ALJDEC decisions subject to certification as final

19F-H1918033-REL · Department of Real Estate - H/C · 2019-11-15

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: October 7, 2019 APPEARANCES: Steven D. Stienstra appeared on his own behalf. Attorneys Michelle Molinario and Keith D. Collett, of Jones, Skelton & Hochuli, PLC., represented Cedar Ridge Homeowners Association. ADMINISTRATIVE LAW JUDGE: Kay Abramsohn _____________________________________________________________________ FINDINGS OF FACT Procedural Background Cedar Ridge Homeowners Association (Cedar or Respondent) is an association of home owners located in Sedona, Arizona. Respondent’s Board of Directors (Board) is a voluntary Board. In November 2018, Steven D. Stienstra (Petitioner) filed a one-issue petition (Petition) with the Arizona Department of Real Estate (Department), alleging that Respondent had violated the provisions of A.R.S. § 33-1806.01 and Respondent’s CC&Rs - Section 1.1 and Section 18. See Exhibit I. On or about November 27, 2018, the Department issued a notice to Respondent regarding the petition. On or about December 18, 2018, Respondent’s Secretary filed an answer to the petition denying all allegations. On or about January 4, 2019, the Department issued a Notice of Hearing to the parties notifying them that a hearing on the petition would be conducted by the Office of Administrative Hearings. Several continuances ensued while Respondent’s new counsel became involved and the parties discussed settlement. The matter was not informally resolved and, on October 7, 2019, an administrative hearing was conducted regarding the Petition. The parties presented evidence and argument regarding the violation alleged in the Petition. The Tribunal’s authority is to rule on the Petition and its alleged violations; however, at hearing, both parties indicated that the “issue” in this matter is legal fees.[1] Based on Petitioner’s position that Respondent did not properly undertake to, or perform and provide due process for, enforcement of the CC&Rs as to the rental activity, Petitioner argues that Petitioner should be released from any liability for the asserted legal fees. Respondent argued that, based on its knowledge regarding the rental activity, it reasonably sought legal advice and incurred legal fees that are now owed to Respondent by Petitioner. Hearing Evidence Petitioner purchased the residence in August of 2017, intending to use the home as a vacation get-away not only for the immediate family but also for friends.[2] Petitioner’s son began living in the home and managing the schedule for family and friends vacationing in the area and staying at the home. In order to track multiple friend and family staying at the home at various times, Petitioner’s son set up an account with VRBO, an Expedia Group website containing listings for property rentals around the world. While not intended to be a revenue source, the rentals began to expand to persons other than family members and did produce some revenue between approximately January 2018 and April 2018. On April 3, 2018, Respondent’s Board Secretary, Vic Burolla penned a memo indicating that he had called Petitioner about a motor home with Canadian plates parked in Petitioner’s driveway in violation of a CC&R prohibiting the parking of motor homes anywhere in the development.[3] See Exhibit H. Other than telling Petitioner to move the motor home “out of” the development, Mr. Burolla had no suggestions for Petitioner. The CC&Rs indicate that motor homes may be parked “within a completely enclosed garage with closed doors.” See Exhibit 2, Section 9. At some point, in April 2018, Respondent’s Board President, Bill Ferguson, called Petitioner about rental activity at the property.[4] The participants have variant recollections of exactly what was said and in what tone; however, the phone call was intended to bring to Petitioner’s attention that the CC&Rs prohibited short-term rentals of less than 30 consecutive days.[5] Petitioner acknowledged to Mr. Ferguson that there had been short-term rentals but also indicated that they would, from then on, comply with the CC&Rs. At hearing, Mr. Ferguson indicated that the Board decided to contact an attorney and send a letter about compliance with the CC&Rs.[6] Mr. Burolla echoed that action when he indicated, at hearing, that the Board had taken the advice of its attorney in sending the May 11, 2018 Cease & Desist Letter. The May 11, 2018 Cease & Desist Letter states as follows, in pertinent part: Since February of 1996, the CC&Rs have required under Section 1.1 that “all leasing or rental of a lot” must be in writing and shall not be for “transient or hotel purposes, which shall be defines as rental [of] any period of less than thirty (30) consecutive days.” Section 1.1 goes on to require that a lease must be for no less than the “owner’s entire lot.” You are in repeat violation of this Section of the CC&Rs as your son openly lists your Property as multiple units on www.vrbo.com as a vacation rental by the night (see enclosed VRBO print out from May 9, 2018). … You have already been verbally warned that your actions are in violation of the CC&Rs. …

Your failure to comply with the clear terms of the CC&Rs has caused the Board to hire our office to send this demand letter.

If you do not cease and desist from all rentals of your Property for a period less than thirty days, or renting less than all of your Property in one lease, within ten (10) days of your receipt of this written demand, the Board has directed our office to file suit as authorized in Section 1.1 of the CC&Rs. Based upon your violations of the CC&Rs as a breach of contract, CRHOA will also seek to recover its attorney’s fees and costs from you in addition to having an injunction put in place prohibiting your short term rentals.

See Exhibit 5. There is no method set forth in the May 11, 2018 letter for Petitioner to demonstrate compliance with the demand letter to the Board. Rather than accept Petitioner’s May 11, 2018 email explanation and information provided in response, and consider the matter resolved,[7] Respondent sent another Cease & Desist letter, dated June 1, 2018, to Petitioner. See Exhibit 7. The letter states, in pertinent part: Mr. Ferguson provided you a courtesy call as a verbal warning of the violations being caused by your VRBO rentals of multiple units within the Property. You say that you ceased rentals, but acknowledge that the listing stayed up on the VRBO website. … You claim the listing would not have allowed a booking, but there was no statement in the listing saying the unit was not open for booking. CRHOA has no duty to try to pay for a rental to “see if it would go through”.

It is important to note in your [April] call with Mr. Ferguson that you indicated that did not believe that your rentals could be restricted. You did not say that you would be ceasing such operations. … You have [now] indicated in writing that you will not again rent the Property for less than the required minimum term, that does not alter your months of prior violations. While the CRHOA will therefore no longer consider filing suit to enjoin you from VRBO rentals, based upon your violations of the CC&Rs as a breach of contract, CRHOA hereby demands payment from you on or before July 2, 2018 in the amount of $1,500.00 to recover attorney’s fees and costs for bringing you into compliance. Please note that this is a number authorized by the Board as a flat amount to resolve the matter; however, if a suit or collection process is necessary to collect such amount, CRHOA reserves the right to pursue collection of all its fees and costs in excess of that number.

On June 17, 2018, Respondent sent another Cease & Desist letter to Petitioner. See Exhibit 9. The letter states, in pertinent part: In our May demand to cease and Desist, we noted that short term rentals of the property were prohibited. We also explicitly stated that Section 1.1 of the CC&Rs also requires that a lease must be for no less than the “owner’s entire lot.” After you and your son were told to cease renting the Property out through [VRBO], you and your son apparently decided to continue violating the CC&Rs by trying to rent the Property in three separate units through Facebook Marketplace …

What is particularly egregious about this ongoing intentional pattern of activity to violate the CC&Rs is that your son … actually acknowledges in the Facebook post that very intent. He clearly indicates that he is renting a two bedroom, one bath “basement unit” while noting that “there are two other month-to- month renters in separate parts of this home. He still calls himself a “property manager” that “lives on location.” He even states that this was a “short-term vacation rental” that is “now transitioning to monthly rentals.” Your son’s statements are further supported by the neighborhood observation of multiple cars parked there daily. You are responsible for your son’s actions in the Property and your son is not able to rent the Property piecemeal any more than you are. … If you do not cease and desist from all rentals of your Property for a period of less than thirty days as well as renting less that all of you Property in one lease, on or before August 17, 2018, the Board has directed our office to file suit as authorized in Section 1.1 of the CC&Rs. … You are now required to also pay $2,600.00 in attorney’s fees for the repeated necessity of our firm’s involvement to bring you into compliance.

The matter was not resolved informally after the filing of the Petition. Initially, Petitioner had believed that the law permitted vacation rentals. Petitioner’s son indicated there were three VRBO listings (apparently to demonstrate the various sleeping accommodations). After Petitioner received the phone call from Bill Ferguson regarding the CC&R violation, Petitioner’s son discontinued all active bookings, and took down two of the listings but kept one listing posted. The evidence provides several explanations for that remaining posting: to “show” the accommodation; to be able to contact persons who had booked for less than days in order to cancel that booking; and, to have a calendar reference for already blocked-out dates (that were planned for their own use). At hearing, Petitioner’s son indicated that, although the listing was still posted, it was not possible to “book” the rental because it was not an active listing. In his explanation in response to the June 1, 2018 letter, Petitioner noted that a person only had to click on any date and a message on the listing would have popped up indicating that there was a minimum 30- day booking.[8] See Exhibit 8. Respondent’s position was that the remaining listing, as could be seen on VRBO, and the fact that the “presence of vehicles outside the home changed on a regular basis” demonstrated to the Board that the [short-term] leasing was still going on.[9] The provision of copies of leases to the Board was another matter of contention between the parties. It is not clear whether and when any or all of the redacted leases were provided to the Board.[10] In regard to a copy of a lease being demonstrative of activity of leasing, the hearing record does not evidence any copies of short-term leases prior to the April 2018 phone call to Petitioner from Mr. Burolla. However, Petitioner does not dispute the fact that there were short-term leases prior to that time. Further, the hearing record does not evidence any copies of short-term leases executed after the April 2018 phone call by Petitioner with any tenant. Petitioner disputes that there were any short-term leases after April 2018.[11] Based on an explanation provided by Petitioner following the June 17, 2018 Cease & Desist letter, Petitioner had not been aware of his son’s Facebook posting offering to lease bedrooms separately. See Exhibit 11. Once he was so informed, he told his son to take the posting down; the explanation further indicates that there were no leases from the Facebook posting. Upon request of Petitioner, and despite the Board maintaining that he was not entitled to a meeting (because the Board had proceeded under Section 1.1, which did not provide for such[12]), three members of the Board met with Petitioner on September 4, 2018.[13] This was a meeting agreed to with specific conditions; the meeting was not arranged as an official or a special Board meeting. See Exhibit 14. A recording and a subsequent transcript were made. See Exhibits 12 and A. The meeting transcript reflects the tense relationship between the parties. For example, at one point, after Petitioner and his son again indicated that the short-term leases had stopped, that the listings were taken down, that leases had been provided, and that there was “nobody under lease,” Ms. Tucker asked “[w]ho’s there then?” to which Petitioner replied “[i]t’s not anybody’s business who’s in our house, really.” See Exhibit 2 at 22:38 to 23:24. Another example is a discussion about the number of cars, where Mr. Burolla stated that the Board was not complaining about the cars and Petitioner’s son noted the Cease and Desist Letter had stated “multiple cars parked there daily”[14] to which Mr. Burolla replied “[t]hat is evidence of something else that’s going on, that might be a violation.”

At hearing, Mr. Burolla stated that he was not aware of any specific instructions in the CC&Rs about notifying a homeowner about a violation, and that there was no description therein about how to notify a homeowner.[15] Mr. Burolla further stated that the Board has proceeded under Section 1.1 of the CC&Rs.[16] Section 1.1 of the CC&Rs provides as follows: Any agreement for the leasing or rental of a lot (hereinafter in this Section referred to as “lease”) shall provide that the terms of such lease shall be subject in all respects to the provisions of this Declaration and the By-laws of the Association. Said lease will be restricted to a single family and shall further provide that any failure by the occupant thereunder to comply with the terms of the foregoing documents shall be a default under the lease. All leases shall be in writing. No owner shall be permitted to lease his property for transient or hotel purposes, which shall be defined as rental [of] any period of less than thirty (30) consecutive days. No owner may lease less than such owner’s entire lot. Any owner who shall lease the owner’s lot shall be responsible for assuring compliance by the occupant with the Declaration and the By-laws of the Association.[17] Failure by an owner to take legal action, including the institution of a forcible entry and detainer procedure against an occupant who is in violation of this Declaration and By-laws within ten (10) days after receipt of written demand to do so from the Board of Directors, shall entitle the Association, through the Board, to take any and all such action as attorney in fact for owner including the institution of proceedings in forcible entry and detainer on behalf of such owner against owner’s occupant. Any expenses incurred by the Association, including attorney’s fees and costs of suit, shall be repaid to it by such owner as a special assessment levied against such owner and the owner’s lot. In the event of a failure of the lot owner to pay such special assessment within thirty (30) days of its due date, for which the owner shall also be personally liable, the amount of the unpaid assessment shall constitute a lien upon the lot owned by the owner. The lien may be enforced in equity as the case of a real estate mortgage judicial like foreclosure in accordance with Arizona law and such policies as the Board of Directors may from time to time adopt. The foreclosure judgment may award to the Association reasonable attorney fees and taxable court costs incurred in connection with the foreclosure, such fees and costs to be fixed by the court without a jury.

Section 18 of the CC&Rs is entitled “Enforcement of Covenants.” Section requires that, when the Board believes there has been a breach or a threatened breach of the covenants, the Board’s required enforcement action is to “notify the [owner] in writing of the breach.” See Exhibit 2. Section 18 also requires that the owners are to be given 30 days thereafter to appear before the Board and respond. Finally, Section 18 further requires that the owner is to be given a time period, as reasonably determined by the Board not to exceed 60 days to remedy the breach. If the breach is not remedied, the Board is authorized to levy a fine, which would be a special assessment and result in a lien on the owner’s Property. CONCLUSIONS OF LAW The Department has jurisdiction to receive petitions, hear disputes between a property owner and a homeowners association, and take other actions pursuant to Arizona Revised Statutes (A.R.S.), Title 33, Chapter 16. In this proceeding, Petitioner bear the burden of proving by a preponderance of the evidence that Respondent violated A.R.S. § 33-1806.01 and the Respondent’s own CC&Rs pursuant to Arizona Administrative Code (A.A.C.) R2-19-119. A preponderance of the evidence is “[e]vidence which is of greater weight or more convincing than the evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not.” Black’s Law Dictionary 1182 (6th ed. 1990). Petitioner alleged that Respondent violated Section 1.1 and Section 18 of the CC&Rs and A.R.S. § 33-1806.01. A.R.S. § 33-1806.01(A) provides that a planned community property owner may use his or her property as a rental “unless prohibited in the declaration and shall use it in accordance with the declaration’s rental time period restrictions.”[18] Section 1.1 of the CC&Rs contains multiple provisions. The Administrative Law Judge concludes that all the provisions are not connected to one single action or the activity of the same person. Section 1.1 mandates that a lease agreement is subject to the CC&Rs. Leases must be in writing. Leases are restricted to a single family.[19] Owners are not permitted to lease for transient or hotel purposes, defined as “rental [of] any period of less than thirty (30) consecutive days.” Finally, the owner may not lease less than the entire property. When an owner creates a lease agreement that violates these lease provision requirements, that circumstance would be a violation by the owner. Section 1.1 of the CC&Rs mandates that “any failure by the occupant [under a lease agreement] to comply with the CC&Rs “shall be a default under the lease” and indicates that one proposed legal action regarding such failure, and resulting default, is institution of a forcible entry and detainer procedure against the occupant who is in violation. Thus, the Administrative Law Judge concludes that the written demand language is connected to requiring an owner to take action against a lessee who has failed to comply with the CC&Rs. The 10-day period is a time frame within which an owner is supposed to take action against the lessee. Actions that the Board may take after the 10-day period are on behalf of the owner against the lessee. Those were not the circumstances in this case. Therefore, the Administrative Law Judge concludes that the Respondent inappropriately proceeded with its May 11, 2018 Cease and Desist Letter regarding violations by the owner of lease provision requirements, as such action against an owner is not anticipated in Section 1.1. Additionally, the Respondent’s continued inappropriate actions in the subsequent Cease and Desist letters were unreasonable given that Petitioner indicated to Mr. Ferguson in the call and to Respondent in his responses that the lease requirement violations had ended and that there were no existing leases in violation of the CC&Rs.[20] Based on the hearing record, the Administrative Law Judge concludes that the appropriate action that was required to be taken by Respondent was set forth in Section 18 of the CC&Rs. Accordingly, the Administrative Law Judge concludes that Petitioner has established a violation by Respondent of Section 1.1 and Section 18 of the CC&Rs. In its June 1, 2018 Cease and Desist Letter, Respondent had demanded a payment in the amount of $1,500.00 “to recover attorney’s fees and costs.” However, the letter then specified that the stated amount of $1,500.00 was “authorized by the Board as a flat amount to resolve the matter.” In no instance, would an amount of “attorney’s fees and costs” be determined by anything other than the actual fees and costs. Therefore, the stated amount could only be looked at as either a settlement offer or as some sort of fine, which is not authorized under Section 1.1 but only under Section 18. In any event, as a result of Respondent’s violation of the CC&Rs, the asserted legal fees are not assigned to Petitioner. Finally, it is implausible that the Board’s Secretary was unaware of how to proceed, with any CC&R violation enforcement action. Section 18 of the CC&Rs clearly states that a written notice of the breach is to be given along with a 30-day time frame within which the owner may appear before “the Board of Directors.”[21] A verbal warning, in this case the call from Mr. Ferguson, while appropriate in the nature of education and in the spirit of garnering compliance with the CC&Rs, is not an “enforcement” action under the CC&Rs and does not comply with the Board’s responsibilities of enforcement as set forth in Section 18 of the CC&Rs.

RECOMMENDED ORDER IT IS ORDERED that the Petition be granted and Respondent be required to reimburse Petitioner the $500.00 filing fee. NOTICE Pursuant to A.R.S. §32-2199.02(B), this Order is binding on the parties unless a rehearing is granted pursuant to A.R.S. § 32-2199.04. Pursuant to A.R.S. § 41-1092.09, a request for rehearing in this matter must be filed with the Commissioner of the Department of Real Estate within days of the service of this Order upon the parties. Done this day, November 15, 2019.

/s/ Kay A. Abramsohn Administrative Law Judge

Transmitted electronically to:

Judy Lowe, Commissioner Arizona Department of Real Estate

Transmitted through U.S. Mail to:

Steven D. Stienstra 9923 E Jensen St. Mesa, AZ 85207

Cedar Ridge Homeowners Association PO Box 3581 Sedona, AZ 86340

L AND C SERVICE LLC 1095 W RIO SALADO PKWY #205 TEMPE, AZ 85281

Michele Molinario, Diana J. Elston, Keith D. Collett JONES, SKELTON & HOCHULI, P.L.C. North Central Avenue, Suite 2700 Phoenix, Arizona 85004

----------------------- [1] Whether legal fees are due depends on the final determination regarding the alleged violations by Respondent. [2] In August 2017, Petitioner had acknowledged the CC&R restrictions on short-term rentals. See Exhibit B. In September of 2017, Respondent sent out to all homeowners a mailing that included a reminder about the CC&R restrictions on short-term rentals. See Exhibit C. Another mailing in December 2017 also mentioned the restrictions. See Exhibit D. [3] By the time of the hearing, Mr. Burolla was not longer Respondent’s Secretary. [4] By the time of the hearing, Mr. Ferguson was no longer Respondent’s President. [5] At hearing, Mr. Ferguson testified that he knew about multiple cars at the home and that he had been contacted by another homeowner who had seen the VRBO listings. There were other underlying concerns that clouded this case and the parties’ tense relationship: (1) while cleaning up the overgrown lot after purchasing the home, Petitioner had a trailer in the driveway and received a call from the HOA about that being a violation (additionally, a letter was sent [Exhibit D)]; (2) there were prior comments about multiple cars at the property; and (3) there were some demands to produce copies of leases to the tenants. [6] This would be an indication that the Board was apparently not satisfied with Petitioner’s indication that the short-term rentals would stop. The first noted contact with an attorney was April 26, 2018. See Exhibit K. Because the first letter to Petitioner is dated May 11, 2018, this referenced Board determination to consult with an attorney happened after the April 2018 telephone conversation. [7] See Exhibit 6. [8] Neither party walked through the VRBO booking process at the time of the hearing. [9] First Audio Hearing Record at 1:20:18 - 1:20:58. When questioned as to whether a phone call to Petitioner might have clarified the situation, Mr. Burolla agreed it may have clarified the matter but further stated “there’s no reason to suspect we would have been told the truth.” First Audio Hearing Record at 1:32:30 – 1:32:58. [10] In this regard, see Exhibits 14 and 15. [11] See Exhibit 10 (para 2). [12] In its letter agreeing to meet with Petitioner, Mr. Burolla informed Petitioner that Section 18 applied when the HOA intended to impose “a fine” and that Section 18 did not apply when the violations were of the more specific rental requirement set forth in Section 1.1. See Exhibit 12. [13] The Board members were Secretary Burolla, Treasurer Griffin, and Vice- president Tucker. Another member, Dick Ellis may have come in after the meeting started. See Exhibit A at 56:42. [14] See Exhibit 9, page 2. [15] First Audio Hearing Record at 1:11:52 – 1:12:39. [16] See Exhibit 12. [17] Emphasis added here. In the context of this Section, the owner is responsible for compliance with the CC&Rs by the lessee of the Property, i.e., the “occupant.” [18] A.R.S. § 33-1806.01(C) provides that the HOA may require disclosure regarding a tenant only of the name of the tenant, contact information of the adult (tenant), the time period of the lease, description of the cars, and the license plate numbers. [19] Enforcement of this provision is questionable at bet. [20] The characterization of Petitioner and his son “intentionally” continuing to violate the CC&Rs in the July 17, 2018 Cease and Desist Letter simply demonstrates that the Board members did not and were not going to believe Petitioner or his son no matter what information they provided as to having stopped any leasing activity that was in violation of the requirements. See Finding of Fact #20 herein. [21] “To appear before the Board of Directors to respond to the notice” can only mean to appear at a Board meeting, whether a regular meeting or a special meeting, and not to have a discussion with a few members of the Board.

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Office of Administrative Hearings 1740 West Adams Street, Lower Level Phoenix, Arizona 85007 (602) 542-9826