Homeowners’ Associations Ability to Restrict Short-Term Rentals in Arizona

By Jeffrey Messing

In 2017 Arizona passed statutes prohibiting cities, towns and counties from restricting short-term rentals of residential properties.  The statute was intended to stop municipalities from limiting the spread of AirBnB and other online marketplaces.  See A.R.S. § 11-269.17 (counties); A.R.S. § 9-500.39 (cities and towns).  The measure was promoted as encouraging free enterprise and allowing homeowners to earn additional income.  It has, however, come under increasing criticism as residential neighborhoods deal with the reality of absentee, investor landlords renting out single-family homes on a short-term, sometimes room-by-room, basis and municipalities facing declining sales tax revenues as motels and hotels lose market share to online rentals.

The Arizona Legislature recently enacted a statute, effective December 31, 2018, to address the tax collection issue. See A.R.S. § 42-5005(L) (requiring online lodging marketplaces to remit all state and local taxes).  But the issues relating to noise, underage drinking and overuse of community facilities remain.  Although promoters of short-term rentals argue such problems can be solved by neighbors calling the police or filing lawsuits to enjoin a nuisance, those are not always effective remedies.

Homeowners’ associations and communities subject to a Declaration of Covenants, Conditions and Restrictions, more commonly known as CC&Rs, do have an alternative in many cases and that is to amend their CC&Rs. A CC&R is essentially a contract and is governed by general contract law.  Powell v. Washburn, 211 Ariz. 553, 555, 125 P.3d 373, 375 (2006) (“A deed containing a restrictive covenant that runs with the land is a contract.”). Most CC&Rs have amendment provisions which allow a specified percentage of the members subject to the CC&Rs to amend or modify them. The number of required votes and amendment procedures vary. For example, some CC&Rs require a simple majority to amend, while others require a two-thirds or a specified super majority to modify the CC&Rs.

Even if the appropriate amendment procedure is followed, the courts have placed additional limits on the nature and extent of changes to the CC&Rs that can be imposed over the objections of dissenting members.

“Unanimous approval is required to adopt a CC&R amendment that would ‘prohibit or materially restrict the use or occupancy of, or behavior within individually owned lots or units.’ . . .”

Restatement (Third) of Property (Servitudes), § 6.10(3)(a)

The key term “materially restrict” is undefined because the materiality of any restriction necessarily depends on the facts in any given case.  A limitation on the ability to enter into short-term rentals of a person’s primary residence may be less substantial or “material” than a limitation on the ability to rent a vacation home or investment property.

Arizona does not have any reported decisions specifically addressing CC&R amendments which seek to limit short-term rentals.  The leading Arizona case on CC&R amendments is Dreamland Villa Community Club, Inc. v. Reimer, 224 Ariz. 43, 226 P.3d 411 (App. 2010), which does provide substantial guidance on how to gauge an amendment’s validity. In Dreamland Villa, a simple majority of association members voted to impose membership, in what had been a voluntary club, on nonmembers.  The majority sought to impose mandatory assessments on those non-members despite the fact that there were no common areas. The Association had historically been a voluntary, recreational club with voluntary membership and private facilities, not open to the public, which the non-members had chosen not to join.  The issue presented in Dreamland Villa was:

[w]hether deed restrictions for a community without common areas, containing only restrictive covenants pertaining to each lot owner’s personal residence can be amended by majority vote of lot owners to require membership in an association and the imposition of assessments.

224 Ariz. at 50, 226 P.3d at 419.

Not surprisingly, the Arizona Court of Appeals answered that question “no.”  The reason was simple.  The proposed change, coming more than four decades after the first homes were built, would have allowed “51% of the lot owners to force the other 49% into club membership the latter had chosen against,” and force them to pay assessments “for an association they did not seek.”  224 Ariz. at 51, 226 P.3d at 420.

The Dreamland Villa court went on to discuss several cases on CC&R amendments comparing the facts presented in each.  The Dreamland Villa Court also expressly rejected an approach to analyzing the validity of CC&R amendments, that attempted to distinguish between changes to existing covenants and the creation of new covenants.  The Court reasoned that distinguishing only between the wording of various CC&R amendment provisions would be ultimately fruitless.

Nonetheless, we do not base our holding on our evaluation of the breadth of the amendment language.  [M]aking distinctions among the multitude of cases in this area “based on the breadth of the language used is an artificial, and ultimately unpersuasive distinction….”

224 Ariz. at 50, 226 P.2d at 419.

Another common strand running through these CC&R amendment cases is the importance of the vote required to amend the CC&Rs.  Most of the cases in which the amendments were struck down, involved CC&Rs that allowed the amendments to be enacted by a simple majority.

In contrast, many if not most of the non-Arizona cases upholding amendments involved CC&Rs that required a super majority to adopt amendments.

The extent to which the CC&R amendment alters long term practices and expectations is also relevant.

While there is no reported Arizona case on this issue, based on the recent case analysis, it is likely that Arizona courts will consider:

  • Whether the CC&Rs and/or the amendments materially restrict the uses, occupancy or behavior within individual lots;
  • The approval mechanism (e., whether the approval was renewed by a simple majority or a super majority); and
  • The long-term practices and expectations of the Association and the affected lot owners.

The ability of any particular Homeowners Association to amend an existing set of CC&Rs to restrict short-term rentals will depend on the terms of the existing CC&Rs and the facts and circumstances of the individual case. It will, however, be a viable option in many cases that should be explored if the community is concerned about actual or possible disruption from short-term rentals.

 

 

By | 2019-06-06T13:17:53+00:00 June 6th, 2019|HOA|Comments Off on Homeowners’ Associations Ability to Restrict Short-Term Rentals in Arizona