Court Finds Short-Term Rentals Violate Deed Restriction

The Kentucky Court of Appeals has rejected a community association owner’s arguments in yet another battle over owners’ right to use their homes as short-term rentals. The court’s ruling, based on a recent decision by the state’s Supreme Court, could provide some useful guidance for your clients that would like to implement enforceable restrictions on such rentals. The Hoffman Revocable Trust v. Marshall (Ky. App. 2020).

Residence or Hotel?

The lawsuit was filed by a trust that owns three lots in the Sledd Creek Subdivision in Gilbertsville, Ky. The Marshalls, the defendants in the case, also own a lot in the subdivision but live in Paducah.

After they purchased the property, the Marshalls established an LLC to rent it. They advertised the property as a short-term vacation rental on Airbnb, Vacation Rental By Owner (better known as VRBO), and HomeAway.com. The Marshalls rented the property 233 of the first 328 days they owned it, never for more than seven nights at any one time.

The trust sued the Marshalls, alleging violations of association restrictions. The trial court found in the Marshalls’ favor, emphasizing the fact that the deed didn’t prohibit renting.

The trust appealed, relying on the Kentucky Supreme Court’s ruling in a similar case (Hensley v. Gadd) that came out after the trial court’s decision. In both cases, the restrictions permitted rentals but limited use to residential purposes.

The Supreme Court, however, came down on the side of the association. It found that one-night, two-night, weekend, and weekly inhabitants couldn’t be considered residents and their use wasn’t residential. Only residential rentals were allowed, the court said, and the owner’s advertising of short-term rentals rendered his property the equivalent of a hotel.

Applying the high court’s reasoning, the Court of Appeals found that the Marshalls’ use of the property also was the equivalent of a hotel.

“The typical short-term rental case is the Airbnb scenario, where the home is rented to a single family for a week or so,” says Dan Artaev, a Detroit area attorney who has represented homeowners associations throughout Michigan.

“The Marshalls were a lot more brazen — registering their business with the name Lincoln Lodge, which implies a hotel, and having beds for up to 18 people. It’s unusual for a homeowner to run such a clearly hotel-type operation out of the home.”

The Court of Appeals also found that Marshalls’ payment of a transient lodging tax indicated that their use of the property was that of a hotel. And, while rentals weren’t prohibited, deed restrictions limited use to private residential and private recreation. Use as a hotel didn’t fall into either permissible category of use.

Dueling Residential Restriction Interpretations

The deed language in the Kentucky case wasn’t unusual. Restrictions commonly include a limitation to “private residential use” or the like.

“In Florida, we have a lot of cases that revolve around the same type of issue, residential versus commercial use, where the associations don’t necessarily have that short-term rental language in their restrictions,” says Jennifer Horan, a shareholder in the Naples, Fla., office of Becker & Poliakoff. “A lot of the cases grapple with whether short-term rentals are prohibited because a restriction says ‘residence.’”

Horan notes a Florida case where the court found an Airbnb rental didn’t violate a residential use restriction: “The court looked at how the occupants were using the unit, not at the use being commercial. It didn’t focus on the duration of rental or the profit portion, but the fact that — whether used for a year or a week — it’s for eating, sleeping, etc., which are all residential purposes.”

That approach is alarming for associations, for sure, but the Hoffman decision is promising if your state hasn’t already created a statutory case law framework that provides clear guidance on this issue.

“Associations should feel empowered by the Kentucky decision, as it gives them a clear standard and interpretation of ‘private residential’ that prohibits short-term commercial uses,” Artaev says. “They can use the case and the referenced Kentucky Supreme Court decision as a basis for pre-lawsuit negotiations or demand letters.”

Define the Terms

Presumably, the court in the Florida case Horan describes had the latitude to interpret the restriction against the association because the governing documents failed to define “residential use.” Neither “private residential” nor “private recreation” was defined in the Kentucky case, so the association was fortunate that the court interpreted the terms in its favor.

If your clients don’t have proper definitions of such terms, they should remedy the situation ASAP. “Any deed restrictions that lack definitions are asking for a lawsuit,” Artaev says. “A lot of deed restrictions were drafted in the 1950s, 60s, and 70s and haven’t been amended since that time.

“Even if there already is a restriction to ‘private residential uses,’ I would recommend adopting more specific language.” For example, Artaev says, a restriction could state:

“‘Private residential’ means the dwelling is occupied by a single family or a group of related persons, and is not used for any commercial purpose, such as a motel, hotel, lodge, or similar short-term rental enterprise. Nothing in these restrictions prohibits leasing the residence for periods longer than one month.”

Too wordy? “Even going as far as saying ‘short-term vacation rentals are prohibited, including but not limited to Airbnb-type rentals’ goes a long way in any sort of litigation,” Artaev says.

Horan also has been using the word ‘Airbnb’ in restrictions and rules. “We’ll say you can’t advertise your property as ‘an Airbnb or similar type of rental.’”

She warns, though, that enforceable rental restrictions still might not be enough to stop short-term rentals. “Airbnb has been successful in arguing that the arrangement is a use license, not a landlord-tenant relationship, so restrictions should address the licensing of use.”

Associations, of course, always should check with their attorneys on the appropriate language to restrict short-term rentals in their particular jurisdictions. Language that works in one state may not fly in another.

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