© 2017 The Texas Lawbook.
By Travis Huehlefeld of Wilson Cribbs and Goren
(Oct. 6) – The “sharing economy” is now in full force and is continuing to gain popularity. Of particular interest in the field of real property law is the short-term residential rental market, led by companies such as Airbnb, HomeAway and VBRO.
These companies offer an online marketplace for individuals to lease or rent short-term lodging in houses, apartments, vacation homes and the like. Short-term rentals offer travelers an alternative to traditional sources of lodging, such as hotels. Short-term rentals also offer property owners a way to generate extra income from their property.
Short-term rentals are not a new concept in real property law. With the expansion of the sharing economy, however, cities, courts and neighborhoods increasingly have to address short-term rentals. This article discusses how cities, courts and neighborhoods are addressing short-term rentals.
Zoning ordinances
Short-term rentals are not addressed or regulated in most zoning ordinances in Texas. If a zoning ordinance is silent on short-term rentals then, absent any other restriction, a property owner is free to lease their property on a short-term basis.
In recent years, however, Texas cities have addressed short-term rentals in their zoning ordinances. For instance, Austin and San Angelo recently amended their zoning ordinances to regulate short-term rentals.
Austin has perhaps the most expansive set of short-term rental regulations in Texas. The ordinance has three categories of short-term rentals: (1) owner-occupied residential rentals, (2) residential rentals not part of multifamily residential use, not owner-occupied and not associated with an owner-occupied principal residential use, and (3) rentals that are part of a multifamily complex. The ordinance also imposes various licensing and regulatory requirements, such as occupancy limits, general limitations on uses and prohibited activities.
Under San Angelo’s scheme, a conditional use permit must be obtained before short-term rentals are possible. San Angelo’s ordinance also has requirements such as parking availability, not more than two adults per bedroom, hotel occupancy tax registration and annual fire safety inspection.
It should be expected that as short-term rentals continue to grow in popularity, more and more Texas cities will put in place regulations – via zoning ordinances – that regulate short-term rentals.
State legislation
This past session, the Texas legislature attempted to preempt city zoning ordinances that regulate short-term rentals. Senate Bill 451 would have prevented Texas cities from banning or regulating short-term rentals. The language was broad and allowed cities to regulate only in limited situations – such as building codes or housing of sex offenders. Yet the bill expressly permitted neighborhoods to govern short-term rentals through deed restrictions.
The bill passed in the Senate but failed in the House. It is likely that more cities will continue to amend their zoning ordinances, which may prompt the legislature to revisit the bill in its next session.
Deed restrictions
Neighborhoods with deed restrictions can address short-term rentals in a number of ways. For instance, some neighborhoods may encourage short-term rentals. Others may want to restrict or place regulations on short-term rentals. No matter the direction, deed restricted neighborhoods have an array of options in dealing with short-term rentals.
Deed restrictions are private, contractual covenants placed on the land by property owners. Such restrictions are often placed in a deed for a specific property. Or a developer may place deed restrictions on all the lots within a subdivision before the first lot is even sold. With a few exceptions, the contents of deed restrictions can be broad.
Neighborhoods, therefore, have latitude to address short-term rentals. Most deed restrictions are likely silent on short-term rentals. A neighborhood seeking to address them would need to amend their deed restrictions to do so.
Prohibition of short-term rentals
A simple approach to short-term rentals would be a complete prohibition. Although this may seem like an overreach on the part of a neighborhood, such prohibition would likely be permissible under Texas law.
With the growing popularity of short-term rentals, some neighborhoods have started to amend their deed restrictions to expressly prohibit them. The prohibition typically would be placed in the “prohibited use” section of the deed restrictions.
An important step would be to define “short-term rentals” within the deed restrictions. The most common approach is defining short-term rentals as a rental of less than thirty days or one month. For instance, the following is from a neighborhood in Houston that is in the process of amending their deed restrictions to prohibit short-term rentals: “single family residential use … prohibits … renting any part of the Residential Dwelling (including any accessory and outbuildings) on a Lot to others for less than one (1) month.”
This approach may be attractive to neighborhoods that already have deed restrictions in place that limit use to single family and otherwise prohibit multi-family use. An express prohibition of short-term rentals is a logical extension for such neighborhoods to maintain a close-knit single-family environment. As addressed below, neighborhoods should not rely on “single family home,” “residential use only,” or similar phrases to prohibit short-term rentals.
Short-term rentals permitted
Neighborhoods may also choose to permit short-term rentals. Neighborhoods taking this route have two primary avenues for achieving such results. The first would be expressly stating that short-term rentals are permitted. Deed restrictions generally have a “permitted use” section which can be amended to include short-term rentals.
But a neighborhood need not necessarily amend its deed restrictions to do this. In many deed restrictions, short-term rentals are likely permitted through silence. Deed restrictions which neither expressly prohibit nor permit short-term rentals likely permit them by default. Simply put, courts will not enforce restrictions that do not exist.
It is prudent, however, for neighborhoods desiring to allow short-term rentals to expressly state that in their deed restrictions. At least two types of common restrictions may prohibit short-term rentals. Neighborhoods with “single-family use only” or “residential only” restrictions, while not expressly prohibiting or permitting short-term rentals, may in fact prohibit such use.
Single-family use is generally interpreted to mean a “nuclear family” or “extended family.” Guests staying at a short-term rental could violate this use because the guests are not part of the owner’s nuclear family or extended family. For the “residential only” restriction, it could be argued that placing a residency on Airbnb violates the requirement because the rental is a commercial endeavor of the property owner. As the below cases illustrate, this issue is currently in flux, and prudent neighborhoods should enact specific language.
Regulating short-term rentals
Neighborhoods can take a third approach and allow short-term rentals subject to various restrictions. This approach provides a neighborhood the opportunity to allow short-term rentals, subject to specific restrictions that best suit its particular needs.
There are countless ways a neighborhood could regulate short-term rentals. As a starting point, neighborhoods may apply different rules to owner-occupied short-term rentals (owner lives in the residence but leases a bedroom or outbuilding on the property on a short-term basis) and non-owner-occupied short-term rentals (an entire residency that is rented on a short-term basis). Austin’s zoning code follows such an approach.
One common restriction is occupancy limits. The maximum number of allowable guests is usually tied to the square footage or number of bedrooms of the residency. Another common restriction is use restrictions. For instance, a neighborhood may prohibit certain types of assemblies (such as bachelor or bachelorette parties, weddings or family reunions) allowed to take place in the rental.
A neighborhood may also place time restrictions on certain types of uses. For instance, the neighborhood may permit weddings at a residency, but only within a certain time window. Neighborhoods may also restrict where in the neighborhood short-term rentals are permitted. A neighborhood, for example, may permit short-term rentals only on streets that abut commercial areas or larger roads while prohibiting short-term rentals in the more interior parts of the neighborhood.
Lease agreements
Even if a neighborhood allows short-term rentals, tenants face an additional hurdle when placing their leased premises on Airbnb that homeowners do not face. Unless the lease agreement provides otherwise, a tenant may not assign or sublet without the consent of the landlord. A tenant renting out an apartment on Airbnb would most likely constitute a sublease, thus requiring landlord consent. Therefore, even if a neighborhood permits short-term rentals, a tenant may need to seek the additional consent of the landlord – which would likely result in an emphatic “no” from the landlord.
Texas case law
As neighborhoods and cities begin to regulate short-term rentals, the first line of appellate cases have been reported. Although there have been no cases challenging a city’s zoning authority over short-term rentals, there have been a couple of notable cases regarding deed restrictions.
The early results from these cases in Texas are split. Cases from the Austin and San Antonio Court of Appeals have come to opposite conclusions despite similar fact patterns. The issue is whether the restrictive language is ambiguous (thus, common law interpretation applies) or unambiguous (thus, statutory interpretation applies).
Zgabay v. NBRC Prop. Owners Association
In this case, the Austin Court of Appeals found that a “for single family residential purposes” restriction did not prohibit short-term rentals. The Zgabays purchased a home in a deed restricted subdivision. The restriction provided that properties be used only “for single family residential purposes.” The Zgabays began leasing their property on a short-term rental basis. The property owners association demanded that the Zgabays cease renting the property on a short-term basis, asserting that such use violated the deed restrictions. The Zgabays filed for declaratory judgment claiming that the deed restrictions do not prohibit short-term rentals and that such short-term rental is a “single family residential purpose.”
The court found that the term “single family residential purpose” was ambiguous and held that short-term leasing did not violate such covenant. The deed restrictions did not define the term “single family residential purpose.” The deed restrictions, however, permit signs advertising a property for sale or rent. Therefore, the court concluded, leasing was permissible under the terms of the deed restrictions. The court also noted that there was no time limitations placed on such rentals. The court liberally construed the deed restrictions and found:
(1) that the leasing or renting of residences in the subdivision is permissible, (2) that the covenants themselves do not place any limit on the duration of the leasing of a residence, and (3) that the drafters were familiar with the concept of time limits with regard to uses that may be made of structures in the subdivision and did not impose any duration limits with regard to the leasing of homes.
Given that the deed restrictions were ambiguous, the court applied the common law doctrine that favors the least restrictive interpretation. Accordingly, the ruling allowed the Zgabays to rent their house on a short-term basis.
Tarr v. Timberwood Park Owners Association
Faced with a similar fact pattern as Zgabay, the San Antonio Court of Appeals came to the opposite conclusion. The issue in Tarr was whether a deed restriction which stated that homes may be “used solely for residential purposes,” prevented Tarr from leasing his home on a short-term basis. Tarr was notified by the property owner’s association that he was using the home as a commercial rental property rather than for residential purposes as required by the deed restrictions. Tarr filed a declaratory judgment action and a claim for breach of restrictive covenant against the association, seeking a declaration that the deed restrictions do not impose duration limits on leasing.
The property owners association claimed that Tarr’s short-term renters are not residents and are thus not using the home solely for residential purposes. The court found that the term “used solely for residential purposes” has a definite legal meaning and is unambiguous. Given that the term was unambiguous, the court applied the standards from Section 202.003 of the Texas Property Code, which liberally construes the phrase to provide for the drafters intent and ensures that every provision is given effect.
The court found the “residence” requires both a physical presence and intention to remain. The short-term leasing was found to be inconsistent with a renter who has the intent to remain at the home. Instead, the agreement shows that the home is being used for transient purposes rather than residential purposes.
Comparing these cases
The Tarr court noted its different result from Zgabay, stating “[w]e recognize that our sister court in Austin has found no violation of a restrictive covenant under similar circumstances.” The key difference is that Tarr found the phrase “used solely for residential purposes” to be unambiguous and thus applied Section 202.003 of the Texas Property Code which liberally construed the deed restrictions which resulted in short-term rentals violating such restrictions.
On the other hand, the Austin Court of Appeals found that the phrase “single family residential purpose” was ambiguous. In doing so, the court applied common law doctrine of least restrictive use of land which allowed the Zgabays to rent their property on a short-term basis.
This case highlights the different approaches courts take when construing language in a deed. If the language is unambiguous, such as in Tarr, the courts may apply Section 202.003 of the Texas Property Code which allows for liberal construction to give effect to the language of the restrictions. If the language is ambiguous, such as in Zgabay, the courts may rely on common law doctrines of most expansive use of property. This line of cases shows that neighborhoods wanting to regulate short-term rentals should carefully draft their language so that there is no doubt.
Travis Huehlefeld is an attorney in the land use practice of Wilson Cribbs and Goren, PC in Houston, Texas.
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