By William W. Abbott

A byproduct of modern planning is the proliferation of property owner associations, mostly centered on residential developments. At the time of formation however, associations are subject to minimal oversight by the State of California, and then only for residential development projects subject to review by the Department of Real Estate. One of the challenges facing associations is continued active participation by the owners in association matters. For associations facing apathetic owners, it may be difficult to obtain the necessary level of votes to take actions on behalf of the association, and in situations in which association documents require a super-majority vote to pass resolutions for certain actions, a stalemate may readily occur.   In 1985, the legislature, recognizing the important role that associations play, enacted statutory provisions which allowed interested parties to file a court action to reduce the required voting percentage in compelling circumstances (Civ. Code § 1356). The recent case of Mission Shores Association v. Pheil (September 5, 2008) 2008 Cal.App.Lexis 1395 illustrates how this works in real life.

David Pheil and his wife purchased a vacation home in the Mission Shores development in Rancho Mirage. The home was subject to a set of covenants, conditions and restrictions (“CC&R’s”) which also provided for an Association and a Board of Directors for the Association (“Board”). The developer told Pheil that they would be allowed to rent their unit without restriction. However, approximately eighteen months later, the Board voted to approve an administrative rule to prohibit short term rentals (less than 30 days). Pheil objected through mediation. The Board, rather than acting by administrative rule, submitted to the owners a proposed amendment to the CC&R’s which would restrict short term rentals. Per the terms of the CC&R’s, any valid amendment required 67% of the voting power of the owners (Class A votes) and of the developer (Class B votes), the latter still owning 11 units. While the Class B votes approved of the change, only 59% of the voting power of the owners supported the proposed amendment, and as a result, the proposed CC&R amendment failed.

Undaunted, the Board petitioned the trial court seeking a court order reducing the requisite amendment threshold to that of a majority of votes actually cast for both classes. Pheil opposed the petition on three grounds. First, Pheil objected to the minimum lease requirement on the grounds that it violated the representation made by the developer at the time of Pheil’s purchase. Second, Pheil claimed that the results of the election were not properly reported as required by statute. Finally, Pheil claimed that the amendment impaired the security of the mortgage holders, and thus required a stated level of approval by the holders of debt. 

Civil Code section 1356 authorizes the court to grant a petition if it makes a number of findings, including that the amendment request was reasonable.  Pheil argued that the Board was controlled by the developer, and while not entirely clear from the legal opinion, that the developer, through the Board, should not be able to act inconsistent with the prior representation to the Pheils as to rental use.   The court however, focused on the statutory reasonableness test. The Association’s stated purpose in enacting the amendment was to avoid a hotel like character within the development. The evidence showed that the minimum stay requirement was common in many other association documents as well as in city and county zoning regulations. Reviewing the arguments presented by the Pheils, both the trial and appellate courts agreed with the Association that such a requirement was reasonable, when considered in light of all of the circumstances.

The trial and appellate courts similarly rejected Pheil’s second and third arguments. As to the second claim, the court found de facto statutory compliance with required voting procedures (Civ. Code § 1363.03(g).). As to the third objection, the court held that there was no impairment to security interests thus lender consent was unnecessary.

Bill Abbott is a partner at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.