Making a Business of "residential Use": the Short-term-rental Dilemma in Common-interest Communities

• Publication year: 2019

Making a Business of "Residential Use": The Short-Term-Rental Dilemma in Common-Interest Communities

Cai Roman

MAKING A BUSINESS OF "RESIDENTIAL USE": THE SHORT-TERM-RENTAL DILEMMA IN COMMON-INTEREST COMMUNITIES

Abstract

Short-term rentals of fewer than thirty days are being used with remarkable frequency due to the staggering popularity of home-sharing sites such as Airbnb and VRBO. At their best, short-term rentals provide a welcome alternative to the hotel industry with cheaper rates for vacationers and simpler listing processes for homeowners. However, as rental properties become an increasingly attractive investment opportunity, a large number are being operated as de facto hotels that are disrupting communities, eating up affordable housing, driving rent prices skyward, and giving government regulators a headache.

Common-interest communities have been especially burdened by the short-term-rental boom. Because many communities did not address rental activity in their governing documents when they were created, they are usually forced to either amend their governing documents or turn to the courts if they wish to place new restrictions on short-term rentals. The former is effective but difficult to accomplish because adding new use restrictions often requires most or all community members to vote in favor of the changes. As for the latter, a number of common-interest communities have argued that a "residential use" restriction should prohibit some short-term-rental activity, but most courts have been unwilling to entertain that argument.

This Comment proposes a solution for both complications. First, common-interest communities need to be more cognizant of short-term rentals. A newly formed common-interest community should clearly and precisely define what rental activity is and is not allowed to avoid the problems that older communities are currently facing. Existing common-interest communities should try in earnest to amend their governing documents to do the same. This is difficult, but not impossible, and it is preferable to costly and time-consuming litigation. Second, courts should change how they interpret residential use restrictions. Short-term rentals should neither be completely prohibited nor untouched under these restrictions: When a property becomes a short-term-rental business, much like a hotel or bed and breakfast, it is no longer a residential use, but rather a commercial one. This interpretation prevents the most harmful short-term-rental activity from infiltrating common-interest communities while leaving stricter regulation up to community associations or local government. A balance of responsibility between communities and the courts should enable common-

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interest communities to fairly and effectively regulate short-term rentals and ease some of the burdens these rentals create.

Introduction.............................................................................................803

I. The Short-Term-Rental Dilemma..............................................806
II. Common-Interest Communities...................................................809

A. The Common-Interest Community............................................ 809
B. The Declaration of Covenants, Conditions, and Restrictions 811
C. The Community Association ..................................................... 813
D. Bylaws and Rules...................................................................... 814

III. Common-Interest Community Regulation of Short-Term Rentals: Means and Impediments...............................................816

A. Regulation of Short-Term Rentals: Best Practices ................... 816
B. Residential Use Covenants ....................................................... 818
C. Differing Interpretations of Residential Use Among State Courts ....................................................................................... 819
D. A Narrow Definition of Residential Use Is Preferable ............. 821
E. When Do Short-Term Rentals Become a Commercial Use? .... 826
F. Appropriate Resolution of Short-Term Rentals and Residential Use Covenants .......................................................................... 829

IV. Common-Interest Communities Can and Should Regulate Short-Term Rentals.....................................................................831

A. Inadequate Governmental Regulation ...................................... 831
B. Common-Interest Communities Are Suited to Regulate Short-Term Rentals ............................................................................. 833

Conclusion.................................................................................................835

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Introduction

The Falls at Arcadia was a lovely common-interest community,¹ with rows of idyllic, single-family detached homes fronted by perfectly manicured lawns and pristine sand-colored mailboxes?Desert Sage, to be exact. New residents were impressed with the community's beautiful appearance and friendly neighbors, but they soon became concerned by the extensive rules contained in Arcadia's Declaration of Covenants, Conditions, and Restrictions, or CC&Rs.² For example, move-ins had to be completed by 6 p.m. sharp, burnt-out light bulbs had to be replaced immediately, and outdoor basketball hoops were strictly prohibited?as was any exterior implement deemed not to be "aesthetically pleasing."³ Any exceptions had to be granted by the president of the community association's board of directors, Gene Gogolak.⁴ The neighbors were quick to remind newcomers any time a rule was threatened to be broken, and they even took it upon themselves to rectify violations from time to time.⁵

Mr. Gogolak took his job as association president seriously, ensuring that the rules were followed to the letter; though exceptions were allowed, they were never granted.⁶ Other association board members had aided Mr. Gogolak in his enforcement of the CC&Rs for years, but they began to wonder if his policies were too harsh?especially when a number of residents began to disappear.⁷ Eventually, a pair of federal agents discovered Gogolak's secret: He had recruited a ravenous Tibetan tulpa monster to enforce the CC&Rs.⁸

Though no existing common-interest community is actually watched over by a murderous, supernatural being, the X-Files episode described above reflects

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a common attitude about life in such communities.⁹ The dissemination of homeowners association (HOA) "horror stories" has led many people, whether or not they live in a common-interest community, to think that life in a common-interest community is a terrible and oppressive experience.¹⁰ However, horror stories like that depicted in the X-Files episode are misleading in two key respects. First, many Americans find common-interest communities an attractive form of homeownership. Second, although most cautionary tales about common-interest communities involve governing associations abusing their power, one of the largest contemporary threats to happiness in common-interest communities comes from the residents themselves due to the proliferation of short-term rentals.

Though not without their drawbacks, common-interest communities can be an attractive form of homeownership. Due to shared resources and amenities, "owners get more than they usually can by investment of a comparable amount in a neighborhood where the only shared resources are those provided by public government."¹¹ Indeed, millions of people have chosen this form of ownership: In the United States, as of 2016, there were 342,000 common-interest communities comprising 26.3 million housing units and 69 million residents?meaning more than 1 in 5 Americans were living in a common-interest community.¹² A survey suggests that these residents were largely satisfied with community life: 65% rated their overall experience as positive, and 22% as neutral; 84% said that members of their community's governing board serve the best interests of the community; 66% said that their community's rules "protect and enhance property values," and 22% said the rules have a neutral effect.¹³

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The common-interest community model¹⁴ works for a large number of Americans.

However, as Part I of this Comment will show, excessive short-term rentals, usually facilitated by home-sharing websites,¹⁵ are a significant modern threat to happiness in common-interest communities. Although these services allow millions of homeowners to list their properties with ease and many more millions of vacationers to find affordable places to rent,¹⁶ they can also be a significant detriment to communities, or even entire cities.¹⁷ The localized ills of short-term rentals are quite familiar to common-interest communities, especially when they become the site of so-called de facto hotels with a heavy volume of out-of-town guests.

Latter Parts discuss the composition of common-interest communities and their legal relationship with short-term rentals. Part II lays out the pertinent features of common-interest communities, especially how they are structured and governed. Part III explores common-interest community regulation of short-term rentals, in both its straightforward and controversial dimensions. Ultimately, this Comment stresses the need for common-interest communities to draft or amend their governing documents so that they clearly and precisely address what kind and volume of rentals are permitted. This is the only way to ensure that short-term rentals are appropriately managed according to the needs of a particular community. Additionally, this Comment argues that courts should interpret residential use covenants, which have been implemented by many communities, to prohibit extraordinary short-term-rental activity where a property is clearly a business and not a residence. This should be a last resort for communities that cannot resolve their difficulties internally and need relief from...