New Short-Term Rental Law to Take Effect in August

A new law impacting owners of short-term rentals will take effect in August. If you own property that you offer for short-term rentals or are considering getting into the short-term rental business, you need to make sure you are in compliance.

HB 2672, which Governor Doug Ducey signed into law in May, regulates vacation and short-term rentals. The new law plays on fears that short-term rentals are creating an influx of “party houses.” While every industry has its bad actors, we find no evidence behind the fear of rampant party houses. As companies like AirBnB and VRBO actively discourage so-called party houses by allowing owners to give ratings to tenants, the occasional party house, where neighborhoods are displaced by excessive noise, trash, and traffic, appears to be a rare exception.

The law’s aim is designed to regulate short-term rentals and prohibit their use s venues for weddings and other large events. Newly-signed House Bill 2672 gives local governments authority to regulate short-term rentals to prevent their commercial use and requires owners to provide contact information. It also requires cities and towns to notify the Arizona Department of Revenue and the owner of any violation of law within 30 days.

Owners are subject to fines starting at $250.00 and increasing to $1,500.00, and more, per violation.

HB 2672, which takes effect on August 2019, can be found here.

If you feel you need legal assistance with regard to the new short-term rental law or if you have any questions, check out our HOA Law or Real Estate Law page for more information.

Your HOA's Short-Term Rental Ban May be Illegal

Short-term rental restrictions are popping up in planned communities and condominiums throughout Arizona at an alarming rate. While exactly what constitutes "short-term" may vary from one association to another, with prohibitive periods ranging from 30 days to in some cases one year, the bans are real and they are having a disastrous impact on owners. In some cases, these bans are being adopted by board edict; in others, a large number of homeowners band together. In both cases, it is very likely that new rental restrictions are unlawful regardless of the number of owners who support them.

There are several arguments for why new rental restrictions are invalid even in cases where a majority or super-majority of members votes to enforce the ban. The Arizona Condominium Act, for example, provides that an amendment to a declaration "shall not create or increase special declarant rights, increase the number of units or change the boundaries of any unit, the allocated interests of a unit or the uses to which any unit is restricted, in the absence of unanimous consent of the unit owners.” A rental restriction is the classic type of use restriction that would seemingly require such unanimous consent. 

In addition, the Arizona Court of Appeals in Dreamland Villa v. Raimey held that amendments to declarations must be with unanimous consent if they “unreasonably alter the nature of the covenants" and that “any amendment must be directed at, and is limited by, the scope of restrictions and cannot create new obligations not previously mentioned. Associations cannot “use the Declaration’s amendment provision as a vehicle for imposing a new and different set of covenants, thereby substituting a new obligation for the original bargain of the covenanting parties,” the Dreamland Villa court held that an amendment that “would unreasonably alter the nature of the covenants,” such as those having a “substantial and unforeseeable” impact on owners, must be disallowed because “such servitudes [cannot] be imposed non-consensually under the generic amendment power.”

Such amendments are also often arbitrary and unreasonable. Courts have recognized that associations must act reasonably and cannot enforce restrictions or take acts that are arbitrary, unreasonable, or selective. Their rulemaking powers are limited to the adoption of “reasonable” rules and they do not have the power to adopt rules that “restrict the use or occupancy of, or behavior within, individually owned lots or units.” 

We believe that the law is clear that new rental restrictions cannot be adopted with less than unanimous consent of all members. Associations, however, are coming up with creative ways to try to circumvent this unanimity requirement, passing rules regulating who can and cannot use the common areas such as pools or boat docks (surprise: short term renters are the ones being denied these rights). 

If you are the victim of a rental restriction or have questions, call today for a consultation. In many cases, you have to act swiftly to prevent the new rental restriction from being enforced. If you do not, you could lose the right to do so!

If you are seeking legal assistance about short-term rental ban or simply want to find out more. Check out Real Estate and HOA Law or schedule a consultation to talk to an attorney.

Second Mortgages and Lines of Credit

Arizona law prohibits a lender from filing a lawsuit to collect on a home loan where the loan represents “purchase money,” that is, money used to purchase the property. This includes purchase money loans that are technically denominated as “home equity lines of credit” taken out at the time of the original purchase of the home. It also includes first, second, and even third mortgages where the money was borrowed as part of the purchase of the property.

Consider the following illustration: You buy a $300,000.00 house. It is structured as two loans in what is commonly called an “80-20” transaction, meaning that the first loan is 80% of the purchase price, or $240,000.00, and the second loan is 20% of the purchase price, or $60,000. Because both of these loans are considered purchase money loans, the lenders cannot sue the borrower to recover the money in the event the borrower defaults. This is true even if the borrower has refinanced the original loan to get a better interest rate or other terms (note: the same may not be true, however, if the borrower has refinanced in order to withdraw some equity). This is also true even if the lender calls the second loan a “home equity line of credit.”

A common scenario in today’s real estate market is that the first mortgage forecloses. Ordinarily, this leaves the second lender without any remedy because they cannot file a lawsuit seeking to recover the difference. A number of lenders, however, are either unaware of, or deliberately ignoring, this prohibition by filing improper lawsuits. In many cases, the original loan has been sold to a different bank and the new bank fails to do its due diligence to determine whether the loan is a purchase money loan before filing a lawsuit. Because borrowers are unaware of the rules, in many cases they do nothing and let the lenders obtain substantial default judgments against them. Judgments to which the lenders otherwise would not be entitled except the borrower has forfeited his or her right to defend the lawsuit! In many cases, you may be entitled to recover your attorneys’ fees and costs if you are forced to defend such a lawsuit.

Don’t become a victim of predatory collection practices on the part of unscrupulous or unknowledgeable banks. If a bank has sued you on a second loan, we strongly advise you to consult with a lawyer to determine your legal rights. Contact the lawyers at the Dessaules Law Group today at 602-274-5400 to schedule a consultation.