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Recent AZ Supreme Court Case’s Significant Potential Impact on HOAs

The Arizona Supreme Court’s recent opinion in Kalway v. Calabria Ranch HOA LLC et al. calls into question whether homeowner’s associations (“HOAs”) are lawfully able to enact and enforce certain amendments to their covenants, conditions and restrictions (“CC&Rs).  The Court’s opinion makes clear that CC&R amendments that impose “affirmative obligations” that create new restrictions on use must be (1) reasonable and (2) foreseeable to be enforceable.  By implication, the ruling likely does not apply to CC&R amendments that ease or remove restrictions on use.

Put simply, the ruling means HOAs cannot amend CC&Rs to create a new obligation without the original CC&R providing notice that owners may be subject to the new obligation.  Because the ruling is retroactive in nature, HOAs also cannot enforce already existing amendments that violate the Court’s standard.  The Court’s ruling is significant because HOA’s frequently enact amendments to their CC&Rs and thereafter enforce those amendments under a presumption of validity.

Among the frequently enacted and contemplated CC&R amendments that are likely to receive increased scrutiny and court challenges in light of the Calabria Ranch HOA decision are those limiting or prohibiting short-term rentals.  Short-term rentals have been a lightning rod of controversy in neighborhoods across Arizona and the nation.  Owners want to take advantage of the financial upside that comes from renting the property.  Users want to take advantage of the additional flexibility, space, and capacity that these hospitality options offer.  Neighbors, however, may find themselves coping with noise, parking, and trash in excess of what they would deal with if they had a traditional, live-in neighbor.  Many HOAs have responded by amending their CC&Rs to restrict short-term rentals, resulting in potentially significant financial damage to individuals who purchased properties in the HOA in reliance on being able to use the property for short-term rental purposes and then were subsequently restricted from doing so.

Whether short-term rental-focused CC&R amendments trigger the Calabria Ranch HOA standard, and if so, whether they violate it, are questions likely to end up in front of Arizona courts with high frequency and high stakes in the coming years.  This is likely true of other types of amendments as well, including the addition of accessory dwelling units, garage enclosures, satellite dishes, and landscaping alterations.

Accordingly, we recommend consulting with a knowledgeable attorney with respect to your CC&R related rights and obligations – whether you are a homeowner looking to challenge a CC&R amendment or an HOA board considering the adoption or enforcement of an amendment.

You can read the Court’s opinion here.

Have questions about the impact of the Supreme Court’s decision on CC&R amendments in your HOA? Contact Grant H. Frazier.