Friday, September 25, 2015

The sharing economy versus HOA CC&Rs: The battle begins

I was recently made aware of what I believe is the first state supreme court case addressing the relationship between short-term rentals (Airbnb, VRBO, and such) and CC&Rs.  Thanks to Bill White, an attorney here in Boise, for sending this my way.

On June 22, 2015, the Idaho Supreme Court decided Adams v. Kimberley One Townhouse Owner's Ass'n, Inc., 158 Idaho 770, 352 P.3d 492, 493-94 (2015), reh'g denied (July 28, 2015), which upheld an amendment to CC&Rs of an HOA that all-but-eliminated the use of a single-family residence for short-term rentals.

As issue in the case was a single-family residence ("Residence") purchased in a subdivision controlled by an HOA that had CC&Rs defining the permitted “Use and Regulation of Uses” for the lots within the subdivision, and providing that “each lot shall be used for single family residential purposes only, on an ownership, rental or lease basis.”  The CC&Rs under which the residence was purchased also "contemplated the possible need for future amendments" to the CC&Rs.

In Summer, 2012, the owner began renting the Residence on short-term rental sites (the specific sites were not stated in the opinion, but I understand from other conversations that they were Airbnb and VRBO).  In 2013, the HOA amended its CC&Rs by providing that units may be rented

only in strict accordance with the following" conditions: (a) the owner must execute a written
document with the renter; (b) the document must be approved in advance by the board; (c)
advertising for the unit must be approved by the board; (d) no rentals for fewer than six months will be approved; (e) no subleasing is permitted; (f) owner must provide contact information to the board; and (g) the board has discretion to grant exceptions to these rental requirements and to create house rules for their enforcement.

The owner of the Residence continued to engage in short-term rentals after the amendment and the HOA board enacted house rules that imposed a $300 fine for each day a unit is rented in violation of the short-term lease requirements and a $100 fine for each day a unit is advertised in violation of those requirements.  The owner challenged the amendment.

The Idaho Supreme Court has a lengthy analysis of whether the new CC&R, which essentially eliminated a short-term rental use, was permissible, but this may be the most interesting section of the opinion:

Adams [the owner] argues Idaho has not addressed the distinction between adding a new restriction to CC & Rs and amending an existing restriction, and he cites to several out-of-state cases to support his proposed distinction. Indeed, there is a split of authority among the states as to whether a new restriction on rental activity may be reasonably added under a general amendment provision, or whether a new restriction is per se unreasonable. E.g., compare Wilkinson v. Chiwawa Cmts. Ass'n, 180 Wash.2d 241, 327 P.3d 614, 622 (2014) (holding a new restriction on short-term rental activity invalid, reasoning “homeowners cannot force a new restriction on a minority of unsuspecting Chiwawa homeowners unrelated to any existing covenant.”) with McElveen–Hunter v. Fountain Manor Ass'n, 96 N.C.App. 627, 386 S.E.2d 435, 435–36 (1989) (upholding an amendment that added a new restriction against rentals of less than one year, reasoning that the plaintiff purchased the units subject to the rights of other owners to restrict their occupancy and with notice before buying the units that the declaration was subject to change).
We find Idaho's approach to CC & R amendments to be more consistent with that line of cases which do not draw a bright-line distinction between the addition of new restrictions and the modification of existing restrictions. We do, of course, agree with the Shawver Court that there is a point at which an amendment to CC & Rs will go too far, and have too adverse an effect on those bound by it, in which case the amendment would be precluded. See 140 Idaho at 365, 93 P.3d at 696. However, the fact that a restriction was not previously addressed in the CC & Rs prior to an amendment does not automatically mean that amendment has gone too far, as shown by Best Hill.
The amendment in the case at hand has not reached the tipping point. Shawver generally *498 suggests that parties should be bound by the terms to which they agree, including a term allowing the significant future alteration of the agreement, unless a term produces unconscionable harm. The record reflects that Adams had only been renting his unit as a vacation property for a few months when the Association began discussing an amendment. We are not faced with a situation where Adams was permitted to engage in short-term renting for ten years and then, all of a sudden, an amendment no longer permitted such use. Additionally, he is still permitted to rent his property as long as he complies with the terms of the new amendment. Even prior to the amendment, the rental activity was limited by the declaration to allow rentals or leases “for single family residential purposes only.” In substance, the 2013 Amendment simply narrowed what may be considered a “single family residential purpose.” That term implies a certain degree of long-term or stable occupancy of the residence, rather than it being used as a hotel as Adams had. The 2013 Amendment simply provided clarity to that term.

Id. at 497-98.  This reasoning raises several interesting questions.  
First, the court frames the issue as whether a new restriction on rental activity may be reasonably added under a general amendment provision, or whether a new restriction is per se unreasonable.  That is perfectly legitimate; however, as the Idaho court notes, there is a split of authority in other states on this threshold issue.  Presumably other states could see it differently than the Idaho court, and in those states, you could have a greater proliferation of short-term rentals in HOAs even though short-term rentals as we know them today were not in place at the time most HOA CC&Rs were written.  Will we soon have divided state courts on whether provisions eliminating short-term rental uses in HOA CC&Rs are permissible?  Another question is whether the short-term rental use of a property was really part of the bargained-for expectation of entering into CC&Rs that existed prior to the sharing economy's rise within the last few years?  How could anyone purchasing the Residence prior to the rise of Airbnb and VRBO ever have predicted the potential new use of private property that they would permit?  Could the property owner really have contemplated that he was bargaining away a short-term rental use in agreeing to amend the CC&Rs even though short-term rentals weren't even in existence when he purchased the Residence?  Should that even matter?
Second, the court does not give much attention to the fact that the HOA's rule essentially eliminates the potential to engage in short-term rentals.  It will be interesting to see what public opinion comes to think of an approach like this:  should a local HOA really be able to entirely eliminate a short-term rental use?  What would it mean for a CC&R to "go too far" under the above analysis, and why doesn't elimination of a short-term rental use go beyond that limitation?  The court doesn't explain that in depth and it is worthy of a further analysis, especially given that the language--going too far--seems to clearly reference the language used in regulatory takings cases.  Sure, in the regulatory takings analysis, the Lucas "deprivation of all beneficial use" test applies, but should that be the same standard in CC&Rs?
Third, the court seems to announce a type of analysis--perhaps it sounds in reliance, or laches, or something else--that the amount of time that the owner engaged in short-term rentals matters here.  But, of course, Airbnb and other short-term rental companies have only been around for several years; for instance, Airbnb wasn't incorporated until 2008 and didn't really become popular until 2011.  And so, the court's hypothetical--that perhaps the answer would be different if the owner had engaged in short term rentals for 10 years--is an impossibility:  there was no service to engage in short-term rentals 10 years ago.  So, it does not seem to me that the owner should lose on this fact alone because the nature of the use is completely new:  there was no way to have established a pattern of rentals before these types of services emerged in the last few years.
Perhaps of more interest is a corollary to the third point:  it is worth asking whether, going forward, HOAs should potentially lose the right to enforce a new restriction on short-term rentals if residences covered by the HOA have established a pattern of engaging in such rentals or, even further, merely invested in the unit in a manner that would enhance its short-term rental appeal.  What would, or should, such a time frame be that would limit further HOA restrictions on short-term rentals?  If the amount of time that the unit governed by an HOA's CC&Rs engages in short-term rentals in violation of a CC&R, or in the absence of a CC&R directly on point, could foreclose later CC&R restrictions, then HOA boards, and lawyers that represent them, should be getting their act together now to foreclose such claims in the future, should they seek to do so.
I welcome others thoughts on the case.  I am also curious if anyone knows of another state supreme court case addressing this same issue.

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