Short-Term Rental Developments: Profits Not Necessary to Violate Residential Use Covenant

Short-term rental arrangements continue to plague community associations, with owners and powerful lobbying groups for companies like Airbnb constantly devising new tactics for avoiding restrictions.

“With Airbnb and those platforms becoming such a huge percentage of rentals,” says Jennifer Biletnikoff, a shareholder in the Naples, Fla., office of Becker & Poliakoff, “we’re going to see a lot of creative arguments.”

The good news is that courts are providing a bulwark against such arguments in some cases. That’s what happened in a recent case out of Michigan where the owners asserted a novel theory for why their short-term rental activities didn’t violate the association’s residential use restriction. (Cherry Home Ass’n v. Barker, Leelanau Cty., Mich. Aug. 26, 2020).

The court’s ruling not only rejected the owners’ defense, it also provides some hope to associations that haven’t been able to amend their documents to deal with the onset of short-term rentals.

What’s ‘Residential Use’?

The case involved a community of more than 200 single-family homes. The association sued several owners who had engaged in extensive short-term renting through Airbnb, VRBO, and other online platforms on a daily basis for several years, according to the association’s attorney, Kevin Hirzel of Hirzel Law, PLC.

The association’s declarations limited the property to residential use, and the owners were cited for violating the restriction (the declarations didn’t include commercial use or rental restrictions). “The board took the usual steps of trying to resolve the dispute out of court first, but it came to a head, and they took the next step to preserve the residential nature of their community,” Hirzel says. That meant pursuing an injunction.

In court, the owners claimed that they couldn’t have violated the residential use restriction because they never turned a profit from their rentals. The court wasn’t persuaded, finding that earning a profit wasn’t the test for whether a use is residential. “As the judge said, just because you’re a bad business person doesn’t mean the use isn’t commercial.”

Moreover, taxes and tax returns can be manipulated. “Any smart business person can make a business look like it’s not making a profit,” Biletnikoff says.

The judge in the Michigan focused on other factors, including:

• The exchange of money to allow strangers to stay on the properties,
• The small size of the lots, and
• The disruption to the neighborhood.

“Renters were throwing loud parties, and the police had been called,” Hirzel says.

Ultimately, the judged granted an injunction in favor of the association — but didn’t block short-term rentals altogether. Rather, the injunction prevents rentals of less than six months without the court’s permission.

“He didn’t say no rentals absolutely ever again, but the injunction was to say the owners had crossed the line,” Hirzel says. “If there’s a family reunion and someone wants to rent for a few days, or they want to let friends or family stay there, the owners are free to file a motion and go ask the judge if the use is residential.

“There’s not a bright-line test about what constitutes a residential use. It’s more of an ‘I know it when I see it’ type thing. There generally are certain hallmarks, like getting mail, going to work from the property, and leaving belongings there.”

What about physical presence? “Courts have to skate the line about that, especially in states like Florida, where people often have vacation homes that aren’t their permanent homes,” Biletnikoff says.

The Role of Enforcement

It’s worth noting that the owners in this case also raised the defenses of waiver, estoppel, and laches — common legal arguments that essentially contend an association can’t enforce a restriction that it has let go unenforced in the past.

“The argument was unsuccessful based on the fact that rentals were never as widespread or done online before,” Hirzel says. “The court determined that there had been a significant increase in short-term rentals in recent years and that prior informal enforcement had produced results.”

Whether formal or informal, Biletnikoff says it’s critical that associations document their actions in this regard. “I’ve seen a lot of associations get frustrated when trying to enforce because renters are coming in and out so fast that it’s hard to keep track, but you have to be able to document your prior enforcement efforts.”

The Michigan judge also relied on an anti-waiver provision in the association’s declarations, Hirzel says. The provision states that failure to enforce any covenant or restriction “shall in no event be deemed a waiver of the right to do so thereafter.”

Another Potential Weapon in the Arsenal

Many associations trying to combat short-term rentals haven’t been able to muster the necessary votes to amend their documents to add commercial use or explicit rental restrictions. This case could offer them hope.

“This residential use restriction had teeth to it,” Hirzel says. “Even if an association is having trouble amending documents, it can hang its hat on that to stop short-term rentals.”