by Allison Preston
Homeowners’ Associations (“HOAs”) commonly cap the number of homes within their communities that may be used as rental properties. Such restrictions may be found in an HOA’s Declaration of Covenants, Conditions, and Restrictions. Rental restrictions are not generally problematic for owner-occupied homes; however, rental restrictions may prove problematic for investors who purchase properties solely for use as rental properties.
An HOA’s restriction on the number of rental properties in a community is supported by A.R.S. § 33-1260.01 (governing condominiums) and A.R.S. § 33-1806.01 (governing planned communities). The Arizona legislature enacted these two statues in 2013, and they took effect in September of 2013.
Section A of both statues read: An owner may use the owner’s property as a rental property unless prohibited in the HOA’s declaration. Such use as a rental property shall be in accordance with any rental time period restrictions included in the declaration.
By enacting the foregoing statutes, the Arizona legislature lent its support to an HOA’s rental restrictions. This support follows the precedent set by the Arizona Supreme Court in Powell v. Washburn, 211 Ariz. 561 (2005), which held that restrictive covenants shall be interpreted to give effect to the intent of the parties as determined from the language of the restrictive covenant. Determining the intent behind a rental restriction does not typically require an analysis beyond the plain language of the restriction: The HOA intended to restrict rental properties.
A logical question that follows from an HOA’s rental restrictions is, how restrictive can an HOA be? Can an HOA limit the number of rental properties to 50% of the total properties in the community? How about a limit of 15%? How about no rental properties?
In Vales v. Kings Hill Condo. Ass’n, 211 Ariz. 561 (2005), the Arizona Court of Appeals upheld a no rental restriction. The Court found that the HOA’s members properly voted on and approved the no rental restriction in accordance with Arizona law and the HOA’s governing documents. Id. The Court stated that its ruling gave effect to the actual intention of the owners who approved the no rental restriction. Id.
In enforcing rental restrictions, Arizona courts fall in line with other states that also enforce rental restrictions. The Florida Court of Appeals upheld a rental restriction and ruled that such restriction did not unlawfully restrain an owner’s use and conveyance of its property, even when applied retroactively. Seagate Condo. Ass’n, Inc. v. Duffy, 330 So.2d 484 (1976). Similarly, the Wisconsin Court of Appeals upheld a rental restriction the required owner-occupancy and ruled that such restriction did not render title to the property unmarketable. Apple Valley Gardens Ass’n, Inc. v. Hutta, 743 N.W.2d 483 (2007).
Although Arizona courts are inclined to uphold an HOA’s rental restriction, the restriction may be unenforceable if (1) it was not part of the original declaration recorded by the declarant, (2) it was not approved by the majority of owners in the community, and (3) it was not properly adopted as an amended to the declaration.
Ms. Preston is an attorney in DMMG’s HOA Practice Group where she works hand-in-hand with Homeowners’ Associations throughout the Phoenix Metropolitan Area. Ms. Preston helps HOAs understand their governing documents and the HOAs’ rights and obligations to the homeowners. Ms. Preston also practices real estate law, landlord-tenant law, and general business law for both transaction and litigation matters.