By Mark B. Zinman | Zona Law
Our AZREIA newsletter readers will recall that in 2016, Governor Ducey signed into law a prohibition for cities and towns from putting restrictions on short-term rentals. What was noticeably absent from that law was any restrictions on homeowner’s associations (HOAs) and their own restrictions. Numerous HOAs have amended their CC&Rs to prohibit short-term rentals. HOAs have a lot of power, but everyone was unclear what is the limit of that power. Are HOAs able to ban short-term rentals? Can they impose other restrictions? What requirements must be met to impose restrictions on short-term rentals in an HOA?
It is clear that if the original CC&Rs banned short-term rentals then an HOA can enforce that rule against any homeowner. The general logic is that the homeowner was on notice of the CC&Rs restriction when they bought the property and therefore they are bound. However, most HOAs were developed before short-term rentals became commonplace and therefore numerous HOAs do not have such a restriction in their CC&Rs. Instead, the HOAs amended the CC&Rs by majority vote and created a new restriction on homeowners. It has been unsettled whether this was valid or not.
In April 2022, the Supreme Court address a related issue and answered a lot of questions that homeowners and investors had about HOAs. In the case of Kalway v. Calabria Ranch HOA, a homeowner got into a legal dispute about numerous changes to the CC&Rs that the HOA had passed without her consent and the consent of every member of the HOA. The Supreme Court framed the issue as follows: “In this case, we are asked to decide the extent to which a homeowners’ association (“HOA”) may rely on a general-amendment power provision in its covenants, conditions, and restrictions (“CC&Rs”) to place restrictions on landowners’ use of their land.” If everyone in the HOA agrees to the changes then they are enforceable. However, if changes are made just by a majority (which is common) then what is the effect if the changes are substantial?
The Arizona Supreme Court said that the changes may not be enforceable if they were not provided for in the original CC&Rs. This doesn’t mean that each and every restriction has to be in the original CC&Rs as that is impossible, but there must be clear power or direction in the CC&Rs as to the issue being amended. The Supreme Court wrote, “We 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.” Furthermore, “The notice requirement relies on a homeowner’s reasonable expectations based on the declaration in effect at the time of purchase.” Finally, “(t)he restriction itself does not have to necessarily give notice of the particular details of a future amendment; that would rarely happen. Instead, it 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. But future amendments cannot be “entirely new and different in character,” untethered to an original covenant.
This ruling may give a stronger basis for homeowners to challenge amendments to the CC&R that prohibit short-term rentals. If there was absolutely nothing in the CC&Rs that could be interpreted to give such power, it’s possible that any amendment is not enforceable. This would require a legal analysis as to the original CC&R language and what was in place when the owner purchased the property. We suspect this issue will be litigated by numerous HOAs and owners/investors throughout the state.