Understanding short term rentals in San Diego (pt II) – The “community’s” secret weapon

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July 28, 2015 by Omar Passons

secret-weapon

I put the term community in quotes in the title because not everyone in every community views these issues the same way. Elected officials and others frequently refer to “the community” as if we all had the same views on these issues when often they really just mean the people in the community who are complaining with the most force. That note aside, on with the story.  The analysis in this post applies to the entire state of California – every community and a potentially large number of residential neighborhoods. Read my last post on short term rental basics in San Diego here.

The anti-short term rental crowd has a weapon.  It’s stealthily hidden in plain sight. Sort of.  Buried in the dusty back rooms and microfiche files of assessor’s offices across California are documents that Internet-based sharing services can only hope never get found.  Because when they are found – IF they are found – the imperfect storm of property rights and NIMBYism can collide in a really spectacular fashion.

Truth be told, if it’s your home or your investment or your child unable to get some rest without some vacationing party of groomsmen dropping F bombs every 10 minutes next door, my introduction to this concept may seem more than a bit harsh.  I’m a little biased.  I like Airbnb. I like VRBO. I even like home exchange and couchsurfing.com even though I haven’t used either service.  And I believe in property rights.  But this bias doesn’t stop me from analyzing the current status of land use law in California, so I figure this is a perfect chance to pull back the curtain on a Supreme Court case that may just be a game changer for California’s home-sharing economy.  Before we get there, though, I have to give you a brief – and utterly nerdtastic – history of the concept of an Equitable Servitude. (Wait, don’t leave, seriously. It’ll be fun) Note to land use lawyers: I’ve taken some liberties in the legal explanations, I’m happy to dork out with you on the side, but don’t want to be sleep-inducing for everyone else. Also, I’d be remiss if I didn’t mention that my research on this area began with a very clever discovery by attorney Michael Taylor of Buffini & Company. Mike and I don’t agree on the full ramifications of his discovery, but given the research I’ve done since my first interaction with Mike, I can’t deny the topic’s overall importance.

**If this is your first time joining in, please note that the hyperlinked items throughout the post are a combination of humorous, informative, or just a bit bizarre. I include them as potentially useful or fun asides.**

Key Point: For those who don’t wish to wind through the minutia of this story, I’ve highlighted the key points throughout the analysis below.  Look for underlined and italicized nuggets if you don’t have time for the detail.

Agreeing not to do something with your property

hoa-rules-300x300

For those who want to skip to the key points, please skim down to the last sentence of this section, where you will find the key point.  For the rest who like to nerd it up a little bit, break out the 20-sided dice and let’s do this! Our story starts with the concept of covenants that run with the land. That is a lawyerly way (blame the Brits) of talking about promises to do (or not do) something with your property. They are promises that bind not just you and the person you bought the property from, but anybody else who buys the property forever (for-ever, for-ever? Forever, ever!).

EXAMPLE: You own a whole block that contains cool places like Station Tavern, Whistle Stop, Rose Wine Pub, Progress, South Park Fitness, the place formerly known as Stone South Park Store, and Graffiti Beach in the South Park neighborhood of San Diego. You want to make sure the place stays cool and happening so you file a document with the County saying that anyone who buys this block is required to keep it properly rad and filled with independent small businesses at all times.  Fast forward 20 years, and when Bargain Giant Store comes knocking to purchase half the block all the anti-corporate folks on the other half of that block would have serious grounds to stop them dead in their tracks.

The concept of an equitable servitude is very similar to the above example, except that it applies not only to the property owner who originally recorded the restriction and the person she sells to, but to everyone who buys the property on down the line no matter how many times it changes hands and regardless of the purchaser’s relationship to the owner who originally placed the restriction.  This is an oversimplification but my eyelids get heavy just thinking about typing the full explanation (and I like this stuff), so I can imagine what a sleep-aid it would be for most readers.

The Key Point: An equitable servitude is a restriction that can be placed on your property, or on all the properties of a subdivision for example, that benefits or hinders everyone who is subject to the restriction. And, as you’ll see in a moment, creates a private right to sue to have those restrictions enforced.

A tricky quirk about grant deeds

Before I get to the California Supreme Court case, there is one other quick concept I need to address.  Historically in California the only way a property interest in land could be transferred from one person to another is in a grant deed.  In fact, if the interest you were trying to convey wasn’t written in the grant deed or at least referred to in that grant deed, the thing you wanted to transfer didn’t get done.

So, in the example above if I wanted to sell you my property but make sure that I limited your rights to do something with that property, I needed to write that in the grant deed.  It would not be enough to just record a document with the deed in the County Assessor’s office, I had to be sure to include it in the deed.  The rationale for this presumably was to make sure you knew everything you were purchasing and because the state of California only has one tool for transferring rights in land – the grant deed – this was the only way to get it done. I won’t run us down the rabbit hole of the state’s recording statutes, but let’s just say that one of the ways the law deals with making sure people know what rights and obligations they are buying is by letting property owners record important items about your property in the County Assessor’s office together with the ownership paperwork.  The most obvious example of this is a mortgage on your home.  The bank records the mortgage with your ownership paperwork for the property so anyone you try to sell the property to will know that you don’t yet own the property free and clear and the bank must get its cut first before the property sale can be completed.

Key Point: Before the Supreme Court case I’m about to discuss, the only way you could transfer a restriction on a property from one buyer to the next was to write it into the grant deed.

The Citizens for Covenant Compliance Case: Supreme Court loads the weapon

One reason people join HOAs

One reason people join HOAs

I found the above cartoon on this HOA law blog and thought I’d share.  The Citizens case involved a dispute between members of a common interest development (the technical name for any community in California with a homeowner’s association, common areas, and some kind of common rules addressing how the properties in the development can be used).  (Citizens for Covenant Compliance v. Anderson, 12 Cal. 4th 345 (1995)). The Anderson family wanted to plant and harvest grapes, operate a winery, and keep llamas on their property.  For some reason, all good legal cases have some bizarre twist like llama ownership involved. I digress.  Some of the Andersons’ neighbors contended that Covenants, Conditions, and Restrictions (CC&Rs) existed which blocked them from using their property in this way. The Andersons owned two parcels that were next to each other but in different subdivisions. One of the two parcels had a Declaration regarding CC&Rs recorded with the ownership paperwork back in the 1950s that limited the use to “residential purposes” but that declaration wasn’t written in any of the grant deeds after that. The Andersons contended they were allowed to operate a winery and keep llamas as pets because their grant deed didn’t contain any restrictions on doing that. The neighbors contended the CC&Rs that were recorded with the property should block the winery and the llamas even if they weren’t written into the deed because the CC&Rs were recorded in the Declaration with the ownership paperwork before the Andersons bought their property.

The neighbors sued the Andersons and the trial court and appeals court both sided with the Andersons, saying the restriction had to be either written into or mentioned in the grant deed.  This brought the case to the highest court in California for one more appeal.

Side note about CC&Rs: If you live in a condo, a gated community, or any of a number of suburbs you are already very familiar with CC&Rs. These are the documents you got when you bought the place (ideally before you agreed to buy) that tell you all the rights and obligations you have as a homeowner in that community. CC&Rs usually include things like not putting satellite dishes outside, how high your grass can be, etc. I wrote about another case involving CC&Rs that restricted vacation rental use here.

In the Citizens case, the original developer of the area recorded the CC&Rs at the time it divided up the property and created the common interest development.  The wording of the restrictions says they are to benefit and bind all subsequent purchasers to ensure the existence of a planned community.  However, the CC&Rs were never written or referenced in any of the grant deeds after the original sale and as I mentioned earlier historically in California the restrictions needed to be mentioned in the deed to actually transfer the restrictions to the next owner.  The Supreme Court decided that this technical requirement was unworkable and made a new rule. That rule is:

If a declaration establishing a common plan for the ownership of property in a subdivision and containing restrictions upon the use of the property as part of the common plan, is recorded before the execution of the contract of sale, describes the property it is to govern, and states that it is to bind all purchasers and their successors, subsequent purchasers who have constructive notice of the recorded declaration are deemed to intend and agree to be bound by, and to accept the benefits of, the common plan; the restrictions, therefore, are not unenforceable merely because they are not additionally cited in a deed or other document at the time of the sale.

Key Point – Translation: If the desired restrictions are recorded with the ownership paperwork of a property before that property is sold, those restrictions will apply to all subsequent purchasers even if they are not written or referred to in the grant deed.

The impact of this weapon on the residential sharing economy

Everybody knows that CC&Rs in a true common interest development like a condo or a gated community restrict the way you can use your property.  When you buy you are essentially entering into a contract not to do certain things and if you do those things the other parties to the contract (your neighbors, typically through the HOA Board) can sue you to make you not do them. An easy example would be those restrictions that don’t let you have a satellite dish on your balcony. If you put one up, the HOA hall monitors typically have the right to make you take it down or ask a court to do so.  The upside of these restrictions is that it reduces the collective action problem and gives you some certainty that your neighbors won’t be able to let their grass get all wild kingdom on you. The down side is that there is something very non-‘Murica about being told what you can do with your property.  The best way to look at it is that if you move into a community with an HOA you are voluntarily giving up some rights by contractual agreement to protect your property values or ensure a certain type of lifestyle.

The Citizens case is important because it arguably says that these Declarations of CC&Rs can be recorded not just in a common interest context when there is an obvious Homeowner’s Association, common areas like workout rooms or clubhouses, or other clear examples of shared property.  But that the restrictions can apply to any subdivision for which the master developer recorded the restrictions at the time he or she subdivided the property!  On top of that, this case also probably means that the restrictions do not need to be in the grant deed to apply to subsequent owners.

The Key Takeaways as a result:

  1. Even if your community isn’t a gated community and doesn’t have common areas nor a Homeowner’s Association, your subdivision may have a restriction that limits you and your neighbors to residential uses.
  2. Even if you buy a house with no restrictions in the grant deed and you intentionally avoided a community with an HOA because you like your freedom, you could be subject to restrictions that weren’t written into your grant deed if they were recorded with your home.
  3. You may have the right to sue neighbors in your community (or the risk of being sued by them) based on restrictions that were recorded on your property that would stop you from doing things like Airbnb, VRBO, etc.

Real World Example

The Declaration of Restrictions pictured below – taken directly from a community in the Bay Ho section of San Diego – provides exactly the type of restriction that could restrict use even though no common area nor other elements of common interest developments exist.

Official document from the County of San Diego - Declaration of Restrictions in San Diego community

Official document from the County of San Diego – Declaration of Restrictions in San Diego community

Page Two of the Declaration presents the core of the question

Declaration page 2

And here is the language in question

Declaration page 2 blowup

As noted below, the document doesn’t include a definition of “single private residential purpose.” This one little clause has potentially dramatic ramifications for entire communities, not to mention a new aspect of our economy.  First the Supreme Court has to tackle whether the rule in Citizens applies when there is no HOA, then it may even have to tackle what this one little clause means. The reason this is so important is that according to at least one report more than 8 million Californians live in common interest developments. Taken a step further, if this case is held to apply to any development in which the original subdivider recorded such a restriction regardless of whether it was a common interest development and regardless of whether subsequent purchasers had actual notice – the number of entire communities affected could be extremely high.  Given that the above restriction is from 1964, it isn’t unreasonable to imagine similar restrictions in Rancho Penasquitos, Poway, Carmel Valley and most communities that emerged at our after that time.

Not so fast

A couple final points ought to be made.  First, the Citizens case involved a traditional common interest development.  The ruling makes sense because you can tell when you are buying a home that there is a common plan and a reasonable expectation that your property rights may be limited even if not written on the grant deed. If you buy in a property that has gates, for example, or a clubhouse, it’s pretty obvious that there are likely restrictions on that property.  It’s less clear if you buy in some random neighborhood with no such common area that some common plan of restrictions exist.

Key Point: It is not obvious – nor certain – that the Citizens ruling extends to properties that are not actually in common interest developments governed by the Davis-Stirling Act (the law for common interest developments).

Second, everywhere this ruling does apply it could trump a lesser city restriction. The real interesting question would be what happens when a local government says something is a legal residential use and one of these restrictions says that only “private residential uses” are allowed (like the declaration posted above).  Would a court interpret “single private residential purpose” based on what that term meant in the 1950s or whenever the restriction was made? Would it default to whatever the legislature says the term residential means now?

Third, what does this mean for residential home sharing or vacation rentals?  Will we see a rash of calls to realtors looking for Title Reports (the document that would tell you if your home is subject to one of these restrictions even if it’s not in the grant deed)?  Will the floodgates open with Quiet Title actions where property owners want to know what restrictions do or do not apply in their communities?

Fourth, how many neighborhoods would this rule actually apply to? In a community like San Diego I know of at least one subdivision that has such a potentially enforceable restriction but isn’t subject to an HOA. There’s a reasonable chance if your community was subdivided after the 1950s that you may have this type of restriction applied to your property.

I don’t have the answers to all of these questions, but given the poor job that many cities are doing with creating organized rules to address the changing ways that people use their homes, this case might suggest a basic framework will have to come from the state legislature – a proposition that could yield very mixed results depending on how you view this issue.

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