The owners need the information in this article, though, to fully understand the ramifications, so that they can answer with an educated viewpoint. Simply answering the questionnaire without understanding the need, or the potential issues, can lead to skewed results. Many individuals oppose the prospect of any limitation on what they can do with their property, until they understand that the marketplace may create its own limits to what they can do. Besides the financing issues, nuisances have to be disclosed in a sale, and more than half of the disputes Associations bring to me with nuisance issues involve tenants.

I usually suggest a two week turnaround time to return the survey and have it considered before any version of the documents is circulated to the membership. Some Boards want to have a town meeting to discuss the prospects. This gives the owners the education and time needed to investigate the possible lending issues with a local bank, and nuisance issues with a local realtor. I think it is a good idea to call a meeting to educate the owners and answer questions. Sometimes, there is a good turnout and the owners can get more information, and the board can get feedback from the membership. However, I have been to such meetings scheduled by the Board to see that only one or two people are interested in the subject enough to attend the meeting.

Some people question the legality of the lease and rental limitations in California. Some attorneys will not write them. Some attorneys will tell clients that they are not legal, without having any background information as to what the courts in California or any other state have done with such provisions. Legal advice without the educated backup information or knowledge is worth little.

The courts of California have spoken on the issue by approving a 100% limitation on a project that was built to provide low income housing in a case called City of Oceanside vs. McKenna. (Court of Appeal, Fourth District, Division 1, California, No. D008264, Nov. 22, 1989. Review Denied Feb. 14, 1990.) The court said:

"Courts have recognized the unique problems of condominium living and the resulting need for more control over--and limitations upon--the rights of the individual owner than in more traditional forms of property ownership. " '[I]nherent in the condominium concept is the principle that to promote the health, happiness, and peace of mind of the majority of the unit owners since they are living in such close proximity and using facilities in common, each unit owner must give up a certain degree of freedom of choice which he might otherwise enjoy in separate, privately owned property.' " (Laguna Royale Owners Assn. v. Darger (1981) 119 Cal.App.3d 670, 681-682, 174 Cal.Rptr. 136, quoting Hidden Harbour Estates, Inc. v. Norman (Fla.App.1975) 309 So.2d 180, 181-182.) "Thus, it is essential to successful condominium living and the maintenance of the value of these increasingly significant property interests that the owners as a group have the authority to regulate reasonably the use and alienation of the condominiums." (Laguna Royale, supra, 119 Cal.App.3d at p. 682, 174 Cal.Rptr. 136.)"

The validity of a lease limitation provision in other types of CIDs (meaning other than affordable housing condominiums) has not yet been tested in on the appellate level in California but lease limitation restrictions have been upheld in other states' courts and at least one California Superior Court that I know of. In the Oceanside case, what was at risk was protecting the availability of affordable housing, and shutting out investors.

Is California different than other states in any way?

There is a statute in California which prohibits unreasonable restraints on alienation of property (Civil Code Section 711). Hence, the key to avoiding contradiction of that statute is to propose a "reasonable" restriction. "Reasonable" restrictions include those that are rationally related to the problem you are trying to address, such as preserving the residential quality of the neighborhood and avoiding common problems identified with high percentage rental developments. When proposing percentages for restrictions, considering objective standards such as those set by the secondary lending industry (FNMA, FHLMC, etc.), and finding a sufficient buffer below those standards is a good way of looking at a reasonable limitation. I also believe that such things as "grandfathering" and "hardship provisions" are necessities that need to be addressed in such an amendment to make it "reasonable".› I discuss these options in more detail below.

All these points are important for purposes of discussion about these amendments. There are many developments in California that want to look at lease limitation provisions, upon hearing that financing units in can be adversely affected by rentals. I believe an Association is justified in presenting such an amendment to the owners for approval.

What are the advantages to a lease limitation provision?

They deter purchase by investment owners.

They tend to minimize problems relating to rentals.

They tend to protect the "finance-ability" of units by avoiding some of the constraints of the mortgage markets (like FHLMC and FNMA) which have restrictions on lending in high percentage rental developments.

What are the disadvantages of a lease limitation provision?

The "pool" of possible purchasers is more limited because the properties are not appealing to investors.

A lease limitation provision might be challenged by an owner who is denied the privilege of leasing his/her unit and if that occurs, the board should consult legal counsel, thereby incurring a cost.

Implementation of a lease limitation provision requires extra bookkeeping including keeping track of owners and renters and their phone numbers and contact information and processing applications for permission to lease.

There are no statistics I know of that will differentiate between the affects on the "purchase pool" as between the mortgage industry providers like FHLMC and FNMA and the "pool" created by investors, but it is fair to say that FHLMC and FNMA are major "players".

In proposing this lease limitation amendment, I will offer clients practical advice based upon my own experiences and this includes:

Obtaining Enough Votes for Passage: Generally, you can count on opposition from those persons already leasing properties in the development, unless there is a "grandfather" clause which allows those people to keep leasing the property even after the measure is passed. I always recommend doing this. The Association can use the support of the community and needs approval - every vote counts. This means persons currently leasing will not be subject to the limitation (they will be counted in the percentage but not prohibited by it from continuing to lease). Some associations limit the "grandfathering" to expire as leases terminate; others grandfather all current owners. The provisions which grandfather in everybody who currently owns in the development are commonly used when it the measure might otherwise lack sufficient support to pass. Naturally, a provision "grandfathering" that many owners takes more time to become effective practically because it really only limits leasing by those people purchasing in the development after the amendment is passed. Most Boards want to look at percentage limitations that are at or near the current percentage of rentals. Some need to look at percentages that are lower. Some need to "work their way backwards" to get out of a high percentage of rentals that is hindering the variety of financing options. Some just want to make sure that purchasers intend to reside in the properties when they buy so they want to consider a requirement of a period of residency before gaining the right to lease. These considerations factor into discussions about what it will take to get member approval of such an amendment.

Hardship Clauses: All provisions need some mechanism to provide relief for exceptions to the limitations so that those members taken by unpleasant surprises can reasonably deal with them. The provisions I recommend always allow the board to provide a waiver to the limitations for any hardship situation that may require temporary leasing - such as call to military service, a temporary job transfer, or a family illness that forces one to move for a limited period of time, and other unanticipated events like that. The HOA may want to exclude lenders from the requirements if lender approval is needed to pass the measure (see below). Usually the "waiver" period is one year or less, with the possibility of extensions.

Lender Issues: Some documents require lender approval for changes in the leasing rights. The provision may bring mixed responses from lenders. The secondary mortgage market may not wish to see any restrictions on leasing properties because that will make it unable to ease out a foreclosed property until it sells, but on the other hand, it may have difficulty marketing a product in a development with a high percentage of lenders. Because of lender concerns, I often recommend an exception to the quota limitation to give lenders that foreclose time to reasonably market the property. Otherwise, if they hold back on their own foreclosure process because they cannot lease the property, it hurts the association.

Percentage Limitation Recommended: In discussing an appropriate limitation, I find that Boards generally seek a percentage based near or at the current number of rentals. Since Associations are apt to get into a "danger zone" if the percentage is set too high, we look at the situation, the type of members, etc. For example, in a community of elderly people, there may be more long-term illnesses to consider. In a younger community, there may be more members being called to reserves duty, or that plan to keep the unit and move up to another at some point, creating an investment property for themselves. The percentage limitation to be considered is an important part of the equation and each community is different.

Extra Administration Duties: Extra bookkeeping work on the part of the Association would be necessary to make sure that its records regarding leased and rented units were up to date.› It would require that all homeowners provide copies of existing leases and/or other pertinent information relating to tenants, and would require formal application processes. It would involve some administration and record keeping relating to applications to lease, priority or waiting lists, hardship cases decisions, and followup.

I hope this information is helpful - included with this article are: a poll/survey I recommend asking owners to return to provide the Board with important feedback, and a form for the Board to provide feedback to me in the event I am asked to draft the ballot and measure for a vote of the members.› In order to do so, I would need to review the governing documents for the association to find the appropriate location for such an amendment and this form. If a Board decides to have a provision drafted, it can ask for an estimate of the charges. The work includes the document review, ballot, certificate of amendment for recording, and letter explaining how to conduct voting by written ballot. See attachments.

You can get more information including an owner survey and an estimate for the work to propose an amendment of the governing documents to your owners with leasing restrictions by sending me an email: Califcondoguru@aol.com with a request. ›I do not believe that HOAs can legally restrict rentals without specific language authorizing the Board to do so, in the CC&Rs, so the cost or proposing a measure involves writing an amendment. Don't "try this at home". Don't try to do it with "rules". You can really make a mess of things.