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California Coastal Cities' Lone Fight for Short Term Ordinances and its Impact on Homeowner Associations

By Katrina E. Solomatina, Esq.
Published: July, 2018

Introduction

California's housing crisis has made short term rental regulations an even more urgent concern for leaders across the state, and some cities have already set their own regulations. These regulations and internal homeowner association rules and CC&Rs provisions sometimes collide. Here is an update based on recent case law and local ordinances.

On the one side of the issue are residents who say the short-term are like mini-hotels that bring problems such as loud parties, trash strewn on yards and sidewalks, and a shortage of parking on their streets. On the other side are those who earn money through vacation rentals of homes and condos. This is because short-term rental sites like Airbnb, VRBO and Homeaway have facilitated a lucrative way for homeowners to earn income by renting out their spare bedrooms or living room space to transient occupants for a short stay. But that industry has also attracted critics who say short-term rentals erode the quality of life in their neighborhoods.

As a result, several California cities have tried to impose a ban on short term rentals. What motivates them? Preservation of a neighborhood's residential character; minimization of inadequate maintenance (from non-resident owners); generation of tax revenue; assuring fair competition with properly licensed hotel and similar facilities; promoting the safety of renters and facilities; controlling traffic and adequacy of parking; noise; dealing with trash; and more.

Five Coastal Cities' Attempt to Regulate Short Term Rentals

The coastal city of Del Mar in San Diego County, for example, approved an ordinance which restricts short term vacation rentals in residential neighborhoods to a minimum period of seven days, for a maximum of 28 rental days per year. The ordinance cannot take effect, however, until approved by the California Coastal Commission (“CCC”)and incorporated into Del Mar's local coastal program. Last month, the California Coastal Commission rejected Del Mar's proposed ordinance short term rental requirements saying they were too restrictive; The CCC staff recommended that the ordinance be changed to allow minimum rental periods of three days, for a maximum of 180 days per calendar year. The City wants to continue to fight for the ordinance as submitted, as has been announced at July 16, 2018 City Council meeting. This position is supported by the City Mayor and the City Attorney as well as all but one of the council members.

The coastal city of San Diego passed an ordinance by a 6-3 vote at City Council's meeting on July 16, 2018, restricting short term rentals and eliminating the Mayor's proposal to exclude Mission Beach neighborhood, a popular beachside and bayside community. The vote outlaws vacation rentals in secondary homes, limiting short-term stays to one's primary residence only, for up to six months of the year. The new rules will go into effect in July, 2019. In Mission Beach the vast majority of those rentals are second homes. Council members, in voting for tighter restrictions, argued that their first obligation was to residents, who have been complaining for years that rotating cycles of vacationers are disrupting their quiet neighborhoods, depleting the supply of long-term housing and turning homes into mini hotels. In pushing down on short-term rentals, the council also approved a registration program that would require the payment of an annual licensing fee of $949, which would help generate revenue to hire personnel to enforce the new laws. The fee was calculated based on allowing primary residence rentals, plus one additional short-term rental. Those who fail to register their properties could face daily fines starting at $2,500 per violation. The hosting platforms would be subject to even stiffer penalties for failing to help ensure their hosts are properly licensed.

Meanwhile, the new regulations still must pass muster with the California Coastal Commission, which has long favored short-term rentals as an affordable option for overnight lodging along the coast. While other coastal cities, including San Francisco, have embraced regulations that limit vacation rentals to primary residences only, the commission has not taken a uniform approach with every city.

The City and County of San Francisco enacted a short-term rental ordinance in 2015. This ordinance requires hosts to register with the City, pay a $250 application fee and self-report every year. I represented a client who rented a lavish mansion in the neighborhood of Presidio in the City. At the same time he purchased another mansion several blocks away and wanted to sub-let a part of the mansion to transient renters. That plan, however, never came to life because hosts must be on the premises while the unit is being rented, but what's even worse is hosts may rent only their primary residence and not a secondary home. And, hosts may be off the premises but only for a maximum of 90 days per year. Airbnb recently spent $8 million successfully opposing San Francisco's Proposition F, which would have limited all private rentals to 75 nights per year and required payment of hotel taxes.

The coastal city of Santa Monica, for example, also adopted a short-term rental ordnance in 2015. It requires hosts to obtain a city license, pay an initial fee of $79.00, and pay a transient occupancy tax. The City refers to such rentals as “home-sharing” where the transient occupants stay for 30 days or less, and where the host lives on-site throughout the visitor's stay. The City outlaws vacation rentals of 30 days or less where the host is not present at any time. In 2016, the City of Santa Monica prosecuted an owner who was renting out five STRs in the city, in violation of this prohibition. The owner was charged with misdemeanor charges of operating a business without city permits as well as ignoring multiple citations that had been issued against him. The owner entered a plea bargain and agreed to stop operating the rentals. Additionally, he also is required to pay the City $3,500 in fines and investigative costs, as well as hundreds of dollars in criminal fines and restitution, and was placed on 24 months of probation.

The city of Santa Cruz in April of 2018 enacted a city-wide ban on short term rentals limiting the amount of short-term rentals to only 450 city-wide. Their goal is to preserve affordable housing in the City. This ordinance would still have to pass muster and get approved by the California Coastal Commission because the plan will affect the price and affordability of rentals in the area, and by extension, the ability of the public to visit and enjoy the beautiful California coast.

Do any of these Proposed or Enacted Ordinances Affect Common Interest Developments?

Leasing Restrictions

Many CIDs nowadays have lease restrictions within their governing documents such as a restriction which prohibits the rental or leasing of a property for a period of less than 30 days. Such a restriction was adopted in 2016 by the coastal community of Mandalay Shores Community Association located in Oxnard; the Board also adopted a schedule of significant fines that could be imposed for violations. Two owners sued Mandalay Shores seeking an injunction to stay the enforcement of the short-term rental rule, contending that it violated the California Coastal Act. The injunction was ultimately granted on appeal. The court of appeal stated the Act was enacted to, among other things, “maximize public access to and along the coast and maximize public recreational opportunities to the coastal zone consistent with sound resources conservation principles and constitutionally protected right of private property owners.” While Mandalay Bay Shores did not erect a physical barrier to the beach, the Court believed it erected a monetary barrier, which had the same effect. The court went on to say that “The decision to ban or regulate short term rentals must be made by the City and Coastal Commission, not a homeowner's association.” Thus, in the court's opinion, an HOA may not adopt rules affecting the “intensity of use or access to single family residences in a coastal zone Under the California Coastal Act, if a violation is determined, the CCC can impose administrative civil penalties of up to $11,250 per day (with greater sums imposed if judicial relief is sought.) (See: "NOTICE: California Coastal Commission ready to fine Community Association over Short-Term Rental ban")

Other Possible Pitfalls

In order to determine whether the HOA prohibits Airbnb rentals, it is essential to review the CC&Rs and Rules and Regulations enacted in a particular community in the coastal zone. Many CC&Rs contain leasing restrictions which prevent homeowners from renting their property for less than 30 days. An argument has been made that Arguably Airbnb or other short term rentals might not qualify as a “lease” even though the host is being paid money (rent?) in exchange for allowing the guest to occupy their home. This is because, the argument goes, a lease or rental involves conveyance of a real property interest and the exclusive right to possession whereas term arrangements are mere licenses to use someone's home (or a portion of it) for a short time, without the exclusive right to possession. However, some CC&Rs define the terms “rental” and “lease” broadly enough to include granting the right to “use” a unit in exchange for the payment of money. In such cases, CC&Rs may, in fact, prohibit short-term vacation rentals and in so may violate the Coastal Act.

Business or Commercial Activity Restrictions

Another approach to limiting or prohibiting short term rentals is to attempt to characterize them as “business or commercial activity” which in theory could be prohibited by an appropriate covenant or rule. However, home businesses are generally permissible in residential zones, as long as there is no unreasonable interference (like traffic or noise) within the community. The law in this area is evolving with some cases suggesting that use of a residence for short term rentals is a business while others saying that use of a residence for things like eating, sleeping and bathing is not a business operation even when utilized for compensation to the owner. In addition, there is one out of state case which held that an owner's receipt of money does not change the use from residential to commercial, at least where the owner does not provide “on-site services.” Unfortunately, the court did not specify the nature or extent of on-site services that would convert the use from residential to commercial, but it did say that sleeping and eating are residential uses.

Approaches

There are “pros and cons” to regulating short term rentals in any community, including those in the Coastal Zone. An association considering regulation should first a get a sense of the interest in the community to expand or limit short term rentals; then, a legal analysis of the applicable local ordinances (a call to the local Planning Department or an online review of loca regulations can help) would help frame the debate before the community actually “goes to vote” on CC&Rs amendments or rule changes. Meanwhile, we'll stay on top of this fast changing area of the law and report back later in the year. For questions about how these rules affect your community, don't hesitate to contact us.

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