New California Law Provides A Pathway To Remove Private Restrictions On Residential Development

Highlights:

• The Governor has signed AB 1050 into law, extending to market rate housing developers the ability to invalidate or modify restrictive covenants within CC&Rs and other private restrictions to the extent they prohibit or limit residential uses, a procedure previously available only to affordable housing developers.
• The new law applies only where (i) the property in question is be owned or controlled by a developer converting commercial property to residential; (ii) the development project includes residential uses permitted by state housing laws or local land use and zoning regulations; and (iii) a development project application has been filed.
• The new law cannot be used to terminate an easement that may be included in CC&Rs or a reciprocal easement agreement.
• The procedure for modifying private restrictions remains the same as the previous statute, requiring that a "restrictive covenant modification" be submitted on a prescribed form to the County Recorder and approved by county counsel.

Introduction

The redevelopment of commercial property to residential and mixed-use just got easier, at least when it comes to fending off recorded covenants, conditions and restrictions ("CC&Rs") and private restrictive covenants other that prohibit or limit residential uses. AB 1050, signed into law by the Governor last Friday, prevents private restrictive covenants from standing in the way of any properly zoned and permitted residential development, a benefit previously applicable only to 100% affordable housing properties.

Housing shortages in California have opened the door to redevelopment of commercial properties to residential uses. Many residential developers have trudged their way through general or specific plan amendments, changing local zoning of their properties from commercial to residential or mixed-use, only to discover that recorded CC&Rs or other private deed restrictions prohibit or restrict residential uses. As a general rule, private restrictions are not trumped by public zoning or entitlements; and they may be enforced by benefitted property owners. "Benefitted" property owners, of course, are usually neighboring property owners concerned about adverse impacts of an adjacent residential development.

In 2021, the California legislature partially addressed this by enacting AB 721, adding Section 714.6 to the California Civil Code. This statute allows developers of 100% affordable housing sites to modify or remove private "restrictive covenants" in CC&Rs and other instruments on record, such as deeds and reciprocal easement agreements, that prohibit or restrict affordable housing. AB 1050 expands Section 714.6 to apply to any housing development proposed on commercial property, whether 100% affordable or not, where the housing development is permitted by state housing laws or local land use and zoning regulations. AB 1050 applies to private CC&Rs and "any deed, contract, security instrument, reciprocal easement agreement, or other instrument affecting the transfer or sale of any interest in real property that restrict ...the number, size, or location of the residences that may be built on the property, or that restrict the number of persons or families who may reside on the property."

AB 1050's Limitations and Requirements

There are some limitations on the new law's application to market rate housing developments. First, the new statute may may be used only by a developer who is seeking to change the use of a property from commercial to residential. As such, it may not be used to modify or invalidate recorded CC&Rs or deed restrictions that restrict an existing residential property.

Further, the proposed development project must include "residential uses permitted by state housing laws or local land use and zoning regulations." It cannot be used for property where housing is not a permitted or conditionally permitted use under applicable laws or regulations.

The statutory procedure to invalidate a restrictive covenant may be used only after the filing of a "development project application" for the new housing use. While the statute does not define "development project application," the term may include all or some subset of applications within the definition of "permit application," a term used elsewhere in Section 714.6 in relation to 100% affordable projects. These could include, without limitation, any application under the Permit Streamlining Act (Government Code Section 65920 et seq.) which governs "development projects."

Finally, the new law may not be used to terminate an easement, even if the easement constrains residential development. For instance, many CC&Rs and reciprocal easement agreements contain utility or parking easements that may functionally preclude residential development. These easements may not be modified or eliminated through Section 714.6. This must be distinguished, however, from general covenants or restrictions that are not easements, such as design review or architectural standards, which, while protected under the statute generally, may be removed if "applied in a manner that renders a housing development infeasible."

The Process for Eliminating a Private Restrictive Covenant

Private restrictions against residential development are not automatically unenforceable. The owner seeking to invalidate such restrictions must submit to the county recorder a proposed "restrictive covenant modification," along with the original restrictive covenant and additional documentation, depending on the type of development. The county recorder then submits the documentation to county counsel for review. County counsel must, within a specified period, review the documentation, determine whether all requirements of the statute have been satisfied, and either approve the modification or specify what other documentation or changes will be required.

Once the submittal is approved by county counsel, the party seeking the restrictive covenant modification may, but is not required to, notify the other owners affected by the restrictive covenant, either by certified mail or by publication, of the modification to be recorded. While this notice is optional and may seem inconvenient, Section 714.6 provides a significant advantage to doing so. The notice triggers an extremely short, 35-day statute of limitations for any party receiving the notice to file suit challenging the restrictive covenant modification. In the absence of the notice, the limitation period is uncertain.

Analysis and Conclusion

While AB 1050 will be a powerful tool for housing developers, it should perhaps be implemented with caution and only after other alternatives are pursued. AB 1050 authorizes, in effect, a unilateral modification or elimination of recorded restrictive covenants by application of State law. This has the potential, where stakes are sufficiently high, of inviting legal challenge by benefitted owners. A private contractual agreement or settlement, such an amendment to the recorded document approved by the required percentage of affected owners, will still likely be the first choice to modify recorded covenants and restrictions, because it eliminates the uncertainty and potential cost associated with a unilateral modification.

AB 1050 nevertheless represents a significant step forward for residential developers by eliminating a significant roadblock to converting or redeveloping of commercial property to residential uses. As the Governor said in signing the bill, it strengthens adaptive reuse strategy and accelerates progress toward statewide housing goals.

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