December 2011 – Sure, you can probably require owners who rent their units to pay a security deposit to your HOA to cover the tenant’s potential damage of HOA facilities. You can probably also charge move–in and move–out fees. But can you slap a general fee on owners who rent out their units just because?

A California trial court says yes. Here, we explain the decision, and our experts discuss whether your board might want to try a similar approach.

What Watts Says

After a five–week trial, the court issued its judgment in Watts v. Oak Shores Community Association on October 11, 2011, likely putting smiles on many HOA board members’ faces throughout California.

Some background: California law says HOAs can’t impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it’s levied.

In Watts, the plaintiffs argued that the board imposed illegal and unreasonable fees on owners who rent their units on a short–term basis in the gated HOA on the banks of Lake Nacimiento. The HOA has about 851 lots, 660 of which have homes on them. Of those, about 80 are occupied by full–time residents. The others, including those owned by the plaintiffs, are rented, some for short–term rentals of 90 days or less.

HOA rules state that owners can’t rent their home out more than once in a seven–day period and set maximum numbers of cars, boats, and other watercraft per home at any one time. They also impose an annual fee of $325 on owners who rent their home and a mandatory garbage collection fee, boat and watercraft fees, building permit fees, and property transfer fees.

The court held that all the contested bylaws, rules and regulations serve important interests within the HOA. “The Board has a legitimate and compelling interest in regulating short–term and long–term rentals, garbage collection, boat and marina areas, construction projects, and other issues pertaining to the common welfare….The governing documents, together with the testimony … convince the Court that the Board has always had, and still has, the power to adopt rules for the common areas and lots, the power to levy fines and fees, the power to restrict uses of common areas, and the power to impose limitations upon, as well as assess fees for the use of homes on a rental basis. These are necessary and proper areas of Board involvement.” The court also held that the board’s actions didn’t breach its fiduciary duties.

Specifically, the court held that the $325 fee on owners who rent was a valid charge to recover the increased costs that owners impose on the community when they rent out their home: “Among other things, short–term renters generate ‘tremendous amounts of garbage’ and impose a large burden on the marina, playgrounds, pool, golf course, courtesy slips and other areas. Tending to be ‘clueless’ when they arrive at Oak Shores, short–term renters seldom have guidance with respect to the rules, regulations and fees that are required. They often need and seek help from OSCA staff. They place an increased burden on gate staff, office staff and security staff.”

The plaintiffs also essentially argued that the HOA hadn’t shown that its fees precisely correlated to the costs the HOA had incurred from rentals. But the court held that wasn’t necessary. “The evidence presented by Oak Shores establishes a reasonably close relationship between each contested fee and the cost it is intended to offset.”

Though Watts could be appealed, it’s still a good decision for HOAs. “I like this decision,” says James R. McCormick, Jr., a partner at Peters & Freedman LLP in Encinitas, Calif., who represents associations. “I think it would be great if we had some appellate law on this same subject. I have this exact issue facing an association client right now. Owners are questioning why they should be paying more because they’re renting out their units. This opinion answers that question by showing it’s because their activities cost the association more, and it’s not reasonable for the association to assess that expense to everyone. To me, that’s something new.”

Other States May Differ

Of course, this decision doesn’t control HOAs outside California. Other states may frown on the idea of charging owners a fee just because they rent out their unit.

That’s probably not the case in Texas, though. “There’s no Texas law that says you can’t have a rental fee,” says Jenny Key, Austin, Texas–based vice president of RealManage, Dallas, TX based, association management firm that oversees properties in Arizona, California, Colorado, Florida, Louisiana, Nevada, and Texas. “I’m not aware of any state law that restricts associations’ right to impose reasonable fees and charges.”

“In Florida, some of the fees being imposed are screening fees, security deposits, and move–in and move–out fees,” says Bill Worrall, vice president of The Continental Group, which is based in Hollywood, Fla., and manages 1,300 condominium and homeowner associations totaling 310,000 residential units. “Associations can and do charge all three types of fees. But we don’t see a lot of general rental fees, if at all.”

In Minnesota, associations may or may not be charging ‘rental fees’ depending on your definition, says Nancy Polomis, a partner at Hellmuth & Johnson PLLC in Edina, Minn., who advises associations. “Is there an administrative cost to processing a rental unit? Yes,” she says. “Are you allowed to charge that administrative cost? Yes. But I’m always concerned about HOAs trying to use rental units as sources of income, where they’re simply imposing fees because they’re rental units. Some boards say they’re going to charge a monthly fee for any unit that’s rented. My question is why? How are they different than any other unit? You have to look at what the fine is for and whether it’s reasonable. I have a straight–face test. Could I defend this fee or fine to a judge with a straight face?”

What can Polomis defend? “In some HOAs, there are rental restrictions, so the HOA is tasked with monitoring rentals so they can respond when owners apply for permission,” explains Polomis. “The HOA isn’t approving the lease, but it’s saying, ‘We have enough room in our rental cap that you may lease your unit.’ Then the association charges for the administrative time to process the necessary compliance package. ”

What can’t Polomis defend? “I’ve had HOAs say owners are going to be charged $150 a month simply because they rent out their unit,” she says. “That won’t pass the test. Some HOAs say they’re going to charge an annual or one–time fee of $5,000 to anyone who wants to rent their unit. You’d have to show me there’s a whole lot of administrative time to justify a $5,000 fee.”

HOA Leader

Matt Humphrey is president of the Alameda, California-based, from which this article was adapted.

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