More Grist for the Milll: Short-Term Rentals

Started by CathyA3 • 11 replies • 822 views

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CathyA3 (Ohio)
Posts: 6,299

Posted:

Came across this interesting item:

Earlier this year, the Kentucky Court of Appeals ruled that using a property for a short-term rental didn’t classify as residential use and violated a restriction limiting the property’s use to a private summer residence.

The court's ruling cited a previous case in which a short-term rental situation was found to be akin to running a hotel and thus constituted business use of the property, and not residential. This is essentially what I've been saying every time this topic comes up, and that calling these things "rentals" is misleading since one does not usually refer to a hotel stay as "renting". :-)

This ruling may help communities whose CC&Rs do not specifically prohibit short-term rentals if the governing documents do have some sort of prohibition against running a business on one's property.

For those who enjoy wading through legalese, the Court of Appeals ruling is here:
https://law.justia.com/cases/kentucky/court-of-appeals/2020/2019-ca-000622-mr.html

GeorgeS21 (Florida)
Posts: 3,808

Posted:

Thanks, Cathy ... good stuff.

AugustinD
Posts: 5,144

Posted:

I looked at the recent Kentucky appeals court case that CathyA3 cited. I think all I could conclude is the court is looking at the covenants' language very closely (as it should). I tend to think the courts are still leaning towards "residential use" not being grounds for prohibiting short term rentals (STRs). But I do hope this will change.

In April 2017 a Florida appeals court decision cited a March 2017 Kentucky appeals court decision pertaining to STRs. Today's citation from CathyA3 turns out to give this earlier Kentucky court case much attention. (Thanks to GenoS who late last year provided the Florida appeals court citation.)

Here's the chronology I have derived using GenoS's cite and CathyA3's citation above.

========================================
Kentucky, Hensley v. Gadd, 2013 to 2018
========================================
2013, October in Kentucky, Hensley files suit against Gadd. Hensley claims Gadd's STR violates the covenants.

2015, October in Kentucky, the trial court rules for Hensley: The covenants prohibit Gadd from having an STR. Gadd appeals.

2017, March in Kentucky, the appeals court reverses the trial court and rules for Gadd: The covenants allow STRs. See https://casetext.com/case/keith-a-gadd-jht-props-llc-v-hensley

2018, November in Kentucky, the Kentucky Supreme Court agrees with the trial court (throwing out the appeals court decision as it pertains to STRs) and rules for Hensley: The covenants prohibit Gadd from having an STR. Much of the Kentucky Supreme Court's reasoning relies on the mention of the word "hotel" in another part of the covenants. The Court contrasts definitions of "hotel" with definitions of "residential" and so on. See https://cases.justia.com/kentucky/supreme-court/2018-2017-sc-000189-dg.pdf?ts=1542295081 .

=================================================
Kentucky, Hoffman v. Marshall, 2018-ish to 2020
=================================================
2018, September in Kentucky, Hoffman v. Marshall, a trial court rules for Marshall: The covenants permit STRs.

November-December 2018, Hoffman asks the trial court to re-consider, in view of the Kentucky Supreme Court decision in Gadd in November, 2018 (ruling that a certain HOA's covenants prohibit STRs). The trial court re-considered but ended up sticking with its original decision: The covenants allow STRs.

2020, February in Kentucky, an appeals court throws out the trial court's decision, ruling for Hoffman: The covenants prohibit STRs. The crux of the ruling is that "residential use" and 'private summer residential' use amounts to a prohibition on STRs. (The reasoning pretty much parallels CathyA3's reasoning, as far as I am concerned.) See
https://cases.justia.com/kentucky/court-of-appeals/2020-2019-ca-000622-mr.pdf?ts=1581692588

Florida
========
2016, July in Florida, a HOA files suit against Acord and others, claiming Acord's STR violates the covenants. The trial court rules for the HOA: The covenants prohibit STRs.

2017, April in Florida, a Florida appeals court cites the previous month's Kentucky appeals court decision in Gadd (and appeals court decisions in a total of 15 states) in reasoning that the covenants in a certain Florida HOA allow STRs. The Florida appeals court reverses the trial court and rules against the HOA: The covenants allow STRs.
https://edca.1dca.org/DCADocs/2016/4782/164782_DC05_04282017_104637_i.pdf

So far I do not see signs that the Florida appeals court decision is being appealed. After all, as far as I can tell, there are still 14 states with court precedent declaring that covenants allowing only "residential use" do not give grounds for prohibiting STRs. Unfortunately.

CathyA3 (Ohio)
Posts: 6,299

Posted:

One interesting thing I noticed in the Hoffman vs. Marshall case in Kentucky: the Marshalls formed an LLC under which to conduct their STR business, rather than simply renting under their own names. I think that this gives additional weight to the Appeals Court's position that their STR is in fact a business. I didn't see any mention of whether their tax returns were inspected, but I'd be willing to bet that they file a business return to report this income.

The courts in the Hensley case also noted that people who stay one night, two nights, or even a week can't be considered "residents" under the commonly understood meaning of the word. Thus the use of the property was not "residential".

(I use the "Miracle on 34th Street" test. If the US Postal Service doesn't think you live there, you're not a resident.) :-)

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By CathyA3 on 07/20/2020 2:00 PM
One interesting thing I noticed in the Hoffman vs. Marshall case in Kentucky: the Marshalls formed an LLC under which to conduct their STR business, rather than simply renting under their own names. I think that this gives additional weight to the Appeals Court's position that their STR is in fact a business. I didn't see any mention of whether their tax returns were inspected, but I'd be willing to bet that they file a business return to report this income.

At your suggestion above, I searched the 2020 Kentucky appeals court decision for the word "tax." From the appeals court decision:
"The Marshalls’ payment of a transient lodging tax is further indication that the property’s use in this case was the equivalent of a hotel, as described in Hensley. Id."

CathyA3, you and the three appeals court judges (who voted unanimously) are good.

Quote:

Posted By CathyA3 on 07/20/2020 2:00 PM
The courts in the Hensley case also noted that people who stay one night, two nights, or even a week can't be considered "residents" under the commonly understood meaning of the word. Thus the use of the property was not "residential".

(I use the "Miracle on 34th Street" test. If the US Postal Service doesn't think you live there, you're not a resident.) :-)

I think this is a great test.

I think these discussions here are going to help boards fight short term rentals.

BenA2 (Texas)
Posts: 1,273

Posted:

The Texas Supreme Court ruled just the opposite, stating it does not violate residential use clauses.

While other states may use these decisions for arguments in court, I would not recommend an HOA using a court decision from another state in setting policies.

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By BenA2 on 07/20/2020 6:53 PM
The Texas Supreme Court ruled just the opposite, stating it does not violate residential use clauses.

I believe this might be Bernard v. Humble, 1999, https://caselaw.findlaw.com/tx-court-of-appeals/1164315.html . The 2017 Florida court cited the latter Texas decision along with the decisions by the courts in 14 other states.

As far as I am concerned, the Kentucky cases are distinguishable from a court decision that only faces the question of whether a covenant restricting house/condo use to "residential use" prohibits STRs. For the Kentucky HOAs, there was more in the covenant than just a restriction to "residential use." Also the court took note of the LLC aspect yada for one of the STRs in one of the two Kentucky cases.

Quote:

Posted By BenA2 on 07/20/2020 6:53 PM
While other states may use these decisions for arguments in court, I would not recommend an HOA using a court decision from another state in setting policies.

If a HOA board does a close reading of the case law nationwide on this issue; finds a case that is way similar to their own situation; consults an attorney; and then sets policy; then in my opinion the board is wise.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Thought about this a bit more, and riffing on my comment about "Miracle on 34th Street":

In general, hotels are zoned commercial, not residential, because the owners of the property are clearly running a business. With the exception of residential hotels (which are also still businesses), the people who stay there live elsewhere. Their drivers licenses say so, the US Postal Service says so, and the IRS says so. The large majority of their possessions are elsewhere. Hotels refer to their clients as "guests", not "residents".

This is different from a condo or house that has a long-term tenant who has signed a lease. This tenant views the unit as his home, gets his mail there, lists this address on his drivers license, and his stuff is there. So it makes sense to view that as "residential" use, as we do with apartment buildings.

Technically you can view all landlords as using their property to earn money, unlike all other owners who occupy their homes. I actually agree with it. Lenders also take this view: they ask whether the home will be your primary or secondary residence vs. an investment property, and the requirements to qualify for each type of loan differ. If you read articles targeted to real estate investors, they often remind their audience that landlords are running a business, not buying an investment such as shares of stock or bonds.

So it's a matter of degrees, not a clear-cut line.

BenA2 (Texas)
Posts: 1,273

Posted:

Quote:

Posted By AugustinD on 07/20/2020 9:17 PM

Posted By BenA2 on 07/20/2020 6:53 PM
The Texas Supreme Court ruled just the opposite, stating it does not violate residential use clauses.

Quote:

Posted By BenA2 on 07/20/2020 6:53 PM
While other states may use these decisions for arguments in court, I would not recommend an HOA using a court decision from another state in setting policies.

I agree. If an attorney gives an opinion based on the law and case law, you should follow it. The problem comes when someone assumes that a case from another jurisdiction will support their policy.

As an example, prior to the Texas Supreme Court decision, the Appeals Court in San Antonio ruled that STRs violated the residential use clause. We are in a county that borders San Antonio's county. If my HOA took that decision as being a matter of law, we would have been wrong because we fall under the jurisdiction of the Appeals Court in Austin, which ruled the opposite of the San Antonio court. We are closer to San Antonio but are bound by the Austin court (fortunately the Texas Supreme Court settled the matter for the whole state). This is why you should never depend on a court decision that does not have jurisdiction over your HOA.

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By BenA2 on 07/21/2020 2:23 PM
As an example, prior to the Texas Supreme Court decision, the Appeals Court in San Antonio ruled that STRs violated the residential use clause. We are in a county that borders San Antonio's county. If my HOA took that decision as being a matter of law, we would have been wrong because we fall under the jurisdiction of the Appeals Court in Austin, which ruled the opposite of the San Antonio court. We are closer to San Antonio but are bound by the Austin court (fortunately the Texas Supreme Court settled the matter for the whole state). This is why you should never depend on a court decision that does not have jurisdiction over your HOA.

It seems to me BenA2's references are further indicia of how hot the issue of STRs and covenants with restrictions on 'residential use' and more are in the courts nationwide.

2015 August, the Austin Court of Appeals rules that covenants restricting units to 'residential use' allow STRs. See Zgabay v. [HOA]

2016 November, the San Antonio Court of Appeals rules the opposite of the Austin Court of Appeals in Tarr v. [HOA]: Covenants restricting units to residential use prohibit STRs.

2017 June, the Forth Worth Court of Appeals rules essentially the same as the Austin Court of Appeals. See Garrett v. Sympson.

2017 August, the Austin Court of Appeals rules similarly to the 2015 Austin Court of Appeals. See Boatner v. Reitz.

2017 December, the Beaumont Court of Appeals notes references to hotels in the covenants and rules that the covenants on 'residential use' prohibit STRs. See Ridgepoint Rentals v. McGrath

2018 May Tarr v. Timberwood Park Owners Association, the Texas Supreme Court rules as the Austin Court of Appeals did: Covenants restricting units to 'residential use' allow STRs. The Texas Supreme Court decision cites decisions in the Idaho Supreme Court and an Alabama appeals court in partial support of its position. In Texas courts, "ambiguity" is the death knell for all HOAs that hope to prohibit short term rentals based on the mere phrase 'residential use' or similar. The HOAs will lose.

As I noted in an earlier post, in 2017 a Florida appeals court cited a 1999 Texas appeals court decision (Benard v. Humble) that said covenants restricting units to 'residential use' do not prohibit rentals. If the Florida Supreme Court ever hears an appeal from a lower court, the more recent Texas Supreme Court decision may buttress a Florida Supreme Court decision to rule that covenants restricting use to 'residential,' with no other wording referring to say, 'hotels,' do not prohibit STRs.

For HOAs whose covenants are ambiguous on what 'residential use' is, and where a HOA wants to prohibit STRs, I think the Texas Supreme Court decision is a reason to try to amend covenants.

MarkW18
Posts: 1,290

Posted:

In the past year, I have had to deal with this with three association in three different local municipalities. These three municipalities have rules agaisnt short term rentals. So if there is a problem at any of those three associations, they are quickly turned over to the Code Enforcement of one of the three cities. None of the associations ever have to file some stupid derivative lawsuit against the owners that they possibly will never win.

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