Over 370 bills were signed into law in California this year. With about as many new laws taking effect on January 1, 2021 – and everything else that has happened in 2020 – to say there is plenty to track would be an understatement.
There are two particularly notable laws affecting our common interest development (“CID”) and business clients that are summarized below.
Please note that we will not be covering the new employment laws taking effect on January 1, as our colleagues are doing so in this edition of Perspectives.
AB 3182 – Rental or Leasing of Separate Interests
Assembly Bill 3182 (“AB 3182”) would enact changes to the Civil Code that would greatly affect CIDs that currently regulate the rental or leasing of separate interests. As you may know, “separate interests” are the units, apartments, or lots you purchase and have the exclusive right to occupy when you purchase real estate in a CID. The new law has already caused some controversy among CID attorneys due to its poor drafting, which has brought competing interpretations of some of its clauses. Below is our explanation of the law, the intent of which is to further limit CID’s power and authority to restrict its members’ right to rent their homes.
Under a broad reading of new Civil Code Section 4741, an owner in a CID (“Owner”) would not be subject to a governing document provision that prohibits, has the effect of prohibiting, or unreasonably restricts the rental or leasing of any separate interests, accessory dwelling units (“ADUs”), or junior ADUs.
This is a significant departure from existing law, which states that an Owner shall not be subject to a governing document provision effective on or after January 1, 2012 that prohibits the rental or leasing of a separate interest unless that provision was (a) effective before the Owner acquired title to their separate interest, or (b) unless that Owner expressly consented to be subject to the provision after the effective date of January 1, 2012. For a governing document provision effective before January 1, 2012 that prohibits the rental or leasing of a separate interest, an Owner would be subject to that prohibition regardless of whether the prohibition was in effect before the Owner acquired title to their separate interest, under existing law.
AB 3182 also effectively prevents CIDs from adopting new prohibitions against the leasing of a separate interest after the effective date of the law, January 1, 2021. Under the existing law, Section 4740 did not preclude the adoption of a new or amended prohibition. Beginning January 1, 2021, CIDs are, in effect, unable to adopt or amend provisions that prohibit, have the effect of prohibiting, or unreasonably restricting the rental of Owners’ separate interests.
The new law has a couple “safe harbors” with regard to what restrictions CIDs may enact and enforce. First, it would permit CIDs to adopt or enforce a provision in the governing documents that restricts the rental of Owners’ separate interests within a CID to as low as twenty-five percent (25%) of the total number of separate interests.
Second, a CID’s ability to prohibit short-term rentals – that is, rentals of 30 days or less – has been left intact by the AB 3182. Specifically, new Section 4741(c) states that CIDs would not be prohibited from adopting and enforcing a provision in a governing document that prohibits transient or short-term rental of a separate interest for a period of 30 days or less.
CIDs would be required to comply with the new law beginning January 1, 2021. To the extent that the governing documents (i.e., your CC&Rs or Proprietary Lease) are out of compliance with the law, those CIDs are required to amend their governing documents to conform with Section 4741 by December 31, 2021. CIDs that “willfully” violate Civil Code Section 4741 would be liable for actual damages and a civil penalty of up to $1,000.
One of the many unclear aspects about the new law is that there is no standard set forth as to what would qualify as an “unreasonable” restriction of the rental of separate interests. Another is that Civil Code Section 4741(h) states that Section 4741 does not change the right of an Owner who acquired title before January 1, 2020 to rent or lease their property, referencing Section 4740. Put simply, the language of this new law greatly complicates the interpretation of existing restrictions and places doubt as to whether they would be viewed as “reasonable” or “unreasonable.”
If Sections 4740 and 4741 are read narrowly:
- Owners, who acquired title to their separate interest before January 1, 2021, but after the effective date of a governing document provision that prohibits or restricts the rental or leasing of separate interests, would be subject to the rental prohibition or restriction.
- Owners, who acquired title to their separate interest before January 1, 2021, and before the effective date of a governing document provision that prohibits or restricts the rental or leasing of separate interests, would not be subject to the rental prohibition or restriction.
- Owners, who acquire title to their separate interest on or after January 1, 2021, would not be subject to a governing document provision that prohibits, has the effect of prohibiting, or unreasonably restricts the rental or leasing of any separate interest, except that a CID may adopt or enforce a limitation of rentals to no lower than 25% of all separate interest and a CID may adopt and enforce a provision that prohibits short-term rentals.
The importance of whether AB 3182 is narrowly or broadly read greatly depends on your CID’s governing documents and how rentals are restricted. We recommend a review of your CID’s governing documents with counsel.
We are aware that some CIDs have one or more provisions in their governing documents the restrict short-term rentals by imposing minimum terms for any rental or leasing of units. For example, a section in a CID’s Declaration of Restrictions may state that any lease shall be for a term of no less than six months or one year. Such a provision should be reviewed by association counsel in light of Civil Code Section 4741.
Finally, for our clients who are members of CIDs that are not condominium projects or stock cooperatives, AB 3182 includes further complications in connection with ADUs and junior ADUs. Under Section 4741, an ADU or junior ADU is not counted as a separate interest in and of itself. Also, under Section 4741, a separate interest lot shall not be counted as rented or leased if some other part of the lot – the home, ADU, or junior ADU – is occupied by the Owner. Essentially, if any part of a separate interest lot is occupied by the Owner, regardless if another portion of the separate interest is being rented, then that separate interest is not counted as being rented.
Please let us know if you would like us to review your governing documents for compliance with AB 3182.
AB 1577
Assembly Bill 1577 (“AB 1577”) took immediate effect on September 9, 2020 and will exclude Paycheck Protection Program (“PPP”) loans that were forgiven from gross income.
One of the most attractive features of the PPP, which was intended to provide small business affected under the federal COVID-19 Emergency Declaration, is that qualified PPP loans may be forgiven up to the full principal amount. Federal law already excludes the amount of PPP loans forgiven under the CARES Act, as amended and supplemented by subsequent law, from gross income for federal income tax purposes. AB1577 extends that exclusion of state income tax purposes from gross income.
AB 1577 added new sections to the Revenue and Taxation Code, affecting personal income and corporate taxes. Those new sections state that for taxable years beginning on and after January 1, 2020, gross income does not include any covered loan (as defined in the CARES Act) forgiven pursuant to the CARES Act or other specified federal law.
If you have further questions regarding these new laws and their impact upon your common interest development or business, please contact BillScherer at wms@sfcounsel.com or Louis Sarmiento at ljs@sfcounsel.com.
– Written by William Scherer and Louis Sarmiento