Appeals Court Grants More Power to HOAs on Short Term Rentals
On March 25, 2015, the Second Appellate District addressed regulations of a homeowner’s association related to short term rentals in Watts v. Oak Shores Community Association. The issue presented to the appeals court was whether the Board of Directors of the Association could create certain regulations and impose certain fees related to short term rental uses by homeowners.
The Oak Shores community is a single family common interest development that is governed by the Board of Directors of its Community Association. It includes 851 parcels, 660 of which are developed with single family homes. Only about 20% of the homes are occupied by full-time residents and about 66 homeowners rent out their homes to short term vacation renters. As with all common interest developments in California, Oak Shores is governed by a combination of Covenants, Conditions, & Restrictions (CC&Rs) and community bylaws. Under the CC&Rs, the board “may adopt, amend, or repeal Rules for the use, occupancy, maintenance of the Project; for the general health, welfare, comfort, and safey of Members; and to interpret and implement these CC&Rs, and establish penalties for violation of such Rules.”
Plaintiffs challenged several rules created by the Association. These included:
- A $325 annual fee for renting homes
- A 7-day minimum rental requirement
- A limitation on the number of automobiles, boats and other watercraft that renters could bring into the development;
- A mandatory garbage collection fee
- Boat and watercraft fees
- Building and property transfer fees
Evidence at trial
At trial, the Association’s general manager testified that short term renters caused more problems than owners or their guests. The problems cited included lack of knowledge of Association rules, parking, noise, and abuse of facilities. Further, certified public accountants testified that the fees charged were all necessary to defray the costs actually experienced by the Association. In addition, a homeowners association expert testified that the Association met the standard of care for giving members notice of rule and fee changes. Evidence at trial indicated that the named plaintiff never obtained a business license to rent his home, had not paid transient occupancy tax, mischaracterized his renters as guests to avoid applicable rental rules and regulations and that portions of his testimony were “demonstrably false.”
The trial court ruled in favor of the Association, finding the rules and regulations reasonable and in compliance with the governing documents of the Association and applicable laws. Plaintiff Watts challenged the trial court on appeal contending the trial court used the wrong legal standard.
Although the conduct of short term renters in this particular instance appears to have been harmful in many ways to the finances of the Association – the appeals court’s ruling would apply equally even without such dramatic concerns.
Plaintiff’s claim was that courts are only required to defer to homeowner’s association decisions for ordinary maintenance decisions. The appeals court disagreed, citing to a 1999 San Diego case in which the Supreme Court stated “Generally, courts will uphold decisions made by the governing board of an owners association so long as they represent good faith efforts to further the purposes of the common interest development, are consistent with the development’s governing documents, and comply with the public policy.” (Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal. 4th 249). The appeals court further cited to a 2000 Rancho Sante Fe case in which a court deferred to an association denial of a room addition on aesthetic grounds (See e.g. Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal. App, 4th 965, 979).
Turning to the issue of setting fees, the appellate court approved the “rough proportionality” test for how an Association sets its fees. That is, the trial court indicated the issue was whether evidence demonstrated that there was a “reasonably close” relationship between each contested fee and the cost it intended to offset. Importantly, the appellate court rejected plaintiff’s contention that the type of test for evaluating the fee amount should be a time and motion test. This is important because the court tacitly embraced a simple audit of the Association’s accounting books rather than any more intense assessment of which residents or guests were responsible for which fees.
Impact on short term rentals
Broadly speaking, the importance of this decision is that it solidifies a level of deference in the decisions of a small group of Directors over a large development. This case does not involve rules that existed at the time that owners bought their homes, but instead were applied to existing owners who bought into the property with a certain understanding of how the homes could be used. The Watts court has arguably placed decision making regarding constitutionally protected property rights in the hands of a small board of individuals with virtually no evaluation of the process through which those decisions were made.
For the short term rental community and property owners looking to supplement income, this case places significant potential barriers and requires enhanced vigilance with regard to the decisions of one’s Homeowner’s Association governing board. Another very important impact of this holding is that it supports an HOA’s ability to change the rules of the game even after you’ve purchased – and even if your development is only 20% occupied by people who live there full time! This puts tremendous power and control in an HOA Board and could have significant impacts for homeowners engaging in short term rentals.
Omar Passons is a Senior Attorney at Stutz Artiano Shinoff & Holtz in San Diego, CA. His practice focuses on construction and land use litigation and he has represented homeowners, homeowners associations, public entities and developers with regard to common interest, construction claims and real estate litigation. He can be reached at (619) 232-3122 or firstname.lastname@example.org.