Moving Forward Post-Brown Montage's Arguments Fail


Montage made three arguments as to why the 2018 amendment should be enforceable against Brown. The court rejected all three of these arguments for the reasons discussed below.


1 I Guests are 'Licensees' not 'Tenants'


Montage first argued that unlike traditional tenants, guests renting Brown's property for less than 30 days were properly considered licensees, and thus not the type of renters contemplated by Section 4740.


The court dispatched with this argument by stating that although an STR could be considered a license, such a rental is also simultaneously a "rental" as defined in Section 4 7 40. In essence, the court explained that a "license" and a "rental" in this circumstance were not mutually exclusive.


2 I Brown Was Operating a Hotel


Montage next argued that Brown was "effectively running a hotel out of her property." Montage claimed this was a violation of Montage's governing documents which only allowed Brown to use her property for "residential" purposes and not for "business or commercial activities."


The court explained that "the association does not purport to ban renting or leasing in general" and that any ban must "refer to operating a business at the property, not renting or leasing the property itself." The court failed to "see how the prohibition on 'business or commercial' activity can be read to prohibit short term rentals but not longer term ones."


Finally, the court reasoned that, even if Montage's interpretation controlled, such a restriction would also run afoul of Section 4740.


3 I Public Policy Considerations


Lastly, Montage argued that at times an individual's rights must yield to the CID's rights to create and enforce rules and regulations. Montage argued that this case was such an example.


The court disagreed, however, noting that public policy considerations must run in both directions. The court explained that just the same way Montage wanted the court to consider the public policy considerations of allowing a CID to create and enforce its rules and regulations, the court must also consider the public policy considerations prioritized by the Legislature when it adopted Section 4 7 40.


As a result, the court held that the public policy considerations contemplated by the Legislature when it adopted Section 4740 prevailed over the public policy considerations of a CID to create and enforce its rules and regulations.


In light of the court's decision in Brown, there are a few important takeaways that associations should consider.


► Consider Enacting a STR Prohibition Although the court in Brown held that Montage could not enforce its STR prohibition against an owner who purchased her property before the restriction was adopted, the law is settled that if an owner takes title to a property within an association after such a restriction is adopted, the restriction is enforceable against the homeowner. As such, communities that wish to curtail STR activity, and do not currently have a prohibition against STRs in their governing documents, should consider amending their CC&Rs to prohibit STRs by all future property owners.


Notwithstanding the above, associations located within a coastal zone may face challenges from the Coastal Commission in enforcing new STR prohibitions and should consult with counsel prior to enacting them. An additional consideration is whether STRs are already regulated by the local municipality.


► Limited Enforcement of an STR Prohibition


Associations should be mindful that, as a result of Brown, if an association does not currently have a prohibition on STRs and decides to adopt such a prohibition, that prohibition will be unenforceable against all current homeowners. Only after title to a property has been transferred to a new owner will the prohibition become operative against that property. The Civil Code lays out which types of transfers are effective to terminate the right to lease and which are exempt.


If an association does currently have an STR prohibition in its governing documents, before enforcing that prohibition against a homeowner, the association should perform a case-by-case analysis to determine when the prohibition was enacted, when the owner against whom enforcement is sought took title, and whether the particular owner is subject to the STR prohibition under Civil Code section 4 7 40 and the holding in Brown.


Associations should strongly consider the assistance of legal counsel when deciding to enforce such a prohibition to ensure any post-amendment transfer of title is not exempt under Section 4 7 40.


► Potential Impact on Other Categories of Rentals


Lastly, the court's decision in Brown has the potential to extend beyond just STRs. Although the court's decision in Brown was confined to a certain category of rentals - short term rentals - the court's language could be used as precedent to limit an association's ability to enforce prohibitions or restrictions on other categories of rentals, such as room rentals. Any restriction which constitutes a categorical prohibition on a type of rental would potentially fall within the court's broad holding in Brown.


Brown has the potential to impact associations and the operation of common interest developments for years to come. Aside from requiring most associations to perform a case-by- case analysis of STR issues as they arise, Brown leaves open the question of damages for lost STR income. The full extent of the downstream effects of the Brown decision may not be known at this time, but what is certain is that the Brown decision is likely to impact many associations and their ability to enforce rental restrictions in their governing documents.


-Philip Walquist, Esq. is a community association attorney with Roseman Law, APC. For additional information please contact Roseman Law, APC at 949.339.2000 or info@roseman.law.


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