“Home Sharing” – is it a problem in your community?

North Carolina has seen a surge of online “home sharing” in recent years.  Companies such as HomeAway, VRBO, and most notably, Airbnb, have faired remarkably well in a current business/political climate that mostly tolerates peer-to-peer rentals, home sharing, and the like.  While on its face, home sharing is touted as an industrious solution to overpriced, overcrowded hotels and resorts, communities throughout the state find themselves in an interesting position when confronted with enforcement against such practices.  Is home sharing a “rental use,” or is it a “business use?”  What can an association do to curtail such use within the community?  Communities attempting to regulate are not without recourse; however, surviving a legal challenge entails careful and thoughtful planning.

Home Sharing - Raleigh

The proverbial “revolving door” effect that home sharing can have on a property is understandably off-putting to certain communities.  Routinely, association boards hear complaints from residents and neighbors that a particular owner’s home sharing creates parking problems, noise violations, and even safety concerns.  Some owners simply feel a sense of community is lost by the practice.  When facing these issues, a board of directors should not attempt an outright ban on home sharing, yet it should look to its governing documents and attempt enforcement through proper channels.

Regulation through Business Use Restrictions

Most declarations contain the prevailing restriction that homes, whether townhomes, condominiums, or in planned communities, are to be used for single-family, residential use only.  This language prohibits the use of a home within the community for business purposes, and courts have regularly upheld these provisions.  With respect to rentals, the Court of Appeals of North Carolina held in Russell v. Donaldson, 731 S.E.2d 535 (N.C. App. 2012), that leasing property in and of itself is not a business use which would run afoul of a use restriction in a community, at least in the sense of a short-term rental¹.  In the context of home sharing, almost every decision turns not on the unique nature of home sharing as a new commercial phenomenon involving leases to property, but rather on the actual character of the transaction – that home sharing is essentially just a short-term lease.  Although a specific challenge to home sharing under an association’s business use restriction has not presented itself in North Carolina, it is highly likely a court would simply categorize the inherent act at issue as a short-term rental, which is subject to precedent in Russell, and therefore, a proper residential use of the property.  If home sharing is characterized as nothing more than a short-term rental, the issue turns to whether the association’s governing documents authorize short-term rentals at all.

Regulation through Rental Use Restrictions

Restrictions on the duration of leases, or the total number of homes that may be rented within a community, are common in various associations’ declarations throughout the state.  These “indigenous” restrictions, or restrictions created at the outset of development, are almost always upheld when challenged because they represent a clear product of a developer’s intent to regulate rentals from the inception of the community.  In 2006, the North Carolina Supreme Court issued an opinion in Armstrong v. Ledges Homeowners Ass’n., Inc., 360 N.C. 547, 633 S.E.2d 78 (2006), which had major implications on rental use restrictions in community associations in North Carolina.  The Armstrong court held that prohibitions or limitations on leasing would be subject to a “reasonableness” test.  In other words, all amendments to a community’s declaration that would restrict rentals must be reasonable under the circumstances.  A community seeking to regulate rental use without pre-existing rental restrictions in its declaration may do so only by amending its declaration.  Accordingly, any attempt to rein in home sharing rentals via amendment would be subject to the reasonableness test articulated in Armstrong.

Although North Carolina courts have not conclusively addressed rental restrictions in the context of home sharing, courts have upheld various communities’ short-term rental restrictions.  Because most home sharing arrangements are for such short duration, the adoption of a short-term rental restriction in a declaration has proven the most effective means to regulate home sharing.  For example, associations that do not allow leases for terms of less than six months have effectively eliminated home sharing from their communities.  Additionally, some community associations require all leases or individual tenants to be approved by the board of directors prior to the lease term. This would be an effective solution for filtering home sharing, as no prospective weekend lessee would be willing to be subjected to a board review.  Some communities have home sharing so prevalent that any newly adopted rental use restriction would undoubtedly be challenged.  In these instances, “grandfathering” current users can provide an effective means to regulate new home shares while appeasing those owners already using the platform.  Under this scenario, while no new home shares are allowed, current users may continue, and are eventually phased out over time.

The context in which an association adopts a rental restriction is also important.  Pursuant to Armstrong, the reasonableness of the use restriction will depend on a number of factors analyzed under the circumstances.  With respect Airbnb use, a restriction limiting short-term rentals in Greensboro may be viewed as reasonable, while a community in a weekend vacation destination in the Outer Banks will face higher scrutiny when limiting short-term rentals.  Again, just as an association should first look to its governing documents before attempting rental restrictions, each situation will differ based on a number of factors.

Working with an experienced attorney will help the association achieve its goals and set in stone a long-lasting and effective rental policy.  Please contact us if your community association has any questions concerning home sharing regulation.  One of our experienced attorneys will be happy to assist in finding a solution to your community’s particular issue.

¹The distinction between a residential use versus a business use relates to the actual use of the property, not the purpose for which the owner maintains the property.  In other words, if an owner owns a home that he never intends to occupy, and only leases the property to a residential tenant as a stream of rental income, this use is considered a residential use because the lessee uses the property as a residence.  The owner’s intent or act of leasing the property is irrelevant in the analysis.

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