Common Interest Developments May Not Impose Post-Purchase Restrictions on Short-Term Rentals

The popularity of Airbnb, VRBO and other online hospitality marketplaces has led to a large increase in short-term vacation rentals (STRs). While STRs might be an owner’s dream, they can be a neighbor’s nightmare. In response, many common interest developments (CIDs) are prohibiting STRs. A recent appellate court decision, Brown v. Montage at Mission Hills, Inc., may fundamentally alter this landscape for CIDs. 

Common Interest Developments
As provided under the Davis–Stirling Common Interest Development Act, CIDs are a form of real estate ownership in which each owner has an exclusive interest in a property (e.g., a unit or lot) as well as a shared or undivided interest in common-area property. CIDs are widespread throughout California and include various types of housing, such as condominiums, community apartment projects and planned developments.

CIDs adopt covenants, conditions and restrictions (CC&Rs) to regulate property and property owners in the CID. CIDs typically include rules governing parking, common areas, long-term guests and property rentals, and are generally enforced by a homeowner’s association and individual property owners within the CID.

CC&Rs are governed by a patchwork of state statutes, including California Civil Code Section 4740. Among other things, section 4740 provides that a CID’s governing documents (which include CC&Rs, bylaws and operating rules) cannot prohibit an owner from renting out a property unless the prohibition was in effect when the owner acquired the property. At issue in Brown v. Montage at Mission Hills was whether section 4740 applies to new governing documents that prohibit STRs. The Brown court says that it does.

Brown v. Montage at Mission Hills
Nancie Brown, the plaintiff in Brown v. Montage at Mission Hills, owned a condominium located within the Montage at Mission Hills, a CID in Cathedral City, California. Brown purchased her condominium in 2002 and, for the next 15 years, consistently rented it as an STR (i.e., for fewer than 30 days). In 2018, Montage amended its CC&Rs to prohibit members, including Brown, from renting or leasing their properties for periods of fewer than 30 days. Litigation ensued.

The central question for the court was whether the phrase “prohibits the rental” in section 4740 extends to a partial restriction of rentals, such as a prohibition on STRs, as opposed to a total ban on all rentals (including long-term rentals). Brown argued that Montage’s ban on STRs “prohibits the rental” of her property (and thus violates section 4740) because it imposed a new limitation on renting her property for terms of less than 30 days.  Montage argued that section 4740 prevents CIDs from imposing “complete bans” on renting but not “restrictions on renting that fall short of outright bans.” Thus, according to Montage, its STR ban was permissible because it was simply a “restriction” that prohibited some, but not all, rentals.

The court found section 4740 to be ambiguous, so turned to legislative history where it found that the Legislature enacted section 4740 to provide “broad protection for owners against restrictions on renting, including the sort of restriction at issue in this case.” The court concluded that the goal of section 4740 “is to exempt CID property owners from any kind of rental prohibition or restriction that did not exist when the owner acquired title to the property.”

Because Montage’s prohibition on STRs did not exist when Brown purchased her condominium, the court held that she was exempt from the prohibition under Section 4740.

Takeaways from Brown v. Montage at Mission Hills, Inc.  

• If a rental restriction (on STRs or other) wasn’t in the governing documents when an owner acquired the property, the CID  may not enforce it against that owner.
• Some owners within CIDs may have been operating under the assumption that they could not rent out their properties for STRs (based on post-purchase HOA-imposed restrictions). Many owners might now decide to do so, which would significantly expand the STR market.
• The court only addressed whether CIDs may enforce a post-purchase prohibition on STRs. The court did not address whether Montage and other CIDs could enforce generally applicable rules that may negatively affect an owner’s ability to rent or lease their property but do not prohibit its rental or leasing (e.g., noise restrictions, fees for using a common facility or housekeeping rules).
• The court harmonizes Civil Code sections 4740 and 4741—the latter of which expressly authorizes CIDs to prohibit transient or short-term rentals for periods of 30 days or less—by explaining that any such restrictions must be forward-looking and, in accordance with section 4740, may not be enforced against owners who purchased their properties before the restrictions took effect.
• Existing CIDs desiring to prohibit STRs in their communities will need to keep meticulous records with respect to when owners acquired their properties. Because bans on STRs must be forward-looking, most CIDs with STR restrictions will need to maintain two ownership ledgers, one of owners who took title before the restrictions and one of those who took title after. 
• ​Nothing about the Brown v. Montage at Mission Hills decision affects local government’s ability to restrict or prohibit STRs. Cities and counties wishing to limit the impacts of STRs on residential neighborhoods and permanent housing inventories may no longer rely on CIDs’ restrictions to the same extent that they might have before—but there remain sound strategies for local governments to appropriately regulate STRs. Government and CIDs maintain the ability to regulate and limit the negative side effects—e.g., noise, parking and maintenance—of all rental units. Consult with a BB&K attorney to learn more.

Disclaimer: BB&K Legal Alerts are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.