Can Rules Be Amended to Prohibit Short-Term Rentals?

Question: Although your Q& A column has said several times in the past few years that a community can amend HOA covenants, conditions, and restrictions (CC&Rs) to prohibit short-term rentals, didn’t the Arizona Supreme Court recently rule that an HOA community cannot amend CC&Rs to ban short-term rentals? In other words, can or cannot CC&Rs be amended by an HOA community to prohibit short-term rentals?

Answer: An HOA community can amend CC&Rs to prohibit short-term rentals. An amendment to ban short-term rentals can be enforced against future home buyers in that HOA community. The only question is whether or not an amended CC&R prohibiting short-term rentals can be enforced against existing homeowners in an HOA community.

The recent Kalway decision by the Arizona Supreme Court is likely to stop the enforcement of an amended CC&R prohibiting short-term rentals against some, but not all, existing owners of homes in an HOA community. Let me explain why.

In the Kalway case, five lot owners had lots varying in size from 3 to 23 acres. Without notifying Kalway, the owner of the largest lot, the four other lot owners amended the CC&Rs to severely restrict Kalway’s development of his 23-acre lot. Kalway then filed a lawsuit claiming this CC&R amendment was not enforceable.

The Arizona Supreme Court ruled that for this CC&R amendment to apply to Kalway’s 23-acre lot, the CC&R amendment had to be ‘reasonable and foreseeable’ by Kalway at the time that he purchased his lot. The Arizona Supreme Court then invalidated most of the restrictions in the CC&R amendment because these restrictions were not ‘reasonable and foreseeable’ by Kalway when he made his land purchase.

This broad ‘reasonable and foreseeable’ language in the Kalway decision may prohibit enforcement against existing homeowners of any CC&R amendment that prohibits short-term rentals in an HOA community. In other words, the date when the CC&Rs in an HOA community are amended to prohibit short-term rentals could determine whether problems with short-term rentals in the HOA community were ‘reasonable and foreseeable’ by an existing homeowner in the HOA community.

For example, short-term rentals have been ‘booming’ in HOA communities near Old Town Scottsdale for at least five years, and there has been much bad publicity about problems with these short-term rentals. A CC&R amendment adopted by an HOA today prohibiting short-term rentals in an HOA community near Old Town Scottsdale could probably not be enforced against an existing owner of a home who bought a house in that HOA community eight years ago because this CC&R amendment could not have been ‘reasonable and foreseeable’ by that homeowner at the time they purchased their property. This CC&R amendment, however, could probably be enforced against an existing homeowner who bought their home one year ago because this CC&R amendment should have been ‘reasonable and foreseeable’ one year ago, after years of bad publicity about short-term rental problems.

Note: Most significantly, the Kalway decision sends a clear message to every community in Arizona that if short-term rentals are, or could be, a problem in their HOA community, the CC&Rs should be amended immediately to prohibit short-term rentals. After the CC&Rs have been amended to prohibit short-term rentals, at least all future buyers of homes in that HOA community will be prohibited from renting for short terms.