COULD YOU BE PREVENTED FROM RENTING OUT YOUR HOME?

In Arizona, many individuals purchase property for investment purposes and then rent out the property for at least a portion of the year. This was especially the case several years ago because of the Valley’s housing boom and may now be an issue again because of the decline in the Valley real estate market as people who purchased properties to sell, cannot and may be looking to rent them out. But is it possible that you could be prevented from leasing the home you purchased? Most individuals would be shocked to learn that this is a very real possibility. Prohibiting property owners from leasing their properties is a trend that started several years ago and was increasingly popular with Valley developers, and many Homeowner Associations support the limitation and prohibition on rentals. This article addresses these issues.

I. BACKGROUND ON BANNING RENTALS.

Homeowners Associations are prevalent throughout the Valley and if you are looking to purchase a new home in a subdivision, the chances of finding a home that is not part of a Homeowners Association is rare. As a homeowner in a Homeowners Association you are bound by the Homeowners Association’s restrictions. These restrictions are referred to as Covenants, Conditions and Restrictions (“CC&Rs”) and they regulate the property owner’s use of their property, restricting everything from the color of the home, window coverings, holiday decorations, sports courts, pets, to landscaping. Several years ago when the Valley’s housing boom was taking place, developers were including in their CC&Rs a restriction that prohibited property owners from leasing their properties. In fact, several developers included provisions in their contracts stating that a home will be a primary or secondary residence, that the purchaser will occupy it, and prohibiting a purchaser from renting out their home.

Why the push to prohibit rentals? The issue received a lot of news attention because of the significant impact it has on home purchasers, and many property owners may have forgotten this issue or the fact that their CC&Rs prohibit rentals and are not thinking about that issue now that it comes to a point in time where they may in fact want or need to rent out their homes. Many developers have included these restrictions to limit the number of investors in a subdivision as lenders often believe that the higher number of rentals in a community affects the value of the property. The restrictions on renting also comes from homeowners who are seeking to protect the property values and neighborhood image, believing that rental properties and investors in a neighborhood decline property values, because of crime that often occurs in rental properties.

Many Homeowners Associations are seeking to amend their CC&Rs to include a restriction prohibiting rentals. A Homeowners Association seeking to amend their restrictions to include such a provision would face a difficult challenge. While many believe that a Homeowners Association could never amend their CC&Rs, and could never prohibit property owners from leasing their homes, that may not be the case. There are no cases that address this issue and prohibiting rentals has not faced any legal challenges. However, the law in Arizona is clear that if you choose to live in a Homeowners Association that has CC&Rs, to an extent you are giving up your property rights. The CC&Rs constitutes a contract between the property owner and the Homeowners Association, and when a purchaser accepts a deed to a property knowing that there are restrictions that are associated with living in that Homeowners Association, those restrictions are binding. The issue with a Homeowners Association changing the CC&Rs after an owner has purchased a property, however, as indicated, may be more difficult.

II. SHAMROCK v. WAGON WHEEL PARK HOMEOWNERS ASSOCIATION.

The Arizona Court of Appeals in Shamrock v. Wagon Wheel Park Homeowners Association, 206 Ariz. 42, 75 P.3d 132 (2003) addressed the ability of a Homeowners Association to impose membership on homeowners and, therefore, may provide some guidance with this issue.

The Plaintiffs, who were Park lot owners, filed a Complaint claiming that the Association was not a valid mandatory Homeowners’ Association and sought a declaration from the Court that membership in the Association was voluntary and that the Association could not impose assessments against non-member lot owners. The Association argued to the trial court that the Plaintiffs were mandatory members of the Association due to their property ownership in the Park. The Plaintiffs contended that they did not automatically become members upon acquiring Park lots because the Association was not legally formed as a mandatory Homeowners’ Association.
The Court of Appeals held that the Association could not have imposed membership on the Plaintiffs absent their express or implied consent. The Association, in turn, argued that the Homeowners’ Association fell under the mandatory membership under Arizona’s Planned Communities Act, A.R.S. § 33-1801 to 1808. The Association argued that the prior Declarations together with the Association’s Articles of Incorporation and Amended Bylaws combined to constitute a proper Declaration under the Act, but that the Act did not prescribe how to create such an Association.

The Court of Appeals referred to common law governing restrictive covenants to decide whether the prior Declarations, the Association’s Articles of Incorporation and the Association’s Amended Bylaws mandated membership in the Association. The Court ruled that in order to impose automatic membership on owners of property located within the neighborhood or community development, it must appear as a requirement in a deed restriction embodied within a recorded instrument. The Court analyzed the documents that had been recorded and noted that neither the Declaration recorded in 1960, which was replaced by the Declaration recorded in 1980, required membership in the Homeowners’ Association, and there was no amendment to the Declaration, by a majority of the Park lot owners, to require membership in the Association until November 30, 2001, after the lawsuit had begun. Up to that time, the Association’s Articles of Incorporation and Amended Bylaws did not affect a change in the restrictions and therefore, the Plaintiffs were not automatically enrolled as members of the Association by virtue of their ownership of Park lots.

III. CONCLUSION.
The impact of developers, and perhaps even Homeowners Associations, controlling whether a property owner can lease their property will likely have dramatic effects. If you are considering purchasing a home, or currently have a home, and in either event your intent is to lease it out immediately, or may in the future, you should carefully read the contract with the developer and the CC&Rs to ascertain whether you have agreed to occupy the home and not rent it out. However, keep in mind that CC&Rs can be amended and, since there is no Arizona case directly addressing whether CC&Rs can be amended to prohibit property owners from leasing out their homes, even if you live in a Homeowners Association that does not contain that restriction at this time, this may be an issue you face in the future.