Short-term Rentals Create Revenue for Owners but Upset their Neighbors and Perplex Association Boards

Published on: October 12, 2014

An owner in your condominium community has begun renting his unit to vacationers, who occupy it for short periods – a day or a few days ─ at a time. The owner is delighted with this new source of income, but his neighbors are less pleased with the revolving door of people they don’t know cycling in and out of the building. How will the board respond to their concerns?

That question is arising with increasing frequency as Internet-based services like airbnb (which matches owners willing to rent their homes with travelers seeking affordable places to stay) grow exponentially. Our office recently received four calls in one week from clients seeking advice on the issue.

Local and state governments are also grappling with the questions raised by transient uses of residential properties. Like association boards, government officials are trying to balance competing interests: On one side, homeowners want to rent their properties and governments want to encourage innovative businesses (and collect tax revenue from them); on the other, neighborhood residents find strangers in their midst uncomfortable. As one New Yorker explained to the New York Post: “When you come home at night, you don’t know if you’ve got a trick, a poker game or a cocaine deal going on next door.”

Like many communities, Boston is trying to decide how, if at all, to regulate owners who are renting their homes, or rooms in their homes, like hotel rooms. The Massachusetts Department of Health and Human Services has suggested that they should be regulated like bed and breakfasts and required to pay an annual fee. But Boston’s Director of Inspectional Services recently issued a memo directing his staff to take no action against owners who fail to register until city officials determine “how these services fit within our existing zoning and permitting definitions and whether new or amended regulations are warranted to address these specific arrangements.”

In Hull, local officials are suing owners who are renting out their beach houses, claiming that the short-term (nightly) rentals are transient and constitute a commercial use barred in neighborhoods zoned for single-family properties. The problem is that zoning codes in Hull and most other communities never contemplated nightly rentals of single-family homes and generally don’t specifically address that use. Courts are just beginning to wrestle with that question.

What’s a “Residential Use?”

A Kentucky appeals court ruled recently (in Vonderhair v. Lakeside Place HOA) that short-term rentals violated the residential use restrictions in a homeowner association’s covenants. The owners renting their property argued that the declaration specifically allowed rentals, without any restriction on the duration of the tenancy. The owners also argued that renters used the property in the same way as full-time residents – for residential purposes – just for shorter periods. Accepting income for the property, they contended, did not alter its residential use.

The Appeals Court disagreed. The issue, the court said, was not how the tenants used the property, but how the owners used it. And in this court’s view, the short term rentals made the property’s use consistent with that of a hotel or a motel, not a single-family residence.

Considering the same question, the state Supreme Court in Washington State reached the opposite conclusion. In this case (Wilkinson v. Chiwawa Communities Association,) a homeowner association seeking to enforce a one-month minimum rental period argued that shorter-term rentals constituted a commercial use of the land, prohibited by the association’s covenants; and that renting to unrelated individuals also violated the association’s single-family use requirement.

Turning the Kentucky decision on its head, the Washington court said the deciding factor was how the tenants were using the property – in the opinion of this court, for eating, sleeping and other “residential” purposes. The fact that owners accepted rental income and paid business and occupancy taxes for the property, the court said, did not change its residential character.

While the contrary reasoning of the Kentucky court would be more helpful to community associations looking to bar short-term rentals, that decision was something of an outlier; the courts in most jurisdictions would likely agree that the short-term rental of a residential property to guests who simply sleep and eat there is still a residential use.

Zoning laws also aren’t likely to be much help, partly because most didn’t anticipate that homeowners would be renting their homes, or rooms in their homes, to travelers; and also because while communities may move to regulate this activity, it appears that they are unlikely to prohibit it. That, at least, has been the prevailing pattern so far in cities and towns (San Francisco and Portland, Oregon among them) that have addressed the issue. So community associations concerned about short-term rentals are probably going to have to rely on their own authority to regulate or ban them.

What Associations Can Do

Many condominium documents either specifically prohibit transient uses or establish minimum rental terms ― 6-to-12 month minimums are common. If the community’s documents don’t contain this provision (and many do not), one obvious solution is to have owners approve a master deed or bylaw amendment adding it. We suggest establishing a minimum rental period of no less than 30 days. You might also specify that owners must rent their entire unit – not just portions of it. This would preclude an owner with a three –bedroom unit from renting the two extra rooms to paying overnight guests.

A provision specifying residential uses only, though common in many documents, probably won’t slam the door firmly on transient uses. As the Kentucky and Washington state cases we cited earlier illustrate, the courts differ on what constitutes a non-residential use.

Mandating minimum rental terms also may not counter all the arguments owners are likely to mount to protect their short-term rentals. One of our association clients is currently dealing with an owner who goes to Spain for two months every year and arranges a “swap”: A Spanish family stays in his home and he stays in theirs. The board will argue that two months violates the community’s six-month minimum rental requirement, but the owner will no doubt contend that this is not a “rental,” because no money changes hands. There is an obvious counter to this – the owner is receiving something of value, even if it isn’t cash – but you can see where this is going. The debate over whether this is or isn’t a rental may end up in court, and there’s no predicting how a court will resolve it.

Is this battle worth fighting? Some board members think not; there is little harm, they suggest, in this kind of a swap arrangement. But residents concerned about having strangers in their midst will be no less concerned if the strangers are “swapping” rather than renting.

When a board member expressed that concern to the owner, he responded quickly that the visiting family were “cousins” – probably not true, but difficult to challenge (should we ask for a family tree?) and ultimately irrelevant. Relatives or not, these family member are still “strangers” to other residents of the community.

That’s not the only concern. Even if board members agree that this arrangement is benign and fail to enforce the violation of the association’s rental rules, they may be hard-pressed to enforce future violations they view as more problematic. If the rentals they challenge belong to members of a protected minority group, for example, the board could find itself on the losing end of a discrimination suit. Whenever you selectively enforce a rule, you’re asking for trouble – and odds are, you’re going to get it.

If your association can’t prohibit short-term rentals, or chooses not to do so, you should manage them as you do rentals of any kind – that is to say, by making the unit owners responsible for any problems created by their “guests” or tenants. If tenants disturb other residents or violate the association’s rules in any way, insist that unit owners deal with the problems, and fine owners who fail to do so. Substantial (and repeated) fines combined with the disapproval of their neighbors may make the ‘my-house-is-a-hotel’ business less profitable for owners — and considerably less appealing for them.

By Mark Einhorn, Matthew Gaines and Alex Levine