The Arizona Court of Appeals has ruled that the Village of Oakcreek Association cannot retroactively impose its 2016 ban on short-term rentals on property owners who acquired title to their property prior to the ban, reaffirming an earlier decision that defined STRs as a residential rather than a business use.

VOCA was formed in 1975 by Village of Oak Creek area homeowners and currently includes 25 subdivisions with 2,340 lots, making up the majority of the northern half of the Village. In November 2016 and May 2017 — shortly after Arizona Gov. Doug Ducey signed Senate Bill 1350 into law legalizing STRs statewide but allowing HOAs to exclude them if they were banned in the HOA’s bylaws — majorities of VOCA members voted to amend the association’s covenants to prohibit STRs outright. The two previous iterations of the covenants, approved in 1981 and 2014, made no mention of STRs.

Elizabeth “Bette” Simmons, formerly of Dallas, purchased a home in the Village in 1989, which is included in VOCA. Simmons transferred title to the home to a trust in 2003 and appointed her son, Lance Bonham, as the trust’s beneficiary before her death in 2009.

Prior to Dec. 23, 2015, Bonham became the sole trustee of the trust, and in that capacity deeded the property to himself on that date by quitclaim deed, recorded on Jan. 23, 2017. Bonham subsequently began renting the property as an STR in 2021.

VOCA sued Bonham in Yavapai County Superior Court in April 2022, seeking a court order to compel him to cease operating his home as an STR. Bonham moved for dismissal, arguing that as he had held effective title since 2003, he could not have received effective notice of the later amendments to the association’s covenants.

On Nov. 9, 2022, Judge Linda Wallace ruled in Bonham’s favor and dismissed VOCA’s suit, relying upon the Arizona Supreme Court’s decision in Kalway v. Calabria Ranch HOA earlier in the year. The Supreme Court in turn cited Arizona Revised Statutes §33-1817[A] to find that “the original declaration must give sufficient notice of the possibility of a future amendment; that is, amendments must be reasonable and foreseeable.”

“Even a broad grant of authority to amend an original declaration is insufficient to allow a majority of property owners to adopt and enforce restrictions on the minority without notice,” the Supreme Court concluded. “An HOA cannot create new affirmative obligations where the original declaration did not provide notice to the homeowners that they might be subject to such obligations … Future amendments cannot be ‘entirely new and different in character,’ untethered to an original covenant. Otherwise, such an amendment would infringe on property owners’ expectations of the scope of the covenants.”

Instead, amendments are required to be “reasonable and foreseeable.”

After unsuccessfully moving for reconsideration, VOCA appealed the Superior Court’s decision on Dec. 1, 2022, arguing that as Bonham’s quitclaim deed was not recorded until Jan. 23, 2017, he would have had sufficient notice of the 2016 amendments to the association’s covenants at that time. The association also argued that as the original covenants prohibited the operation of a business on the premises, and STRs are a form of business enterprise, Bonham would have been prohibited from operating an STR under the original as well as the amended covenants.

The Court of Appeals wasn’t buying it.

“This argument fails,” Judges David Weinzweig, Michael Catlett and Maria Elena Cruz wrote of VOCA’s first contention. “The declaration broadly defines ‘owner’ as a ‘record owner, whether one or more persons of [l]egal, beneficial or equitable title to fee simple interest to a lot.’ Bonham was an owner and held legal title since at least December 2015, when he was appointed sole trustee.”

As for VOCA’s claim that STRs constitute a form of business enterprise, “we disagree,” the judges wrote. “Section 4.03 [of the original covenants] generally forbids business operations on the premises; it says nothing about residential rentals. Because the declaration did not provide sufficient notice of the possibility of a future rental restriction, the court did not err by granting Bonham’s motion and striking the rental restriction from the amendments.”

The Court of Appeals also granted Bonham fees and costs against VOCA. Bonham did not respond to a request for comment on the suit’s outcome by press time.

“The Village of Oakcreek Association is aware of the Court of Appeals’ ruling and the matter is currently under further appeal to the Arizona Supreme Court,” VOCA attorney Tessa Knueppel said. “As such, the association is not in the position to comment further on ongoing litigation at this time.”

“If Mr. Bonham’s argument is correct, then the Kalway decision has an enormous impact on short-term rentals in Arizona because the majority of existing CC&Rs do not restrict short-term rentals,” attorney Christopher Charles of Provident Law wrote regarding the case on Nov. 6. “The Arizona Court of Appeals agreed with Mr. Bonham and expressly extended the Kalway holding to short-term rentals. Now, following the Kalway and [Village of] Oakcreek Association decisions, pursuant to Arizona common law, CC&Rs can only be lawfully amended to restrict short-term rentals if the original CC&Rs or declaration provide sufficient notice to the property owners of the future amendment and if the amendment is reasonable and foreseeable in the original declaration … The Court of Appeals [also] agreed with its prior ruling in the Horton v. Hartsook case and held that short-term rental operations qualify as residential use and not commercial or business use.”

“It is uncertain at this time whether CC&Rs can be amended to impose new and different restrictions on future owners in the community,” Charles added