By Ronald Garfield and Hunter S. Ross

Airbnb, Inc. (Airbnb) launched in 2007, causing massive disruption to the entire hospitality industry. Before Airbnb’s launch, those wishing to rent a home or condominium on a short-term basis usually worked with a travel agent, real estate broker, or rental management company. Now, renters may simply search Airbnb (or its competitors, such as VRBO) and book their vacation getaways directly with homeowners. Though Airbnb cuts out middlemen such as travel agents or real estate brokers, the company still takes a substantial portion of revenues. Hosts are charged a flat fee of three percent of the total booking price, and guests pay Airbnb a service fee of around 14 percent of the total booking price. How Much Does Airbnb Charge Hosts, Airbnb (Nov. 16, 2020), https://bit.ly/3KI87xL.

But Airbnb’s explosion onto the scene has created interesting legal questions as lawyers attempt to represent the interests of both landlords and tenants, while homeowners associations (HOAs) and local governments attempt to control short-term rental use.

This article begins with a brief discussion of the common terminology in the short-term rental industry and attempts to define a “short-term rental.” Then, it discusses local and state laws that are attempting to regulate the industry. Next, it discusses how HOAs are attempting to rein in short-term rentals, analyzing the rights of both HOAs and owners. Then, this article discusses common legal challenges to short-term rental regulations. Finally, this article offers practical advice for lawyers and property owners who are attempting to navigate this relatively new industry.

What Is a Short-Term Rental?

Because Airbnb, VRBO, and the like have caused local governments and HOAs to regulate STRs, the question often arises: What is a short-term rental? Generally, short-term rentals are defined as tenancies of 30 days or fewer. See, e.g., Aspen Mun. Code § 26.104.100. (This article uses the term “STR” to refer to short-term rentals generally.) Although that term usually refers to tenancies of 30 days or fewer, states, localities, and HOAs are free to define the term however they please. It is important to remember that an STR can be procured without the aid of Airbnb or its competitors, and a booking on Airbnb could last longer than the standard 30 days. Therefore, this article uses the general term “Airbnb” to refer to the online STR industry generally.

State and Local STR Regulations

Airbnb and the increasing frequency of STRs have spurred state and local governments to step in and regulate the industry. Airbnbs have attracted the attention of state and local lawmakers largely because of their perceived social, economic, and environmental impacts. Housing that was once exclusively residential can now become a form of mixed-use real estate. Peter Coles et al., Airbnb Usage Across New York City Neighborhoods: Geographic Patterns and Regulatory Implications at 1, in Cambridge Handbook on the Law of the Sharing Economy (Nestor M. Davidson, Michèle Finck & John J. Infranca eds. 2017). STRs raise the concern that properties previously used as long-term rentals are being converted into more profitable short-term uses, thereby reducing the local housing supply and increasing rent. Id. at 4.

Sensing competition from Airbnb, the hotel industry’s leading trade organization, the American Hotel and Lodging Association, has launched a campaign encouraging lawmakers to crack down on Airbnbs, referring to them as “illegal hotels.” See Illegal Hotels, Am. Hotel & Lodging Ass’n (accessed Feb. 2023), https://bit.ly/43CI43G. The authors of this article are unable to speculate as to how much the hotel industry’s lobbying efforts have caused a change in laws. It is apparent, however, that local governments are increasing efforts to regulate the industry.

Many local governments have enacted licensing requirements for homeowners hoping to use their property as an STR. For example, Aspen, Colorado, requires homeowners to obtain an STR permit and maintain an active business license. Aspen Mun. Code § 26.530.020(a)(1)–(5). In Austin, Texas, STR permit applicants are required to pay a nonrefundable fee in excess of $700. License My Short-Term Rental, Austin, Texas (accessed Feb. 2023), https://bit.ly/41bg4lY. Several towns in Colorado have also created requirements that STRs have a property manager who is near the property 24/7. Vail Mun. Code § 4-14-5; Winter Park Mun. Code § 3-10-5(A)(8)(a). Typically, the licenses are not permanent and instead required annual renewal and automatically terminate upon the transfer of ownership. Licenses can also come with ongoing responsibilities of the owner such as trash removal, noise mitigation, or limits as to on-site parking, and the like.

But permitting requirements are not the only way localities have sought to regulate STRs. Summit, Lake, and Aspen Counties, Colorado, Clatsop County, Oregon, and others have enacted outright moratoriums on the issuance of STR permits to allow time to enact sufficient regulations. The upshot of these regulations is that those hoping to use their properties as Airbnbs should be careful to comply with all local regulations. In many cases, a consultation with an attorney would be wise.

Homeowner Associations and STRs

Although most localities regulate STRs, HOAs have also attempted to grapple with the disruptive Airbnb industry. HOAs also can face legal issues when attempting to rein in Airbnbs. Eight states, including Colorado, have enacted the Uniform Common Interest Community Ownership Act. Common Interest Ownership Act, Uniform Law Comm’n (accessed Feb. 2023), https://bit.ly/3ULN8P1. That law states that restrictions on the use of units must be contained within the recorded declaration. See Colo. Rev. Stat. § 38-33.3-205(1)(l). Common interest declarations, however, cannot be amended without a vote of 67% of the unit owners. Id. § 38-33.3-217(4.5). Therefore, assuming an STR ban or other restriction restricts the “use” of a unit, unit owners (not the HOA board) must approve such a restriction by more than a two- thirds majority.

Each state, however, will be different. In Arizona, where the Uniform Common Interest Ownership Act has not been adopted, HOA properties may be used as rentals unless the declaration specifically forbids it. Ariz. Rev. Stat. § 33-1806.01. Additionally, the Arizona Supreme Court recently held that an HOA’s general amendment powers may be used only to amend restrictions of which the HOA’s original declaration provided sufficient notice. Kalway v. Calabria Ranch HOA, LLC, 506 P.3d 18, 22 (Ariz. 2022). In that case, because the original declaration did not provide reasonable notice of a possible total STR ban, the court struck it down. Id. at 25. Keep in mind that if an HOA can ban short-term rentals under its private governing documents, then licensing from a local government would likely not be sufficient for an owner to engage in the STR business.

Legal Challenges to STR Regulations

Both localities and HOAs have found themselves in the courtroom over their enactment of STR regulations. This portion of the article discusses those legal challenges and practical considerations for litigators considering a challenge to an STR regulation.

Challenges to Local Laws

As a type of zoning law, the right to regulate STRs falls within localities’ inherent police power. E.g., Ewing v. City of Carmel-by-the-Sea, 234 Cal. App. 3d 1579, 1587 (1991); see also Vill. of Belle Terre v. Borras, 416 U.S. 1, 9 (1974) (noting that “The police power is not confined to elimination of filth, stench, and unhealthy places. It is ample to lay out zones where family values, youth values, and the blessings of quiet seclusion and clean air make the area a sanctuary for people.”). Therefore, constitutional challenges to STR regulations under the Due Process or Equal Protection Clauses will usually fail when the locality has a rational basis for enacting the regulation. For example, in Ewing, the plaintiffs brought due process and equal protection challenges against a city’s total ban on STRs in residential zone districts. 234

Cal. App. 3d at 1584. Because the ban was rationally related to the legitimate government interest of maintaining community character, the court upheld the law. Id. at 1596. In doing so, it noted that:

Short-term tenants have little interest in public agencies or in the welfare of the citizenry. They do not participate in local government, coach little league, or join the hospital guild. They do not lead a scout troop, volunteer at the library, or keep an eye on an elderly neighbor. Literally, they are here today and gone tomorrow—without engaging in the sort of activities that weld and strengthen a community.

Id. at 1591. In addition, courts have held that STR landlords are not “similarly situated” with long-term landlords. See, e.g., Draper v. City of Arlington, 629 S.W.3d 777, 792 (Tex. App. 2009). Because disparate treatment of similarly situated people is an essential element of equal protection claims, these challenges are also likely to fail. See id.

Challenges under the Takings Clause of the Constitution are also unlikely to successfully strike down STR regulations. For example, a town in Oregon completely banned STRs. See Cope v. City of Cannon Beach, 855 P.2d 1083, 1084 (Or. 1993). Because the ban did not deprive owners of all “economically viable” use of their homes, the Oregon Supreme Court determined no taking occurred. See id. at 1086–87. Under certain circumstances, however, STR bans could constitute a taking. In one Texas case, for example, the plaintiff homeowners alleged they bought their properties with the specific intention of using them as STRs. Village of Tiki Island v. Ronquille, 463 S.W.3d 562, 569 (Tex. App. 2015). Considering the case under the more limited eminent domain power granted to the state of Texas by Article 1, Section 17 of the Texas Constitution, the Texas Court of Appeals concluded the plaintiffs had sufficient, investment-backed expectations to render the ban an unconstitutional taking. See id. at 581. Therefore, the appellate court upheld the lower court’s temporary restraining order enjoining enforcement of the ban. See id. at 582. The lack of additional appellate cases concerning that dispute indicates a resolution at the trial court level.

Lawyers should keep in mind that Tiki Island is an exception to the norm and turned on the fact that homeowners had bought properties with the intention of using them as STRs.

There has been at least one successful challenge to an STR regulation based on the Dormant Commerce Clause. The so-called Dormant Commerce Clause is an unwritten, implicit restraint on state authority. Hignell-Stark v. City of New Orleans, 46 F.4th 317, 325 (5th Cir. 2022). When a state or local law discriminates against interstate commerce in favor of local interests, it is virtually per se invalid. Id. Against this backdrop, the City of New Orleans passed an ordinance prohibiting anyone from using a property as an STR unless it was that person’s “primary residence.” Id. at 321. By enacting a residency requirement to obtain an STR permit, the Fifth Circuit found that New Orleans’s regulation violated the Dormant Commerce Clause. See id.

For local governments and municipal or town attorneys, the takeaway from these cases is that they can generally regulate STRs, but, in doing so, they should make sure that their measures do not discriminate against out-of-town visitors or non-residents and that the regulations are rationally related to some legitimate government interest.

Challenges to HOA Restrictions

Although local governments generally face smooth sailing when regulating STRs, HOAs should take care to ensure their restrictions comply with any governing documents and state laws regulating common interest communities. For example, a Colorado HOA’s covenants expressly prohibited any commercial use. See Houston v. Wilson Mesa Ranch Homeowners Ass’n, 360 P.3d 255, 256 (Colo. App. 2015). Using that provision, the HOA board (not the owners) banned STRs, labeling them “commercial uses.” Id. Finding that STRs were not “commercial uses,” the Colorado Court of Appeals struck down the HOA’s ban.

See id. at 259. If an HOA board wishes to restrict STRs, it should be careful to strictly comply with its governing documents and, in most cases, should consult with its attorney. A failure to do so could result in the HOA finding itself in court. And in states that have enacted the Uniform Common Interest Ownership Act, a prevailing owner would be entitled to attorney fees. See Colo. Rev. Stat. § 38-33.3-123(1)(b).

STR Practice Pointers

This article will now discuss practical considerations lawyers representing homeowners engaged in the STR industry should consider. First and foremost, lawyers should be careful to ensure their clients obtain all proper permits and otherwise comply with any regulations or HOA restrictions.

Advisable Lease Provisions

Most states have some sort of statutory provision governing landlord rights when a tenant defaults on its lease. These statutes require the landlord to turn to the courts to evict a tenant wrongfully holding over in the leased premises. See, e.g., id. § 13-40-101 et seq. For that reason, STR leases should be called licenses, avoid terminology such as “landlord” and “tenant,” and expressly provide the owner with the right to perform a nonjudicial lockout in the event of a default. To that end, the STR lease (i.e., license) should also require the tenant (i.e., user) to represent that the home is not its residence and the rental (i.e., use) agreement is not governed by the relevant forcible entry and detainer statute. The authors of this article are unable, however, to find any definitive case law confirming that this kind of draftsmanship will take the arrangement outside of statutory provisions that regulate more normal residential leasing.

Because STR landlords are usually renting their properties to relative strangers, it is advisable to take steps to ensure an unscrupulous tenant does not harm the landlord. This should begin with the lease requiring the tenant to list the name, phone number, and contact information for everyone who will reside at the property. Then, the property owner should perform a background check through a commercial service on each tenant. This allows the owners to know that they are renting their property to safe, responsible people.

STR landlords should make sure every lease gives them the right to immediately evict the tenant for any of the following reasons: (i) a criminal act occurring on the premises; (ii) the tenant’s failure to pay; (iii) the tenant’s failure to maintain the property in a clean and habitable condition; and (iv) the tenant’s failure to abide by the agreed-upon occupancy limits. These eviction rights help ensure the landlord has a remedy when a tenant disrespects the home.

Like all leases, STR landlords should consider adding no-smoking provisions, prohibiting cannabis and other illegal substances, limiting the number of pets (and taking pet deposits), and collecting security deposits or credit card numbers. The problem with a credit card, however, is that the renter can always dispute the charge. In addition, the lease should include waivers holding the landlord harmless from injuries arising out of use of things like barbecues, pools, and bicycles. Further, STR landlords should impose cancellation fees against anyone who attempts to renege on a booking and consider adding cleaning fees to the lease. Finally, when the leased property is inside a common interest community, the relevant rules and regulations should be attached to the lease along with a promise that the tenant will obey them.

Surveillance Cameras

When renting their property to strangers, some homeowners may be inclined to install surveillance cameras. Surveillance cameras may be installed where people do not have a reasonable expectation of privacy. There is no reasonable expectation of privacy in the “common areas” of apartments and condominiums. See United States v. Maestas, 639 F.3d 1032, 1038 (10th Cir. 2011). But there is a reasonable expectation of privacy inside a home. See, e.g., United States v. Hatfield, 333 F.3d 1189, 1194 (10th Cir. 2003). That expectation extends to the home’s “curtilage” (i.e., enclosed areas immediately surrounding the home) but not to open fields. See id. Therefore, STR landlords should never, under any circumstances, install surveillance cameras inside the home unless the tenant is made aware of their presence and agrees to them. A failure to do so could result in criminal liability. See Colo. Rev. Stat. § 18-7-801(1).

Ownership of the Property

It is advisable that STR landlords own their real property in a single-asset entity and enter into lease agreements through said entity. If an owner personally owns the property and personally enters into leases, he or she could be personally liable if anything goes awry and litigation with the tenant ensues.

Property Management Agreements

Most STR landlords will engage property managers to handle the daily tasks that come with renting property on short-term bases. In such cases, lawyers should always ensure the contract with the property manager contains a termination clause. That way, if the property manager neglects its duties, the homeowner can easily move on from the relationship. Homeowners and their lawyers should also consider whether they are amenable to a property management contract being assignable. If a property manager assigns a contract to another entity, the homeowner may be faced with a stranger managing their property. Homeowners should also consider inserting indemnification clauses that protect the homeowner from any liability arising from the property manager’s own negligence.

Insurance

Homeowners and their attorneys should be certain the homeowner insurance extends to STRs, which might be considered a business use. This may require an endorsement to the policy.

Tax Considerations

In most states, the STR landlord is required to collect a sales tax. Some states, however, exempt continuous leases. See id. § 39-26-713(1)(a). In addition, localities may treat STRs like hotels and collect a lodging tax, as is the case in Aspen, Colorado. Aspen Mun. Code § 23.50.010. If a property owner rents his or her home for more than 14 days per year, he or she must pay federal income tax. 26 U.S.C. § 280A(d)(1)(A). Additionally, HOAs may charge fees for each STR use. Landlords should consider adding these taxes to the fees that must be paid by the tenant.

Conclusion

Airbnb has disrupted the hospitality industry. While it certainly makes travel easier for some and provides a reliable revenue stream for homeowners, Airbnb has drawn the ire of lawmakers around the country.

These laws are generally upheld, but HOAs must be careful to comply with their governing documents. Those wishing to rent their properties on Airbnb should take care to comply with all relevant laws and applicable HOA rules. Additionally, landlords should make sure that their leases are drafted in such a way that allows for the quick eviction of problematic tenants and limits the landlord’s liability.

Published in Pub: Volume 37, Number 4, ©2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.