Michigan Court of Appeals Rules in Favor of HOA on Short-Term Rental Ban

Short-term rental websites such as AirBNB, Booking.com, FlipKey, HomeAway, Homestay, House Trip, Roomorama, Tripping.com, Trivago, VBRO and VayStays have become an increasing concern for Michigan condominium and homeowner’s associations that are populated by full-time residents. The rise of short-term rental websites has led owners and investors to seek out extra income by renting their properties on a nightly basis. Condominium and homeowner associations that are primarily comprised of full-time residents typically oppose short-term rentals as a result of security risks, noise issues and provisions in governing documents that prohibit short-term rentals. On April 25, 2017, HB 4503 and SB 329 were introduced in the Michigan legislature. HB 4503 and SB 329 would preclude municipalities from completely zoning out short-term rentals. While these bills are controversial, as they pit private property interests against municipal regulation, they would have little impact on the governing documents of a condominium or homeowner’s association as the Michigan Courts have made clear that these are matters of private contract between the owners. In John H Bauckham Trust v Matthew Petter, unpublished opinion of the Court of Appeals, issued September 19, 2017 (Docket No. 332643), the Michigan Court of Appeals recently held that short-term rentals violated the “residential use” and the “non-commercial use” deed restrictions of the Sunset Short Subdivision and issued an injunction banning short-term rentals in the subdivision. 

Facts

The deed restrictions for the Sunset Short Subdivision in Casco Township were recorded in 1961 and provided in pertinent part:

1. No building shall be erected or maintained on any lot in Sunset Shore, sold by the grantor herein, other than a private residence and a private garage for the sole use of the owner or occupant, except those lots designated as Commercial on the plat map. ***

3. No part of said premises shall be used for commercial or manufacturing purposes, except those lots designated as Commercial on the plat map.

The 1926 plat map for the Subdivision did not identify any “commercial” lots. The court found that there was no dispute between the parties as to the following facts:

• On the internet, the Defendants advertise their properties to the public for short-term rentals year round for a fee. Nightly occupancy rates range from between $250.00 per night and $400.00 per night.

• Three of the Defendants have received a combined $140,000 in fees for short-term rental of their subdivision properties during 2014.

• Two of the Defendant’s [sic] are Illinois residents, according to their deposition testimony.

• Two of the Defendants admitted in their depositions that they spent less than two weeks on their subdivision lots in year 2014.

• None of the Defendant’s [sic] were present on the property when their licensees/customers were using the property.

• Two Defendants employ 3^rd party enterprises to provide “concierge” services and maid service, clear up after guests and perform grounds maintenance.

Id. at *3.

Analysis

In holding that the above activities violated the deed restrictions, the Court stated as follows:

When the construction of a restrictive covenant is clear, “the mere circumstances of the breach of the covenant affords sufficient grounds for the court to interfere by injunction.” In this case, the court determined before trial that the restrictive covenants at issue unambiguously restricted use of the lots within Sunset Shores to residential purposes and categorically barred all commercial uses of the restricted lots. The court construed the term “commercial” to mean “able or likely to yield a profit,” and found that defendants’ practice of renting their lots to the public for a fee constituted a prohibited commercial use. The court’s reasoning was consistent with caselaw construing similar restrictions on commercial uses and supported by the record….

Defendants’ argument is unpersuasive because the court’s rationale concerning defendants’ short-term rental practices is equally applicable to rentals of any length, regardless of whether long-term renting was challenged by plaintiffs. As the trial court observed,

“Commercial” is commonly defined as “able or likely to yield a profit.” Random House Webster’s College Dictionary (1991). “Commercial use” is defined in legal parlance as “use in connection with or for furtherance of a profit-making enterprise.” Black’s Law Dictionary (6th ed). “Commercial activity” is defined in legal parlance as “any type of business or activity which is carried on for a profit.”

The act of renting property to a third-party for any length of time involves a commercial use because the property owner is likely to yield a profit from the activity. Restrictions barring commercial uses of property proscribe a wide variety of activities, even activities that are residential in nature, such as renting to residential tenants for extended periods of time. As such, the trial court’s decision to bar “all rental activity for a fee” was not outside the range of principled outcomes because the court was authorized to “interfere by injunction” as a result of defendants’ breach of the deed restrictions, and the restrictions clearly barred any commercial activity from occurring on defendants’ lots. Id. at *3–4

In upholding the injunction, it should also be noted that the Court rejected the equitable defense that short-term renting was a common and long-accepted practice in the subdivision.

Conclusion

John H Bauckham Trust v Matthew Petter, unpublished opinion of the Court of Appeals, issued September 19, 2017 (Docket No. 332643) stands for the proposition that Michigan Courts will enforce deed restrictions as written and that short-term rentals constitute a “commercial use” of property. Other Michigan Court cases have reached similar holdings. See, e.g., Enchanted Forest Property Owners Ass’n v Schilling, unpublished court of appeals decision, issued March 11, 2010 (Docket No 287614) (holding that daily rentals were not “residential use” and constituted “commercial use” in violation of the deed restrictions); See also O’Connor v Resort Custom Builders, Inc, 459 Mich 335, 345–46; 591 NW2d 216, 220–21 (1999) (holding that use of property for one-week timeshare intervals violated the “residential use” provision of the deed restrictions). Accordingly, condominium and homeowner associations that are primarily compromised of full-time residents should review their governing documents to see if they have the following common provisions that can be used to ban short-term rentals:

1. A restriction limiting the use of a lot or unit to residential use;
2. A restriction that bans or otherwise limits the commercial use of a lot or unit;
3. A restriction on renting, which often includes the following: A) A rental cap limiting the number of rentals; B) A minimum rental period; and/or C) A requirement that the condominium or homeowner association be notified of any rentals;
4. A restriction that bans activities that constitute a nuisance or annoyance; or
5. A restriction that requires compliance with local ordinances, if the local zoning ordinance contains a ban on short-term rentals or other rental requirements. However, this could be subject to change if HB 4503 and SB 329 were to pass in the future.

Kevin Hirzel is the Managing Member of Hirzel Law, PLC. He concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association and real estate law. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country.  He has been a Michigan Super Lawyer’s Rising Star in Real Estate Law from 2013-2018, an award given to only 2.5% of the attorneys in Michigan each year. Mr. Hirzel was named an Up & Coming Lawyer by Michigan Lawyer’s Weekly in 2015, an award given to only 30 attorneys in Michigan each year. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan. He may be reached at (248) 986-2290 or kevin@hirzellaw.com.