Homeowners Associations And Homeowners Beware: Airbnb, VRBO And Other Short-Term Use Rentals May Be Prohibited

Simon PLC Attorneys & Counselors – December 2021 Memorandum

Homeowners Associations And Homeowners Beware: Airbnb, VRBO And Other Short-Term Use Rentals May Be Prohibited

Bloomfield Hills, Michigan – Our Team’s focus has always been broader than just commercial and banking litigation.  Simon PLC Attorneys & Counselors have experienced attorneys that have represented homeowners’ associations and homeowners in counseling clients, prosecuting and defending disputes regarding homeowner association governing documents, restrictive covenants and bylaws.  The case discussed below demonstrates the complex nature of interpreting historical governing documents to present day disputes.

On October 21, 2021, the Michigan Court of Appeals issued a decision that upheld the Leelanau County circuit court’s ruling that short-term rentals violated residential use restrictions contained in a homeowners’ association’s deed restriction.   Homeowners’ associations and individual homeowners must be aware of potential violations of association governing documents and deed restrictions that could result when a homeowner decides to rent out their property on a short-term basis.  This may be through one of the popular vacation rental websites like Airbnb and VRBO or independently.  Careful consideration by qualified counsel at Simon PLC Attorneys & Counselors of the underlying declaration of restrictive covenants and other historical governing documents could avoid pitfalls for homeowners’ associations and homeowners alike, especially expensive and time-consuming litigation.

In Cherry Home Association v. Baker, et al, a Michigan homeowners’ association sued several owners engaging in short-term rentals, citing the residential use limitation in their declaration. The homeowners argued that they had not violated the residential use restriction because short-term rentals were not expressly prohibited in the declaration of covenants and restrictions recorded with the Leelanau County Register of Deeds on August 27, 1965.  However, the COA upheld the lower court’s ruling that the defendants were using their property not for a residential purpose but rather a commercial purpose.  Advertising a property for rental on Airbnb, VRBO or other websites, the court held, was for the purpose of raising money.  The COA held that generating income from one’s home is not a residential purpose.  The COA also rejected defendants’ argument that the homeowners’ association waived enforcement because it did not enforce this provision every time there was a short-term rental.

Article VII of the declaration is entitled “Building and Use Limitations.” Section 1 reads, in relevant part:

All land which is subject to this Declaration shall be limited to residential use. No building shall be erected, altered, placed or permitted to remain on any property other than a one family dwelling and private garage or outbuildings incidental thereto.

Section 5 reads:

Variance. The purpose of the foregoing Building and Use Limitations being to insure the use of the properties for attractive residential uses, to prevent nuisances, to prevent impairment of the attractiveness of the property, to maintain the desirability of the community and thereby secure to each owner the full benefits and enjoyments to his home with no greater restriction upon the free and undisturbed use of his property than are necessary to insure the same advantages to other owners. Any reasonable change, modification or addition to the foregoing shall be considered by the Developer and the Association and if so approved will then be submitted in writing to the abutting property owners and if so consented to in writing shall be recorded and when recorded shall be as binding as the original Covenants.

Article VIII of the declaration states in § 1, in part, that “[t]he covenants and restrictions of this Declaration shall run with and bind the land and shall inure to the benefit of and be enforceable by the Association, or the owner of any land subject to this Declaration, their respective legal representatives, heirs, successors, and assigns.”  § 4 reads:

Enforcement of these covenants and restrictions shall be by any proceeding at law or in equity against any person or persons violation or attempting to violate any covenant or restriction, either to restrain violation or to recover damages, and against the land to enforce any lien created by these covenants; and failure by the Association or any owner to enforce any covenant or restriction herein contained shall in no event be deemed a waiver of the right to do so thereafter.

The homeowners’ association sued for injunctive relief and for a declaratory judgment that the declaration prohibited short-term rentals.  Defendants admitted they rented their property but argued that the short-term rental of the property was for use as a residence.  They further asserted that the declaration did not expressly prohibit short-term rentals but even if it did, that the homeowners’ association waived its right to enforce because it failed to enforce this provision in the past.

The COA affirmed the lower court’s ruling which held that the property was not used by defendants for a residential purpose, but instead, was used as a rental property.  The lower court   explained that “when you put [a property] on a[n online] platform offering it to the public at large . . . the purpose of that is raising money, it is not for a residential purpose.”  Next, the lower court rejected defendants’ waiver argument, stating that homeowners’ association did not waive enforcement of the covenant merely because it did not enforce it “every time” there was a short-term rental.  Moreover, there was an antiwaiver clause in the declaration, “which says that failure to enforce these provisions . . . in one instance[] does not prevent enforcement” in a later situation. Finally, the lower court fashioned an injunction prohibiting only defendants from renting their property for a term of six months or less.

The COA did not rule that rental periods longer than six months were not out of the range of reasonable and principled outcomes.  However, this case is important because it reaffirms the COA’s residential use restrictions found in homeowners’ associations’ declarations, even if generically called “residential use.”  This case is also important because there were no express terms in the declaration prohibiting short-term rentals or any restrictions on commercial use.  It is important for homeowners and homeowners’ associations alike to review their governing documents. Associations must decide if, changes need to be made to expressly prohibit short-term rentals.  Homeowners facing a lawsuit by their homeowners’ association for engaging in short-term rentals, or considering offering their home for rental, must confirm what their rights are.

If you or your homeowners’ association needs advice or assistance in drafting, interpreting, or enforcing governing documents, contact us at Simon PLC Attorneys & Counselors.  Our attorneys are experienced at counseling individuals and homeowners’ associations.

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