In this Article:
- History of short-term rental legislation in AZ
- HOAs have used CC&Rs to ban short-term rentals
- Supreme Court decision requiring “reasonable and foreseeable” notice to amend CC&Rs
- Ruling can be applied retroactively and cause a flood of new cases
For years and years, HOA’s have relied on the general amendment power in their CC&Rs to apply new and often unforeseeable duties or restrictions upon property owners in an HOA. The majority often imposes the restrictions on the minority in a community and often it is difficult and expensive to fight an HOA that does amend its CC&Rs. Property owners usually capitulate and just sell their homes or investment properties to get out from under the duties and restrictions.
In Arizona specifically, property owners that utilize the short-term rental (“STR”) market to generate higher returns on their properties than could otherwise be generated in a long-term lease, received assurance by a law signed by Governor Ducey in 2016, that effectively made STRs legal (SB1350) in AZ and protected them from the State, County or City laws that would ban them like many other cities across the country have done.
Not So Fast, Governor
While the legislation was quite helpful and does provide broad protection. The favorable law did not stop private entities (HOAs) or communities from using private governing documents called the Covenant, Conditions, and Restrictions (“CC&Rs”) to restrict or ban STRs in a private community. Since 2016, there have been 100’s of HOAs that have taken the step to amend their CC&Rs and effectively ban STRs.
The effect has been to cause investors and potential STR homeowners to buy in a community without any restrictions under the CC&Rs and thereafter face a ban due to an amendment passed by the HOA or Community. There is no amount of due diligence that can be conducted prior to purchasing in a community if an HOA or a majority of homeowners can simply change the rules after the fact.
Que the Supreme Court…
In a recent case, the Arizona Supreme Court was challenged with this issue. Though not dealing directly with STRs. The case was instructive for how an HOA can amend its CC&Rs. The Court limited an HOA’s ability to amend the CC&Rs without some notice that it could occur under the current CC&Rs.
[Maarten Kalway v. Calabria Ranch HOA by following the link, you can review the final decision as well as listen to the oral arguments that led to the decision where Justices question the attorneys and ask them for their thoughts on the case and the standard to be employed. The questioning is insightful when thinking about how to apply the case or argue using the case as a precedent for arguments in later cases. It’s worth a look.]
What does the case mean moving forward?
It means protection from unforeseeable changes for STR property owners and homeowners generally. The Court made several pointed statements that create a precedent that will cause HOAs to avoid or at the very least to think long and hard before amending current CC&Rs. See below:
- “[W]e hold that an HOA cannot create new affirmative obligations where the original declaration did not provide notice to the homeowners that they might be subject to such obligations”
- “The notice requirement relies on a homeowner’s reasonable expectations based on the declaration in effect at the time of purchase”
- “The law will not subject a minority of landowners to unlimited and unexpected restrictions on the use of their land merely because the [CC&Rs] permitted a majority to make changes to existing covenants”
- CC&R “amendments must be reasonable and foreseeable” meaning… the current CC&Rs “must give notice that a restrictive or affirmative covenant exists and that the covenant can be amended to refine it, correct an error, fill in a gap, or change it in a particular way.”
- “[F]uture amendments cannot be entirely new and different in character”
Kalway v. Calabria Ranch HOA, LLC, No. CV-20-0152-PR. The core ruling weaved throughout the decision is that HOAs will be held to a strong “notice standard” when determining whether the amendments are allowable.
The Court decision may be enforced retroactively against communities that have amended CC&Rs in such a way that would not have provided proper notice under the former CC&Rs. The future will tell whether this happens as a practical matter, it is a long, expensive trip to take if a STR property owner already cut their losses and abandoned their investment by selling and moving on. There may not be much of an upside in trying to sue an HOA retroactively to remove the amendment.
Hypothetically, there is a route to demand removal of the newly recorded CC&Rs by providing notice of the decision to the HOA or community board and stating the amendment recorded with the county harms their title as a false statement or is groundless. An action thereafter would allow for stated damages and attorneys’ fees. See A.R.S. §33-420. The statute itself states the following presumption, “A document purporting to create an interest in, or a lien or encumbrance against, real property not authorized by statute, judgment or other specific legal authority is presumed to be groundless and invalid.” Id. That means the case could be easier won with that presumption if proven that the amendment did not provide notice that was required. Another area that could uncover property owners motivated to challenge previously passed amendments is a homeowner that may desire to convert an existing primary residence into an STR. That homeowner may be more motivated to take action against an HOA or community board where an amendment was passed after they had purchased their home and now that restriction stops them from using their home how they choose. It will be interesting to watch.
Chris Niederhauser is a real estate & transactional attorney with WELLS Law Group, PLLC. Chris focuses his practice on helping clients achieve real world solutions to real world challenges by combining practical legal advice with his market knowledge gained from operating a law firm and his multistate real estate team, LUXRE International, since 2011. Chris can be contacted via email at Chris@wellsrealtylaw.com or via phone at 480-543-9366.
Some additional Q&A’s we have been asked
How strong is the Kalway v. Calabria Ranch HOA decision for purposes of controlling Future actions of HOAs and non-HOA Communities with CC&Rs?
There is some discussion to be had concerning the facts of this case as compared to others the court used as precedent to make their decision. There were strong facts in this case that could distinguish it and cause it to be sidestepped by other Justices in the future. The other land owners in the community of Calabria Ranch ganged up on one land owner in the community and not only did the CC&Rs not give notice, but the HOA/other members of the community also acted poorly to in some ways to make the single land owner Mr. Kalaway a sympathetic party in the case.
Does the Kalway v. Calabria Ranch HOA decision directly state anything about short-term rentals?
No. The Justices do not address short-term rentals in any way. The case was not dealing with that and any direct discussion would have then been called dicta. The power of the decision is in how the language can be applied to what 100’s of HOAs have done in dealing with STRs in their communities as an afterthought. It should be noted the case has far-reaching implications for land owners in any community governed by CC&Rs. The decision protects all owners from the majority rules scenarios that so often play out. In the past, the CC&R amendment powers we almost indefensible. HOAs and community owner majorities were able to operate as superpowers in those communities because the amendment power was considered notice that things could change at any time.
What if I move into a community where the CC&Rs were already changed, but in the past, the CC&Rs did not ban STRs, can I sue?
Most likely, the notice is now in place and you would not have a cause of action. Previous owners in the community may have an action if they chose to pursue overturning the amendment, but a likely method some HOA will choose to employ is not to enforce the amendment against former owners and then enforce it against new owners. In a way grandfathering the STR owners from the past without allowing more to happen in the future. I am not sure how that would play out in a court based on this decision, but there is a possibility an HOA could employ that strategy and a court find no cause of action because there are no damages to the individual owner filing suit.