An interesting case was recently decided by a Texas Court of Appeals in the matter of Tarr v. Timberwood Park Owners Association, Inc., No. 04-16-00022-CV (Tex. App. Nov. 16, 2016). Timberwood Park’s governing documents stated that the homes in the subdivision were to be used exclusively for residential purposes but did not contain any specific prohibition of short-term leasing, i.e. requiring a minimum number of days or months for the term of a lease.
Owner Kenneth Tarr decided to begin leasing his home out for as little as one day at a time. The association demanded that he cease doing so, pointing to the residential use requirement in the governing documents. The trial court and appeals court agreed, finding that the term “residential use” unambiguously excludes “transient use”, which the court found was the kind of use contemplated by Tarr’s agreements with his lessees, based on the terms of the leases and several other factors:
“The leasing agreement between [Tarr’s rental company] and its “guests” discusses a “check-in” time of 4:00 p.m. and a “check-out” time of 11:00 a.m. The agreement requires “a two-night minimum stay” and states that a “two-night rate” will be charged to guests who leave early. The agreement provides for a full refund if a cancellation is made more than thirty days prior to arrival, but does not provide for any refund if a cancellation is made less than thirty days. The leasing agreement is not consistent with a renter who has the intent to remain at the home; the agreement thus shows that the home is being used for transient purposes rather than residential purposes. Furthermore, the record shows that Tarr paid hotel state and municipal hotel taxes.”
UPDATE: Tarr was successful in his appeal to the Texas Supreme Court, which instead found that “residential use” was not defined in the governing documents, it was ambiguous and must be interpreted liberally to include the context in which it appears, which meant that the renters’ residential use of the property should be allowed.
In Michigan, we have unpublished case law confirming that prohibitions on “commercial use” likely prohibit short-term or “vacation” rentals. In Enchanted Forest v. Schilling, Not Reported in N.W.2d, 2010 WL 866148, again, there was no specific restriction against renting under a minimum number of days, but the deed restriction against commercial use was found to mean that short-term rentals were not allowed. A prior case was referenced in that decision, Terrien v. Zwit, 467 Mich 56 (2002) where the court held that “an activity may be both residential in nature and commercial, industrial, or business in nature.” In that case, the governing documents both limited use to residential use and specifically prohibited commercial use, and the Michigan Supreme Court found that the commercial nature of a day care operating from a home in the subdivision meant that the day care operator was violating the prohibition on commercial use.
That being said, we might also consider Beverly Island Association v. Zinger, 113 Mich.App. 322 (1982) where the documents only required residential use and did not specifically prohibit commercial use; the court found a day care operating from a home to conform to the residential use requirement. Although the attorneys for the day care in Terrien cited Beverly Island, the court’s decision in Terrien emphasized the difference between the provisions being considered in the two cases. So, the final outcome of litigation over short-term rentals may depend on the particular provisions in question.
In any case, it would be best to ensure that your governing documents contain a specific provision clearly establishing a minimum lease term if you want to prohibit short-term rentals. With clear provisions, you can avoid getting involved in costly court battles over the definition of what constitutes “residential use” and/or “commercial use”.
By Mark Petrie, Legal Assistant
Need to update your Bylaw provisions to address short-term leasing? Contact Robert Meisner at email@example.com or 248.644.4433.