The Battle Over Short Term Rentals: Community Rights vs. Property Owner Rights
In Texas and throughout the United States, a war is being fought between owners of residences who want to rent their properties to short-term visitors, and cities and communities that want to preserve the ambience and character of traditional neighborhoods. And often standing behind opposition to short-term rentals (STRs) is the wealth and influence of the commercial hospitality industry, whose hotel rooms can stand vacant when visitors and tourists choose to unpack their suitcases in someone’s bedroom.
Residential neighborhoods and subdivisions are often built as planned developments with rules about use of property and construction of homes that are designed to make the community attractive and comfortable places to live. A mixed development that contemplate a patchwork of residential and commercial uses have rules designed to create separation between places where people live, and places where people shop and transact business. These rules are typically set out in a legal document drawn up by the developer called “Covenants, Conditions, and Restrictions” (CCR), which may also establish a homeowner’s association architectural committee and regulate the use and maintenance of common areas, among other provisions. The CCR, commonly referred to as “deed restrictions,” is filed of record in the official deed records, typically applies to all the lots in the development, and is incorporated into individual deeds by reference.
CCRs for residential neighborhoods usually require that the homes be restricted to “residential purposes,” “residential use,” or similar terms. A gas station, factory, or hog farm operating in the middle of a neighborhood could seriously impair the character of the area, and create sights, sounds, and smells inconsistent with comfortable and peaceful residential life.
But what about homeowners who rent their empty bedrooms or backyard bungalows to visitors and tourists who will stay there for only few days? What if the property owner owns and rents out one or more houses in the neighborhood to visitors, but does not live there and does not directly monitor and control the use of the property? Add in the exploding online industry that markets and facilitates STRs to the entire world, like VRBO.com (Vacation Rentals By Owner) and Airbnb.com.
Opponents of STRs are worried by the influx of strangers into their neighborhoods, some of whom may not fit the prevailing demographics of the area; stress the risks of absent owners who may not maintain the property or supervise its use like they lived there (and who don’t need to maintain friendly relations with the neighbors); and recount tales of wild parties and carousing by guests who have no stake in maintaining a quiet, G-rated, beer-can-free environment for the families living around them.
Cities also tend to look on STRs with a jaded eye because hotel taxes can be a major source of municipal income, and a robust “black market” of individually-owned homes and rooms for rent cuts into those revenues.
These and other factors create a classic conflict between the right of a landowner to use his property as he wishes, versus the collective community’s interest in keeping residential and commercial areas separate and maintaining a desirable quality of life in the areas where people live.
Texas is a huge state with wide expanses of rural country where people can live out the western ideal of the rugged, self-sufficient landowner, and large, densely-populated cities where residents have to keep their animals under control, cannot blast out George Strait or ZZ Top whenever they want, and cannot discharge their firearms in random directions. Texas is a perfect laboratory to test where the line should be drawn in this showdown.
In May of 2018, the Texas Supreme Court declared the property owner the winner. In Tarr v. Timberwood Park Owners Ass’n, No. 16-1005 (May 25, 2018), a San Antonio homeowner got transferred to Houston and decided to rent his home out on VRBO. He formed a limited liability company for his rental business and during a five-month period rented out the home 31 times for stays ranging between one and seven days. Tarr dutifully paid hotel taxes to the city for the rentals.
The homeowner’s association demanded that Tarr cease renting out his house, claiming that it violated the deed restrictions contained in the subdivision’s CCRs. The CCRs stated that “[a]ll tracts shall be used solely for residential purposes, except tracts designated for business purposes ….” The CCRs also provided that only “single family residence[s]” could be built on the lots in the subdivision. Tarr ignored the demand, and the HOA began assessing a fine of $25 per day, as allowed by chapter 202 of the Texas Property Code. Tarr ended up filing a lawsuit against the HOA, but lost in both the trial court and the court of appeals. The latter court ruled that the STRs were “transient” rather residential in nature, based on the premise that “residential use” implies permanent occupation. Because the court found the residential use restriction to be unambiguous, it held that no presumption in favor of free use of real property should be applied.
The landowner’s fortunes turned in his favor in the Texas Supreme Court. The court, after a lengthy discussion of whether restrictive covenants should be strictly construed in favor of free use of property, or liberally applied in favor of the drafter’s intent pursuant to statute, the court held that the residential use restriction was unambiguous and therefore no presumption would be applied one way or another.
But the court read the unambiguous language to reach a result opposite from that of the court below. (As an aside, the language of a contract or statute is ambiguous when reasonable minds could differ as to it meaning, either on its face or as applied to a particular situation. This is a notable example of the nine minds of the supreme court differing from the three minds of the court of appeals’ panel as to the meaning of language that both courts viewed as unambiguous.)
In any event, the supreme court held that Tarr’s STR business did not violate the subdivision’s deed restrictions. The court pointed out that the restriction to “residential purposes” was not defined in the CCRs, and that it did not explicitly require the owner to use the property for that purpose. And nowhere in the CCRs were short term rentals mentioned or addressed. The court agreed with courts in Arkansas, Alabama, Colorado, and Florida that the language focused on the use of the property, not who used the property. The court concluded:
The covenants in the Timberwood deeds fail to address leasing, use as a vacation home, short-term rentals, minimum-occupancy durations, or the like. They do not require owner occupancy or occupancy by a tenant who uses the home as his domicile. Instead, the covenants merely require that the activities on the property comport with a “residential purpose” and not a “business purpose.” We decline to add restrictions to the Timberwood covenants by adopting an overly narrow reading of “residential.”
The court also did not find any obstacle to STRs in the restriction that limits the construction of buildings to “single family residence[s].” This is a restriction on the kind of structures that can be built in the subdivision, and does not speak to what the property can be used for.
The upshot of the supreme court’s ruling is that if a developer of a residential neighborhood wants to prohibit or regulate use of the homes for short term rentals, the CCRs need to do so explicitly. After Tarr v. Timberwood Park Owners Ass’n, Texas courts will not infer such restrictions from standard clauses requiring use for residential purpose or limiting buildings to single-family residences.
It would be easy enough to draw up a deed restriction that would prevent homeowners from renting their properties on a short-term basis, if that is what is desired. Such a restriction would be attractive to some home buyers, but probably not others. For an owner like Tarr who is transferred to another city or state, a prohibition of short-term rentals would limit the owner to either selling the property or renting it on a long-term basis. This would substantially impinge on the property rights of home buyers in the subdivision and limit their economic prerogatives. We will have to see if developers revise their CCRs to crack down on STRs, and if the market will tolerate such a change.
Part 2 of the series will address the other major source of regulation of STRs, which is city zoning regulations. Austin and a number of other Texas cities have adopted ordinances regulating STRs with various levels of strictness, with the Austin ordinance being especially tough. The Austin ordinance is being challenged in court by property rights groups on numerous constitutional grounds. Stay tuned.