Industry experts are predicting strong demand for short-term rentals in 2021, due in large part to a re-opening economy and pent-up demand for travel. While the decision to encourage or restrict short-term rentals varies from project to project, at minimum, the impending influx in vacation renters warrants a discussion and review of short-term rental policies as summer arrives.

Regulating Short-Term Rentals Requires Intentional Action

Prior to 2018, many communities relied on “single-family residential” restrictions and prohibitions on “business use” to regulate short-term rental activity. However, in Tarr v. Timberwood Park, the Texas Supreme Court unanimously held that a “single-family residential” restriction applies to the type of structure, not the duration of the occupancy. This effectively ended the argument that non-durational terms in deed restrictions can limit short-term rentals. In short, if a community wants to regulate short-term rentals, there must be intentional action, and that action can take several forms.

Regulating Short-Term Rentals: By Elimination

There are several methods for limiting, or eliminating, short-term rental in single-family communities. The broadest form of regulation is prohibition. This is accomplished by an amendment of the deed restrictions. The amendment must, at a minimum, provide for a specific duration of prohibited leases, and should also define “single-family” to specifically regulate the use of the dwelling, not just the type of construction. For example:

“A Dwelling, or the Lot on which the Dwelling is located, or any part of the Dwelling or Lot (including any other buildings or structures on the Lot), may only be leased for single-family residential purposes. Single-family residential purposes does not include, and expressly excludes, a Lease for transient housing (including but not limited to, a hotel, motel, tourist home, tourist court, lodging house, inn, rooming house, bed and breakfast, vacation rental such as AirBnb, VRBO, etc., or corporate lodging), for a duration of less than ninety (90) days.”

The above provision address several issues that arise in the short-term rental context. First, it includes an express duration of 90 days as the minimum lease. Second, it encompasses not only the dwelling, but also the “lot”, thereby preventing an outdoor venue lease. Third, it specifically defines uses prohibited by the term “single-family residential purposes.” And fourth, it mentions short-term rental sites by name, thereby avoiding an argument that the provision merely prohibits the traditional owner-occupied bed and breakfast.

Care should be exercised when implementing a broad prohibition. Exceptions may need to be made. For example, when an owner sells his or her dwelling and delivers the dwelling to the buyer under a temporary residential lease until closing, that may technically violate the above provision, but is not the type of conduct that was intended to be prohibited.

To deal with exigent circumstances, the amendment may include a provision that gives the declarant or the association the authority to grant exceptions to the requirement that a lease be for a period of at least ninety (90) days in instances of substantial hardship, for example an unexpected delay in the construction of a home necessitating short-term housing.

As a final safeguard, the amendment may require that each lease be in writing, and may further allow the Association to request a copy of any lease within a prescribed time period (e.g. three business days).

Regulating Short-Term Rentals: By Limitation  

If the community would be better served by reducing the number of short-term rentals, but not eliminating all short-term rentals, a declarant or association can choose limitation over elimination.

In the condominium context, the Texas Uniform Condominium Act gives an association the authority to “adopt and amend rules regulating the use, occupancy, leasing or sale, maintenance, repair, modification, and appearance of units and common elements, to the extent the regulated actions affect common elements or other units.” This authority extends to limiting the percentage of units available for lease, mandating the minimum duration of leases, and requiring that all leases be in writing and subject to disclosure upon request.

In the single-family context, a community may want to allow rentals in one section, but not another. By amending the declaration for specific sections, long-term residents can restrict short-term rentals to a certain area within the community.

Regulating Short-Term Rentals: By Incorporation

A final option is to develop a “build-to-rent” section from the outset. The build-to-rent development maintains the look and feel of the single-family community, while expressly providing for rentals. In 2017, 37,000 homes were built as rentals. In 2018, that number jumped to 43,000. About 16 million rental properties today are single-family homes, and another 13 million rental households are expected to be formed by 2030, according to the Urban Institute. With this projected growth, build-to-rent is a proactive and forward-looking concept.

Conclusion

The battle over whether short-term rentals are beneficial to communities rages on. But if the pandemic has shown the real estate market anything, it is that these companies are resilient and thriving – and will only continue to grow in number. Taking a proactive approach after careful consideration of the needs of the planned community, especially during the declarant control period, is essential to preserving and protecting the character of the development – whether by elimination, limitation, or incorporation.

Disclaimer: Content contained within this publication provides information on general legal issues and is not intended to provide advice on any specific legal matter or factual situation. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel.