Many homeowner associations have declarations of covenants, conditions and restrictions (CC&Rs) that limit the number of rentals allowed in a community. (As of January 1, 2021, rental caps cannot be lower than 25%.) How can a homeowner association enforce these limitations? What challenges do associations face when attempting to enforce rental caps? What tools are available to assist them?
An HOA, through its board of directors, has a fiduciary duty to enforce rental caps, if such caps are identified in the CC&Rs. Limiting the number of rentals benefits the community in several ways. A lower number of rentals meets financing guidelines which helps owners obtain mortgages and refinance existing loans, lowers the association’s insurance premiums, and reduces wear and tear in the common area.
When the maximum number of rentals permitted has been reached, owners who wish to rent their separate interests must be placed on a waiting list maintained by the association before they may do so. If the property was purchased before the recordation date of the CC&Rs that impose the rental cap, the owner has “legacy status” and is exempt from this restriction which may result in more rentals in a community than is permitted by the CC&Rs. (For example, if a 100-unit community has a 25% rental cap, the maximum number of permitted rentals is 25. However, because owners with legacy status are exempt from the rental cap, the actual number of rentals may exceed 25 until the legacy owners sell their separate interests.)
Enforcement Challenges
Associations face several enforcement challenges when working to keep the number of rentals in the community at the required level:
- Association cannot enforce the rental cap against owners with legacy status.
- Owners fail to inform the association when they rent so the association does not know if a home is being rented.
- Owners with legacy status fail to inform the association when they sell their homes, so the association does not know that the new owners are subject to the rental cap restriction.
- Association does not have contact information for the owner or tenant.
- Association does not have a legal relationship with the tenant, and thus are unable to evict the tenant.
- Local ordinances make it difficult for owners to evict tenants.
- Heavier workloads caused by maintaining the waiting list and associated recordkeeping.
- Expensive to take enforcement action (attorneys’ fees, etc.).
Enforcement Options
To enforce rental caps, the following options may be available if specified in the HOA’s governing documents:
- Suspend privileges for use of recreational facilities (if any).
- Levy fines and/or a reimbursement assessment for legal fees incurred to obtain compliance with the rental cap (if authorized by the CC&Rs).
- Request internal dispute resolution (IDR) to meet and confer with the owner.
- Serve a request for resolution by mediation with the owner.
- If the owner still refuses to comply after participating in the dispute resolution procedures above, the board of directors may consider a lawsuit for a court order enjoining the rental of the home.
Enforcement Tools
To assist in rental cap enforcement, the association should consider having the following in place:
- Rental restriction policy to supplement the CC&Rs rental cap, requiring owners to provide a copy of their lease before occupancy and to submit an occupancy form annually. The occupancy forms enable the association to enforce the rental cap and respond to lender questionnaires (when owners are selling or refinancing) requesting the number of rentals in the community.
- Create a waiting list (if none exists) to track and manage rentals.
- Compile a list of owners who are exempt from the rental cap (purchased their home before the date of the recordation of the restriction in the CC&Rs that imposes the rental cap).
- Adopt or amend a fine policy to deter violations by: (i) increasing the fine for violations of the rental cap and (ii) imposing a fine against owners who fail to provide their lease or return their occupancy form within a designated time period (e.g., 30 days).
Given the significant economic interests at stake, many owners choose to contest any enforcement action by the association. As a result, associations should prepare for an uphill battle and consult with experienced counsel before taking enforcement action.