One question we get from clients more and more frequently in this age of Airbnb (and all of its competitors) is how an association can deal with short-term rentals under their existing documents. Many association documents restrict the use of dwellings to “residential purposes,” but this undefined term has led to problems in its use to prevent short-term rentals. Courts across the country are split in ruling on whether short-term rentals are a “residential use” or a “commercial use.”
Two recent cases from other states illustrate the different conclusions a court might come to in answering the question of what “residential use” means. Cases outside of our jurisdiction are not binding on Washington courts, but they can be persuasive and also shed light on the reasoning courts use in coming to their conclusions.
In February 2018, the Louisiana Court of Appeals found that using a home for short-term rentals was a commercial use that was in violation of the CC&Rs for the community in question. Edwards v. Landry Chalet Rentals, LLC, No. 51,883-CA (La. Ct. App. Feb. 28, 2018). In Edwards, the owner advertised its home/lot as a vacation rental with a two-night minimum. The CC&Rs for the community only permitted the lots to be used for residential purposes, and specifically prohibited commercial use.
The appeals court noted that Black’s Law Dictionary defines the term “commercial” as “conducting an activity for profit or for a use that furthers and ongoing profit-making business activity.” The court determined that the LLC earned rental income. The court also highlighted the fact that the LLC insured the property with a commercial insurance policy. The policy provided coverage for lost rents and business liability, in addition to standard property insurance. Finally, the court characterized the “tenants'” use of the property as transient in nature, rather than residential. Based upon all of these factors, the Edwards court held that the short-term rental of the property was a commercial use in violation of the CC&Rs.
Conversely, also in February 2018, the Supreme Court of Arkansas held that using a home for short-term rentals did not constitute a commercial use, and therefore did not violate the CC&Rs. Vera Lee Angel Revocable Trust v. O’Bryant, No. CV-16-1041, 2018 Ark. 38 (Ark. Feb. 8, 2018). In the Vera Lee case, the CC&Rs prohibited using the lots for commercial purposes, including use as motels or hotels.
The Arkansas Supreme Court noted that Black’s Law Dictionary defined a “residence” as a place where someone actually lives, and opined that renting a home out on a short-term basis did not change the nature of the home as a residence. It also noted that the commercial use examples in the CC&Rs – such as a hotel or motel – have a manner of operation and outward appearance that is very different than a single-family home being rented out on a short-term basis. Finally, the Court found that the drafters of the CC&Rs could have included a prohibition on rentals but did not do so. For these reasons, the Court held that short-term rentals do not constitute a commercial use in violation of the CC&Rs.
Once again, these cases are not binding in Washington but they serve as a good reminder that our courts could rule either way once a decision on this issue is rendered in Washington. Certainly, one obvious and risk-averse approach is to record an amendment to the declaration for your community that specifically prohibits short-term rentals altogether, defining for your community what “residential use” means. Another approach would be to cap or even ban all forms of rentals or otherwise regulate them to prevent short-term stays (i.e., minimum lease requirements).
If you have questions about how to deal with short-term rentals in your community, please feel free to contact us directly.
