Can Your HOA Say No to VRBO?
In the not-so-distant past, if you wanted to get from one place to another without a car of your own, you would call a taxi, with your only choice being which of the many taxicab companies to call upon. Now, of course, calling a taxi is scoffed at as being “old fashioned” and overpriced, with many, if not most, people opting to instead call Uber or Lyft, or some other rideshare service. Likewise, it used to be that if you were traveling to another city and wanted a place to stay, you would simply book a hotel room. And while the hotel industry is certainly still going strong, there now exists an ever-increasing inventory of “short-term rentals” available as alternatives to hotels. Several companies exist to offer these types of sharing economy services, such as Airbnb, VRBO, or WanderJaunt.
The fast-growing popularity of short-term rentals cannot be denied. The Arizona Republic reported in January 2019 that a staggering twenty percent of all houses in the popular tourist city of Sedona are operating as short-term rentals, which has resulted a housing shortage in that city for its full-time residents. Data from the research firm AirDNA shows that the Aribnb market has grown exponentially during the past five years, from 687 Phoenix properties listed on Airbnb in 2014 to 4,224 properties listed in 2019. Scottsdale, a city that is smaller in size and population than Phoenix, had even more listings, with 5,379 as of March 2019.
With more and more people wanting to generate income by using properties that they own for short-term rentals, there is an inherent conflict between the right of a property owner to use their property as they choose, and the right of a city, state, or on a smaller scale of a homeowner’s association, to control the way that the properties within their jurisdiction are being used. The issue regarding the right of a city to limit short-term rentals was resolved in 2016 (and put in place in 2017), when the Arizona State Legislature enacted A.R.S. §9-500.39. This brand-new statute eliminates the ability of local cities and towns to regulate these types of rentals based solely on their classification or use. The legislation was championed by companies like Airbnb and Expedia, as well as groups like the Goldwater Institute, and nonprofits funded by the Koch network, including Americans For Prosperity and the Arizona Free Enterprise Club. Consequently, short-rentals are now specifically allowed by Arizona state law.
That doesn’t mean, however, that you have a blanket right to turn your Arizona home into a short-term rental. Even in the brief amount of time since the statute was enacted, changes have already been made by the Arizona legislature. A common complaint by residents living in the vicinity of a short-term rental is an increase in traffic, noise, and trash in their neighborhoods, as well as the manner in which some of the short-term tenant’s behave. In response to such complaints, A.R.S. §9-500.39 was amended to allow a city to “regulate vacation rentals or short-term rentals” for certain specified purposes, including “adopting and enforcing residential use and zoning ordinances, including ordinances related to noise, protection of welfare, property maintenance and other nuisance issues.” Arizona law now puts limitations on the use of a property as a “party house” for special events, by specifying that “a short-term rental may not be used to nonresidential uses, including for a special event that would otherwise require a permit or license pursuant to a city or town ordinance or a state law or a retail, restaurant, banquet space or similar use.”
While A.R.S. §9-500.39 limits the ability of an Arizona city to restrict or regulate short-term rentals, it does not preclude a homeowners’ association (“HOA”) from imposing much more draconian limitations, or eliminating them altogether. HOA’s are governed by Code, Covenants and Restrictions (“CC&R’s”), which are by their very nature replete with restrictions on how a property owner may, or may not, utilize their property.
The most common prohibition contained within an HOA’s CC&R’s, that would seemingly prohibit the use of a property as a short-term rental, is a prohibition against the use of a property for “commercial purposes,” or for any purpose other than for “residential purposes.” However, whether such language is sufficient so as to stop a homeowner from renting out their property on a short-term basis is far from clear. In that there are no reported Arizona cases regarding HOA restrictions over short-term rentals, we must look to other states for guidance. At present there are only 45 reported cases in all courts in the U.S., both state and federal, that deal with the subject of HOA restrictions on short-term rentals.
We start with the basic concept that CC&R’s, which operate the same as a deed containing a restrictive covenant that runs with the land, are enforceable to the extent that they are unambiguous. Ultimately, the CC&Rs are just a contract. This contract is between the subdivision’s property owners as a whole and individual lot owners. In Arizona, the traditional rule has been that when a restrictive covenant is unambiguous, it is enforced so as to give effect to the intent of the parties.
In interpreting CC&R’s, courts read the language used in its ordinary sense, construing it in light of the circumstances surrounding its formulation, and with the idea of carrying out its object, purpose, and intent. “We are not bound by the ‘strict and technical meaning of the particular words’ in the declaration.” Instead, “‘the function of the law is to ascertain and give effect to the likely intentions and legitimate expectations of the parties’ who create the covenants.” “When the meaning of a covenant is reasonable and unambiguous ... there is no need to seek further clarification outside its language.” “In the absence of ambiguity, restrictive covenants will be enforced according to their terms.” The law in Arizona that courts should enforce the intent of the parties to a restrictive covenant in the absence of ambiguity reaches back to the 1930’s. In Ainsworth v. Elder, Arizona’s court of appeals adopted an intent-based analysis (without calling it such) when it stated that “courts should consider not only the strict and technical meaning of the particular words of restriction, but also the surrounding circumstances, the general purpose of the restrictions, and the manner in which they have been interpreted by the property owners.” This general principle of looking beyond the mere words of a restrictive covenant to the surrounding circumstances and the general purpose of the restriction has been repeated in subsequent decisions. (“This court has previously recognized that in determining the meaning of restrictive covenants, the surrounding circumstances will be looked to as well as the meaning of particular words.”) (stating that when interpreting restrictive covenants “the courts not only look to the meaning of the particular words but also to other surrounding circumstances”).
On the other hand, while Arizona courts will enforce unambiguous restrictive covenants so as to give effect to the intent of the parties, if the restrictive covenant is ambiguous, the Courts will strictly construe such covenant so as to not prohibit or restrict a property owner in the manner in which they can use their property. (“if the language of a restrictive covenant is judged to be ambiguous, it should be construed in favor of the free use of the land.” *** “Restrictive covenants are to be strictly construed against persons seeking to enforce them and any ambiguities or doubts as to their effect should be resolved in favor of the free use and enjoyment of the property and against restrictions.”).
In the absence of any Arizona cases dealing with the issue of whether restrictive covenants in CC&R’s are enforceable restrictions against the use of a particular property for a short-term rental, we can look to other opinions issued in other jurisdictions for guidance. As set forth below, however, such opinions are not consistent.
For example, limiting the property to only a “residential use” is typically not a specific enough limitation to eliminate short-term rentals through the CC&Rs. The phrase “‘residential use,’ without more, has been consistently interpreted as meaning that the use of the property is for living purposes, or a dwelling, or a place of abode.” A place used for “residential purposes” is, according to its plain and ordinary meaning, “one in which people reside or dwell, or which they make their homes, as distinguished from one which is used for commercial or business purposes.” Although “residential” unambiguously refers to use for living purposes, courts have recognized ambiguity in the term in cases involving short-term rentals or other situations where those residing in the property are living there only temporarily, not permanently. These courts concluded that, because ambiguities in restrictive covenants were to be construed in favor of the free use of property, short-term rentals were not precluded as inconsistent with residential use. Thus, the phrasing of a limitation of the property to a “residential use” most likely will not eliminate a homeowner from engaging in short-term rental activity of that property.
Other courts have found no ambiguity, reasoning that, as long as the property is used for living purposes, it does not cease being “residential” simply because such use is transitory rather than permanent. In Lowden, the Missouri court summarized cases applying the term “residential” to a variety of structures used for habitation purposes and recognizing that the transitory or temporary nature of such use did not defeat the residential status. It concluded that “when the owner of a permanent home rents the home to a family, and that family, as tenant, resides in the home, there obviously is no violation of the declaration. While the owner may be receiving rental income, the use of the property is unquestionably ‘residential’.”
In Pinehaven Planning Board v. Brooks, the covenants at issue restricted the use of residential property to the construction of a single-family residence, which could not be used for commercial, industrial, or business purposes. The Idaho Supreme Court in Pinehaven held that renting a property to people who used it for residential purposes, whether short or long term, did not violate the covenants. Colorado courts agreed, noting that “short-term vacation rentals are not barred by the commercial use prohibition in the covenants. Our conclusion is consistent with the Colorado Supreme Court's that receipt of income does not transform residential use of property into commercial use.”
Based upon the non-Arizona case law, it would appear that a CC&R’s prohibition against using a property for any purpose other than “residential,” or using it for any “commercial” purpose, is not sufficient to allow an HOA to stop the use of property as a short-term rental. Instead, to assure its ability to prohibit short-terms rentals, an Arizona HOA will need to amend its CC&R’s to state in clear, unambiguous language, that short-term rentals (defined as those with a duration of less than a specific time period) are strictly prohibited. Of course, that solution raises another issue regarding the difficulty in amending CC&R’s, which is beyond the scope of this article. Because of the newness of this issue, such a restriction specifically targeting short-term rentals has not yet been tested in any Arizona court. Based upon the law summarized here, however, there is no reason to believe that such a prohibition would not be an effective tool for HOA’s to manage short-term rentals within their community.
About the Authors: David Allen, a partner in the Phoenix law firm of Jaburg Wilk, has been representing clients in both transactional and litigation real estate and business related matters for over thirty years. He is licensed as an attorney in both Arizona and California, and is also a licensed Arizona real estate broker.
- The “sharing economy” is defined as “economic activity that involves individuals buying or selling usually temporary access to goods or services especially as arranged through an online company or organization.” See https://www.merriam-webster.com/dictionary/sharing%20economy
- AirDNA leverages data science to provide short-term vacation rental data and analytics by tracking the daily performance of over 10 million short-term rental listings across 80,000 markets. See https://www.airdna.co/about
- Powell v. Washburn, 211 Ariz. 553, 555, ¶ 8, 125 P.3d 373, 375 (2006).
- See Arizona Biltmore Estates Ass'n v. Tezak, 177 Ariz. 447, 448, 868 P.2d 1030, 1031 (1993)
- Arizona Biltmore Estates, 177 Ariz. at 449, 868 P.2d at 1032 (“[T]he cardinal principle in construing restrictive covenants is that the intention of the parties to the instrument is paramount.”) (citing Riley v. Stoves, 22 Ariz.App. 223, 225–26, 526 P.2d 747, 749–50 (1974)); Sky Mountain Ranch Subdiv. Prop. Owners Ass'n v. Williams, 12 Ariz.App. 244, 246, 469 P.2d 478, 480 (1970) (“The intent of the parties and the object of the deed or restriction should govern, giving the instrument a just and fair interpretation.”)
- Cypress on Sunland Homeowners Ass'n v. Orlandini, 227 Ariz. 288, 297, ¶ 31, 257 P.3d 1168, 1177 (App. 2011) (citing Powell, 211 Ariz. at 557, ¶ 16, 125 P.3d at 377).
- Cypress, supra. (citing Powell, 211 Ariz. at 556, ¶ 10, 125 P.3d at 376)
- Saguaro Highlands Cmty. Ass'n v. Biltis, 224 Ariz. 294, 296, ¶ 6, 229 P.3d 1036, 1038 (App. 2010) (quoting Powell, 211 Ariz. at 556–57, ¶ 13, 125 P.3d at 376–77)
- Duffy v. Sunburst Farms E. Mut. Water & Agric. Co., 124 Ariz. 413, 416, 604 P.2d 1124, 1127 (1979).
- Duffy at 416–17, 604 P.2d at 1127–28
- Ainsworth v. Elder, 40 Ariz. 71, 74–75, 9 P.2d 1007, 1008 (1932)
- See, e.g., Duffy, 124 Ariz. at 416, 604 P.2d at 1127
- Whitaker v. Holmes, 74 Ariz. 30, 32, 243 P.2d 462, 463 (1952)
- See, e.g., Duffy, 124 Ariz. at 417, 604 P.2d at 1128; Burke v. Voicestream Wireless Corp. II, 207 Ariz. 393, 396, ¶ 13, 87 P.3d 81, 84, (App.2004)
- Grossman v. Hatley, 21 Ariz.App. 581, 583, 522 P.2d 46, 48 (1974)
- Lowden v. Bosley, 395 Md. 58, 909 A.2d 261, 267 (2006)
- Mullin v. Silvercreek Condo. Owner's Ass'n, 195 S.W.3d 484, 490 (Mo. Ct. App. 2006)
- See Yogman v. Parrott, 325 Or. 358, 937 P.2d 1019, 1021 (1997) (“The ordinary meaning of ‘residential’ does not resolve the issue between the parties. That is so because a ‘residence’ can refer simply to a building used as a dwelling place, or it can refer to a place where one intends to live for a long time.”); Scott v. Walker, 274 Va. 209, 645 S.E.2d 278, 283 (2007) (Restrictive covenant's requirement that lots be used for “residential purposes” was “ambiguous both as to whether a residential purpose requires an intention to be physically present in a home for more than a transient stay and as to whether the focus of the inquiry is on the owner's use of the property or the renter's use. . . . Moreover, if the phrase ‘residential purposes’ carries with it a ‘duration of use’ component, it is ambiguous as to when a rental of the property moves from short-term to long-term.”); Dunn v. Aamodt, 695 F.3d 797, 800 (8th Cir. 2012) (the phrase “residential purposes” in restrictive covenant was ambiguous as to short-term rental of property)
- Lowden, 909 A.2d at 267
- Pinehaven Planning Board v. Brooks, 138 Idaho 826, 70 P.3d 664, 667–68 (2003)
- Id. at 668–69; see also Slaby v. Mountain River Estates Residential Ass'n, 100 So.3d 569, 579 (Ala. Civ. App. 2012) (“[P]roperty is used for ‘residential purposes’ when those occupying it do so for ordinary living purposes. Thus, so long as the renters continue to relax, eat, sleep, bathe, and engage in other incidental activities ... they are using the [property] for residential purposes.”); Ross v. Bennett, 148 Wash.App. 40, 203 P.3d 383, 388 (2008) (rejecting argument that short-term vacation rentals were distinguishable from permitted long-term rentals and concluding that: “Renting the ... home to people who use it for the purposes of eating, sleeping, and other residential purposes is consistent with the plain language of the ... [c]ovenant. The transitory or temporary nature of such use by vacation renters does not defeat the residential status.”) Houston v. Wilson Mesa Ranch Homeowners Ass'n, Inc., 2015 COA 113, ¶ 24, 360 P.3d 255, 260 (Co. App. 2015).