Short-Term Rentals and the Arizona Supreme Court

Question: Although your Q&A column has said several times in the last few years that CC&Rs can be amended by an HOA community to prohibit short-term rentals, hasn’t the Arizona Supreme Court ruled that CC&Rs cannot be amended by an HOA community to prohibit 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. Any amended CC&R to prohibit short-term rentals will definitely apply to future buyers of a home in that HOA community. The question is whether or not this amended CC&R to prohibit short-term rentals can be enforced against existing owners of homes in that HOA community. Some commentators believe that the recent Kalway decision by the Arizona Supreme Court, 252 Ariz. 532 (March 22, 2022), will prohibit enforcement of this  amended CC&R against existing owners of homes in an HOA community.

In the Kalway decision, there were five lot owners who owned lots varying in size from 3 acres to 23 acres. Without notifying Kalway, who was the owner of the 23‑acre lot, the four other lot owners amended the CC&Rs to severely restrict the development by Kalway of his 23-acre lot. Kalway then filed a lawsuit that the CC&R amendment was not enforceable.

The Arizona Supreme Court ruled that, for the CC&R amendment to apply to Kalway’s 23-acre lot, the CC&R amendment had to be “reasonable and foreseeable” by Kalway when he purchased the 23-acre lot. The Arizona Supreme Court then invalidated most of the amended CC&Rs because those amended CC&Rs were not “reasonable and foreseeable” by Kalway when he purchased the 23-acre lot.

By way of background, short-term rentals didn’t become an issue in Arizona until 2016, when Senate Bill 1350 was adopted to prohibit any Arizona town or city, e.g., Sedona or Scottsdale from regulating short-term rentals. Short-term rentals were not even mentioned in the Kalway decision. The broad “reasonable and foreseeable” language in the Kalway decision, however, could prohibit enforcement against existing homeowners in an HOA community of a CC&R amendment that prohibits short-term rentals. In other words, the date when the CC&Rs in an HOA community are amended to prohibit short-term rentals will determine whether problems with short-term rentals in the HOA community were “reasonable and foreseeable” at that time by an existing owner of a home in the HOA community.

For example, short-term rentals have been “booming” in HOA communities near Old Town Scottsdale for five years, and there has been much publicity about problems with these short-term rentals. A CC&R amendment 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 home in that HOA community eight years ago because this CC&R amendment would not have been “reasonable and foreseeable” eight years ago. This CC&R amendment, however, could probably be enforced against an existing owner of a home who bought the home one year ago because this CC&R amendment would have been “reasonable and foreseeable” at the time of purchase of the home.

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, all future buyers of homes in that HOA community will be prohibited from doing short-term rentals.