LAYING DOWN THE LAW
COURT OF APPEALS ISSUES RULING FURTHER PROTECTING SHORT TERM RENTALS
The Arizona Court of Appeals recently issued a decision further protecting short-term rentals in planned communities and condominium associations. In Village of Oak Creek Association v. Bonham, 2023 WL 6444337 (App. 2023), the Arizona Court of Appeals answered the question of “whether CC&Rs can be amended to restrict short-term rentals if the original CC&Rs does not already include rental restrictions?”
In the Oak Creek Association case, the original CC&Rs were created and recorded in 1981. At that time, short-term rentals were not really a thing yet in Arizona, and as a result, like most other CC&Rs that were drafted by attorneys during that era, the CC&Rs did not address short-term rentals.
Later, in 2016, the Oak Creek HOA amended the CC&Rs to expressly restrict short-term rentals. The defendant in the case, Lance Bonham, acquired one of the residential properties in the Oak Creek community in 2015 – prior to the 2016 Amendment restricting short-term rentals. Mr. Bonham began renting his property to short-term renters in 2021 and 2022. The Oak Creek HOA sued Mr. Bonham in 2022 seeking a court order to enforce the 2016 Amendment and to stop Mr. Bonham from utilizing the property as a short-term rental.
Mr. Bonham filed a Motion to Dismiss the HOA’s Complaint, arguing that the 2016 Amendment was unenforceable against him pursuant to Arizona law and the Kalway decision. (In 2022, the Arizona Supreme Court handed down the unanimous Kalway decision where the Supreme Court ruled that covenants conditions & restrictions (CC&Rs) can only be amended if the amendment is reasonable and foreseeable from the original declaration. Kalway v. Calabria Ranch HOA, LLC, 252 Ariz. 532, 537 – 38 (2022).)
If Mr. Bonham’s argument is correct, then the Kalway decision has an enormous impact on short- term rentals in Arizona because the majority of existing CC&Rs do not restrict short term rentals. Following the 2022 Kalway decision and prior to the recent Oak Creek Association decision, opponents of short-term rentals argued that Kalway does not apply to CC&R amendments concerning short-term rentals because the facts of the Kalway case involved a CC&R amendment concerning architectural guidelines and did not specifically involve short-term rentals.
But the Arizona Court of Appeals agreed with Mr. Bonham and expressly extended the Kalway holding to short term rentals. Now, following the Kalway and Oak Creek Association decisions, pursuant to Arizona common law, CC&Rs can only be lawfully amended to restrict short-term rentals if the original CC&Rs or declaration provide sufficient notice to the property owners of the future amendment and if the amendment is reasonable and foreseeable in the original declaration. In other words, “An amendment cannot be entirely new and different in character form the provisions in the original declaration.” Village of Oak Creek Association v. Bonham, 2023 WL 6444337 (App. 2023).
A careful review of the Oak Creek Association case makes clear that CC&Rs cannot be amended to impose unexpected restrictions on existing property owners. But it is uncertain at this time whether CC&Rs can be amended to impose new and different restrictions on future owners in the community.
Also worth noting, the Oak Creek Association presented a second argument against short term rentals based on the CC&R’s express prohibition against commercial or business use stated below:
No store, office or other place of business of any kind and no hospital, sanitarium or other place for the care or treatment of the physically or mentally ill shall be erected or permitted, and no business of any kind or character whatsoever shall be conducted from or located on any lot or unit other than:
- the activities of the association in furtherance of its powers and purposes; or
- as expressly permitted in the declaration; or
- home occupations prescribed by the rules and regulations of the board and conducted according to the Rules.
Id. at 2. The Oak Creek Association argued that because short term rental properties are typically owned by a limited liability company and are operated for a profit, they qualify as commercial or business use and thus violate the CC&Rs. But the Court of Appeals agreed with its prior ruling in the Horton v. Hartsook case and held that short term rental operations qualify as residential use and not commercial or business use. See Horton v. Hartsook, 2009 WL 2244503.
Following the Oak Creek Association case, property owners and planned communities have better guidance on how and when CC&Rs can be amended to restrict short term rentals. If you or someone you know has questions about short term rentals, call or email us today to schedule a consultation with Mr. Charles or one of our other real estate attorneys.
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Christopher J. Charles is the Founder and Managing Partner of Provident Law ®. He is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS ® (the “AAR”). In 2017, Mr. Charles obtained one of the Top Ten Civil Verdicts for his client in a real estate dispute. Mr. Charles holds the AV ® Preeminent Rating by the Martindale-Hubbell Peer Review Ratings system which connotes the highest possible rating in both legal ability and ethical standards. He serves as an Arbitrator and Mediator for the AAR regarding real estate disputes; and he served on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions. Christopher regularly teaches continuing education classes at the Arizona School of Real Estate and Business, and he can be reached at Chris@ProvidentLawyers.com or at 480-388-3343.