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Posts Tagged ‘COA’

HOAs and COAs increasingly confront owner challenges to regulation of short-term rental

Posted on: May 28th, 2019

By: Justin Boron

By now, it’s clear that short-term rentals are neither a passing fad nor the high-minded pretense that underpinned their growth—laid-back homeowners who connect through an online platform with other like-minded individuals just looking for a place to crash for a few nights.

Instead, the short-term rental market is a full-fledged, real-estate business disrupter that is highly profitable and attractive to condo owners in areas with vacation appeal.  For condominium and homeowner associations, the word ‘disrupter’ is all too true.

Take your pick of the “disruptions” that short-term rentals can cause HOAs and COAs.  Safety, noise and pollution, insurance issues, inability to obtain mortgage financing, short-term rental taxes, violation of condo rules and destruction of property by the transient renter.

In response, HOAs and COAs have tried to push back on short-term rentals by attempting to enforce existing restrictions in their governing documents or by adopting new restrictions on short-term leases.  But unit owners eager to take advantage of the income-potential in the short-term rental market aren’t going away quietly and have gotten ever-more creative in avoiding HOA and COA restrictions.

The battle-lines have been drawn, and many of the disputes are making their way to court.  Below are some of the more interesting cases involving short-term rentals and potential solutions to the problems they present.

Can A Condo Association Ban Short-Term Rentals?

Putting aside the question of whether it should, whether a COA or HOA can ban short-term rentals outright, of course, depends on the authority granted to the association and the board in the governing documents.

Many associations have some sort of restriction on leasing of units within the association, whether it is durational (e.g., no less than six-month rental terms), a ban on commercial use of a unit, or an owner-occupied requirement.  But on the other side, there are individual property rights that courts must balance.  HOAs and COAs have met court challenges when attempting to ban short-term rentals using these types of restrictions, which in almost every case, were not drafted with the short-term rental market in mind.

For example, several condo owners successfully argued that a condo association’s ban on short-term rentals was beyond its power because its founding documents did not grant the association the right to restrict leases by duration.  See Wilkinson v. Chiwawa Cmtys. Ass’n, 327 P.3d 614, 621 (Wash. 2014).

Condo owners waged a similar challenge based on an association’s attempt to rely on its covenants against commercial use to ban short-term rentals.  See Houston v. Wilson Mesa Ranch Homeowners Ass’n, 360 P.3d 255, 261 (Colo. App. Ct. 2015).  The court agreed that short-term rentals used for sleeping and eating did not fit within the definition of a business use.

In instances where a HOA or COA lacks authority to ban short-term rentals in its governing documents, its next best option is likely to amend its governing documents according to the procedures supplied in them—typically a supermajority vote of the unit owners—to specifically ban short-term rentals.

Flouting An Owner Occupied-Requirement

HOAs and COAs might take comfort in condo documents that affirmatively require any units to be “owner-occupied.”  But an enterprising owner developed an interesting work-around for the owner-occupied requirement.  He placed his unit in an LLC, and then he sold small percentage shares of the LLC to would-be short-term renters that the LLC documents required the purchaser to sell back to the LLC at the end of their stay.  It allowed the short-term renter to say: “I’m not a tenant.  I’m a co-owner.”[1]

The COA could argue that the owner’s arrangement is essentially a time-share, which many COA and HOA documents prohibit.  But in omitting a particular block of time that a member of the LLC owns, it lacks one of the essential qualities of a timeshare.  A COA would likely be more successful in arguing that the substance of the arrangement should be considered over the form.  None of the “owners” of the LLC could say with a straight face that they believed they were investing in a real estate venture.

The Absent Owner Renting Short-Term Under The Radar

The most ubiquitous problem related to short-term rentals likely arises when an HOA or COA has effectively banned short-term rentals.  Despite a clear prohibition, there is often an absent owner who flouts COA rules and rents short-term.  To the extent his or her violations are detected, boards can likely be effective in enforcing rules with notice and fines.  If the measures are ignored, most states’ legislation for HOAs and COAs permit the association to obtain an injunction to end a unit owners’ violation.

If you have any questions or would like more information, please contact Justin Boron at [email protected].

[1] Marshal Granor, Emerging Trends and Hot Topics in Condominiums and Homeowners Association, Ch. 2 Short-Term Rentals (2019).