HOAs with significant populations of renters may encounter problems that do not arise in developments that consist of primarily owner-occupied homes and condominiums. Those problems typically include higher amounts of assessment delinquencies, more rules violations, lower maintenance standards, more insurance claims, etc. HOAs seeking to avoid such problems often amend their governing documents (i.e., amend their CC&Rs) to impose reasonable rental restrictions within their developments. California courts have recognized a HOA’s authority to take such action as well as its general power to regulate rentals:
“Reasonable restrictions on alienation of condominiums are entirely consistent with Civil Code section 711 in which the California law on unlawful restraints on alienation has its origins. The day has long since passed when the rule in California was that all restraints on alienation were unlawful under the statute; it is now the settled law in this jurisdiction that only unreasonable restraints on alienation are invalid. (Laguna Royale Owners Assn. v. Darger (1981) 119 Cal.App.3d 670, 682.)
“The power to regulate pertains to a wide spectrum of activities, such as the volume of playing music, hours of social gatherings, use of patio furniture and barbecues, and rental of units.” (Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, FN 6.)
“Here we hold, among other things, that homeowners associations may adopt reasonable rules and impose fees on members relating to short-term rentals of condominium units.” (Watts v. Oak Shores Community Assn. (2015) 235 Cal.App.4th 466, 468.)
Statutory Limitations on Rental Prohibitions within HOAs The policy of the California Legislature in seeking to address the state’s housing and homelessness crisis has resulted in several changes to the law that significantly limit the degree to which an HOA may restrict the rights of its members to rent out their homes. For information addressing those limitations and the only rental prohibitions that may be lawfully enforced, see “Limitations on Rental Prohibitions.”
Disclosure of Rental Prohibition to Prospective Purchaser
If a provision of an association’s governing documents “prohibits the rental or leasing of any of the separate interests in the common interest development,” the owner of a property has a duty to disclose to its prospective purchaser the existence of the rental prohibition and provide a statement describing the prohibition. (Civ. Code § 4525(a)(9).)
Developments in Very High Fire Severity Zones The governing documents (i.e., CC&Rs or architectural standards) of developments that are located in very high fire severity zones must allow for the use of at least one type of fire retardant roof covering material that meets the requirements of Section 13132.7. (Civ. Code § 4720(b).)
Roof Repair & Replacement The obligation to use fire-retardant materials is not triggered for minor roof repairs. However, if more than fifty percent (50%) of the total roof area is replaced within any one (1) year period, any roof covering materials that is applied “in the alteration, repair or replacement of the roof” must be a fire retardant roof covering that meets either Class A or Class B standards. (H&S Code § 13132.7.).
Commercial in Nature Civil Code Section 4710 provides homeowners with rights to display and post noncommercial signs in or upon their separate interests, subject to certain limitations. (See “Flags, Banners & Signs.”) However, Section 4710 does not apply to the display and posting of real estate signs (i.e., “For Sale” or “For Rent” signs) because such signs are deemed commercial signs. (See Fourth La Costa v. Seith, at 579(“…signs advertising property for sale or for lease constitute commercial speech as the advertiser’s interest is purely economical.”).)
Notwithstanding that fact, Civil Code Sections 712 and 713 provide homeowners with limited rights to display real estate signs on their properties, subject to the limitations discussed below.
General Protections Civil Code Section 712 renders void any provision in an association’s governing documents that seeks to prohibit or restrict the right of a property owner or the owner’s agent to display a real estate sign on the owner’s property. (Civ. Code § 712(a).) The real estate sign may advertise the following:
That the property is for sale, lease or exchange by the owner or his or her agent. (Civ. Code §§ 712(a), 713(a)(1).)
Directions to the property. (Civ. Code §§ 712(a), 713(a)(2).)
Sign Posting & Display Locations Real estate signs may be posted or displayed on the owner’s property, or the property of another with their consent. (Civ. Code §§ 712(a), 713(a).) However, owners have no right to post real estate signs in association common areas if prohibited by the association. (Fourth La Costa v. Seith, at 581.) Therefore, in a condominium situation where the owner does not have a yard, the owner typically posts the real estate sign in the window of his/her unit. In planned developments, the owner may post the sign in any reasonable location of his/her property that is in plain view of the public, so long as it does not adversely affect public safety or traffic safety. (Civ. Code §§ 712(a), 713(a).)
Reasonable Restrictions Permitted
Aesthetic Restrictions – the real estate signs must be of “reasonable dimensions and design.” (Civ. Code §§ 712(a), 713(a).) An association therefore has the authority to impose reasonable restrictions on real estate signs for aesthetic purposes. (Fourth La Costa v. Seith, at 581.)
Quantity Restrictions – an association may limit real estate signs to one (1) sign per unit/property. (Fourth La Costa v. Seith, at 581.)
Removal Requirements – an association may require that signs be removed within a reasonable time-period following a sale (i.e., within three (3) days). (Fourth La Costa v. Seith, at 581.)
The extent to which a HOA may restrict or prohibit homeowners from posting flags, banners and signs depends upon: (1) the nature/content of the flag, banner or sign, (2) its dimensions, and (3) the location where it is to be displayed or posted.
Noncommercial Flags, Banners & Signs Permitted Civil Code Section 4710 provides homeowners within associations the right to display “noncommercial” signs, posters, flags or banners:
“The governing documents may not prohibit posting or displaying of noncommercial signs, posters, flags, or banners on or in a member’s separate interest, except as required for the protection of public health or safety or if the posting or display would violate a local, state, or federal law.” (Civ. Code § 4710(a).)
Permitted Signage Materials
For the purposes of Section 4710, a noncommercial sign, poster, flag, or banner may be made of “paper, cardboard, cloth, plastic or fabric…but may not be made of lights, roofing, siding, paving materials, flora, or balloons, or any other similar building, landscaping, or decorative component,” nor may it “include the painting of architectural surfaces.” (Civ. Code § 4710(b).)
Permitted Posting Locations
For the purposes of Section 4710, a noncommercial sign, poster, flag or banner “may be posted or displayed from the yard, window, door, balcony, or outside wall of the separate interest.” (Civ. Code §4710(b).) This language does not necessarily permit homeowners to display noncommercial signs upon any portions of HOA common area (i.e., common area parks or recreational facilities, common area walls surrounding condominium units, etc.).
Permitted Sign Dimensions
Section 4710 does allow for a HOA to prohibit flags, banners and signs that exceed the following dimensions:
Noncommercial Signs and Posters that are more than nine (9) square feet in size may be prohibited. (Civ. Code § 4710(c).)
Noncommercial Flags or Banners that are more than fifteen (15) square feet in size may be prohibited. (Civ. Code § 4710(c).)
Political Signs Although not explicitly addressed in Section 4710, political signage is generally understood to constitute “noncommercial” signage. Additionally, pursuant to Civil Code Section 1940.4, it is unlawful for a landlord to prohibit a residential tenant from posting or displaying a political sign or banner. California Courts have analogized HOAs to landlords in certain respects. (See Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 499.)
Commercial Signs & Real Estate Signs
While Section 4710 limits a HOA’s authority to restrict the display or posting of noncommercial signs, its language does not address prohibitions on the display of commercial signs (i.e., a sign advertising a business, promoting a company or individual for profit motives, etc.). By implication, Section 4710 would not impact a HOA’s authority to prohibit or restrict the display of commercial signs. Most sets of HOA governing documents contain restrictions on the commercial use of properties; such restrictions often include language that prohibits commercial signage.
*Exception: Real Estate Signs
Notwithstanding the above, Civil Code Sections 712 and 713 provide homeowners with limited rights to display real estate signs (“For Sale,” “For Rent,” etc.), even though such signs are commercial in nature. (See “Real Estate Signs.”)
Number of Signs Section 4710 does not address the number of noncommercial signs that may be displayed by a particular homeowner. However, in the case of Fourth La Costa v. Seith, the California Court of Appeal “[saw] no problem with allowing only one sign per unit, or requiring that signs be removed within three days of a lease or sale.” (Fourth La Costa v. Seith (2008) 159 Cal.App.4th 563, 581.) Though that case pertained to real estate signs, the Court’s reasoning could similarly apply to restrictions on the number of noncommercial signs.
U.S. Flags Civil Code Section 4705 contains similar protections for homeowners displaying a flag of the United States, as well as similar restrictions on permissible flag materials and display locations. However, unlike Section 4710, Section 4705 does not contain language addressing the permissible dimensions of U.S. flags.
Religious Items on Doors
Civil Code sections 1940.45 and 4706 grant members the right to display religious items on the entry doors and door frames to their respective units, subject to certain limitations. (See “Religious Items on Doors.”)
An association has the general authority to restrict or prohibit the operation of commercial and business activities inside its members’ separate interests (in or upon their respective units or lots). Such restrictions and prohibitions are almost always contained in an association’s governing documents (i.e., in its CC&Rs) from the time the association was originally developed. Those provisions often define “commercial” in a broad sense to include any business, commercial, manufacturing, mercantile, storing, vending or other such non-residential purpose.
The intent behind such provisions are to reduce the burdens placed upon association common areas (i.e., customers/employees parking in the HOA’s streets or parking spaces), and to prevent commercial activities from becoming a nuisance to neighboring homeowners and the HOA in general. Municipal ordinances and laws that permit the operation of home-based business do not necessarily supersede conflicting provisions in an association’s governing documents unless they explicitly state that they do.
Interpretation of CC&R Restrictions & Judicial Deference
CC&R provisions that prohibit and restrict commercial uses and home businesses are often drafted broadly. Courts may grant judicial deference to a decision made by an association’s board of directors as to whether alleged business activity violates those restrictions:
“The trial court properly deferred to the Board’s discretionary decision that the Ketelhuts’ operation of the vineyard did not violate the prohibition against business or commercial activity because it did not affect the community’s residential character.” (Eith v. Ketelhut (2018) 31 Cal.App.5th 1, 17.)
Commercial Signage Civil Code Section 4710 affords homeowners with rights to display “noncommercial” signage on their separate interests. Even where an association does not have a restriction on commercial use, it may still have the authority to prohibit the display of commercial signage on a homeowner’s lot or unit. (See “Flags, Banners & Signs.”)
No Flat Prohibitions In 1994, the California Supreme Court upheld the validity of a CC&R restriction that broadly prohibited homeowners from having pets in their units. (See Nahrstedt v. Lakeside Village (1994) 8 Cal.4th 361.) Several years after that decision, the California Legislature enacted Civil Code Section 1360.5 (now Civil Code Section 4715) to afford homeowners within associations the limited right to keep and maintain at least one (1) pet. However, as written, Section 4715 does not affect the validity of a pet prohibition contained in an association’s governing documents that has not been “entered into, amended, or otherwise modified” on or after January 1, 2001. (Civ. Code § 4715(e).) This created an ambiguity as to whether Section 4715 applies only to situations where the specific governing document containing the pet prohibition (i.e., the CC&Rs) was amended after 2001, or whether Section 4715 would apply if any governing document of the association was amended or modified after 2001 (i.e., the bylaws, operating rules, etc.).
This ambiguity became especially significant upon the adoption of Civil Code Section 1363.03 (now Civil Code Section 5105) in 2006 that required all associations to adopt election rules. Because election rules are “operating rules” within the meaning of Civil Code Section 4355, they constitute a component of the association’s governing documents for the purposes of Section 4715. (Civ. Code § 4715(d).) Thus, there was a concern that Section 1363.03 (now Section 5105) requiring associations to adopt election rules served to effectively nullify any existing pet prohibitions.
To address this concern, in 2007, Senator Kuehl requested that the California Office of Legislative Counsel (COLC) review this ambiguity and provide some guidance. On July 19, 2007, COLC rendered an opinion that the adoption of election rules pursuant to Section 1363.03 would indeed void pet prohibitions contained in other provisions of an association’s governing documents. The COLC opinion states in pertinent part that:
“…it is our opinion that, under Section 1363.05 of the Civil Code, the adoption of a rule by a common interest development to comply with the election requirements of Section 1363.03 of the Civil Code renders unenforceable a provision of the governing documents of that development that prohibits the keeping of at least one pet.”
While the COLC opinion does not have the weight of law or legal precedent, it does illustrate how courts may interpret Section 4715 moving forward. The HOA industry took notice of the COLC opinion, and the general consensus among HOA attorneys is that flat prohibitions on pets are no longer enforceable.
Reasonable Restrictions Permitted
The rights afforded to homeowners under Section 4715 are “subject to reasonable rules and regulations of the association.” (Civ. Code § 4715(a).) Rules and regulations utilized by associations in this respect typically include restrictions on the type of breed, size (weight), and number of pets that a homeowner may have. Additionally, associations often enact operating rules that regulate pets entering into the association’s common areas (i.e., rules requiring pets to be leashed when in common area streets, parks, hallways, etc.).
Companion & Service Animals An association’s authority to regulate and restrict pets is also subject to Federal and State laws prohibiting discrimination against persons with disabilities. Those laws may require an association in particular circumstances to exempt a disabled owner’s pet from having to comply with the association’s otherwise reasonable pet restrictions.
All funds received by an association are deposited into the association’s operating account. A portion of those funds are then transferred into the association’s reserve account according to the association’s reserve funding plan.
Review Requirements
Included within the board’s financial review requirements is the review of information pertaining to the association’s operating account (i.e., review bank account statements, review current reconciliation of the operating account, etc.). (Civ. Code § 5500; See also “Financial Review Requirements.”)
Manager Deposits & Control of Account Civil Code Section 5380 contains several requirements governing how funds received by a managing agent on behalf of an association must be deposited into certain bank accounts. (See “Deposit of Association Funds by Manager.”)
Financial Transfers Requiring Written Board Authorization
Transfers from the association’s operating account over certain thresholds require written board authorization. (See “Financial Transfers Requiring Written Board Authorization.”)
Review the association’s most recent reserve study on an annual basis in order to consider and implement any necessary adjustments to the board’s analysis of the HOA’s reserve account requirements. (Civ. Code § 5550(a).)
Notwithstanding the above, the board has the duty to adhere to any more stringent financial review requirements that may be contained in the association’s governing documents. (Civ. Code § 5500.)
Financial Review by Board Independent of Board Meeting The financial review requirements of Section 5500 discussed above may be met when every individual member of the board, or a subcommittee of the board consisting of the treasurer and at least one other board member, reviews the documents and statements described in Section 5500 independent of a board meeting, so long as the review is ratified at the next board meeting and that ratification is reflected in the minutes of that meeting. (Civ. Code § 5501.)
Authority to Obtain Loan A HOA’s authority to obtain a loan (borrow money) is generally contained within the provisions of its governing documents—typically its CC&Rs or bylaws. Where such provisions are absent, the authority to obtain a loan is found in Corporations Code Section 7140(i). Section 7140(i) allows corporations to borrow money, subject to any limitations contained in the corporation’s articles or bylaws.
Membership Approval Requirements Many sets of HOA governing documents contain provisions that require membership approval in connection with obtaining a bank loan for the HOA. Those approval requirements could extend to any of the following issues:
An association’s “reserve account” means both of the following:
“Moneys that the board has identified for use to defray the future repair or replacement of, or additions to, those major components that the association is obligated to maintain.” (Civ. Code § 4177(a).)
“The funds received, and not yet expended or disposed of, from either a compensatory damage award or settlement to an association from any person for injuries to property, real or personal, arising from any construction or design defects.” (Civ. Code § 4177(b).)
The reserve account is thus separate and distinct from the association’s operating account that contains funds used to carry out the association’s day-to-day operations.
Withdrawal, Spending & Disclosure Requirements Boards are required to “exercise prudent fiscal management in maintaining the integrity of the reserve account.” (Civ. Code § 5515(e).) Failing to do so could not only jeopardize the financial viability of the association and the property values of its members, but could also constitute a breach of the board’s fiduciary duties. (Raven’s Cove Townhomes, Inc. v. Knuppe Dev. Co. (1981) 114 Cal.App.3d 783, 800-801.)
Associations are therefore subject to numerous statutory requirements that serve to:
Limit the purposes for which funds may be expended from the reserve account;
Regulate the procedure through which a board may authorize the temporary transfer (borrowing) of funds from the reserve account without the membership’s approval; and
Financial Transfers Requiring Written Board Authorization
Transfers from the association’s reserve account over certain thresholds require written board authorization. (See “Financial Transfers Requiring Written Board Authorization.”)
