Michigan Court of Appeals affirms Short-Term Rental Ban in Restrictive Covenant

As we previously discussed on September 21, 2017, in Michigan Court of Appeals Rules in Favor of HOA on Short-Term Rental Ban, Michigan courts have consistently held that short-term rentals violate “residential use” and “non-commercial use” restrictions contained in restrictive covenants. On November 30, 2017, in Eager v Peasley, et. al., published opinion of the Court of Appeals, issued November 30, 2017 (Docket No. 336460), a majority opinion of the Michigan Court of Appeals once again affirmed this principle. While the dissenting opinion disagreed, as it did not believe that short-term rentals constituted commercial activity, the majority opinion will serve as binding precedent.

Facts

At the trial court level, the parties stipulated to the following facts:

Defendant Peasley has owned the cottage since 2009 and Defendant has been renting it during the summer season each year since then.

Defendant advertises its rental availability on-line through a national website, http://www.homeaway.com, which also serves as the medium for payment.

The renter must be at least 26 years old, and the rental is limited to 10 guests with no pets allowed.

The year 2016, which is typical of the rental history, shows 64 days booked over the four-month period of May through August. No dates have yet been booked in September.

Defendants have rented and continue to rent the Peasley Property on a short-term basis, for a minimum of two (2) nights to seven (7) nights for each rental, with prices ranging from $150.00 – $225.00 per night to $850.00 – $1,700.00 per week depending upon the season, Spring May 19 – May 21, 2016; Summer May 22nd – September 2016.

The Defendant’s calendar for 2016 reflects rentals for 10 different families and one business group (Leadership Retreat). The rentals average six (6) days in length.

Among the covenants and restrictions placed under the chain of title of each of these parties’ by warranty deed dated February 26, 1946, recorded March 18, 1946 at Liber 78, Page 432, Alcona County Records are the following:

“ . . . the premises shall be used for private occupancy only; . . .that no commodity shall be sold or offered for the sale upon the premises and no commercial use made thereof, . . .” In pertinent part, the restrictive covenant provided:

[T]hat the premises shall be used for private occupancy only; that no building to be erected on said lands shall be used for purposes otherwise than as a private dwelling and such buildings as garage, ice-house, or other structures usually appurtenant to summer resort dwellings are to be at the rear of said dwellings; that such dwellings shall face the lake unless otherwise specified; that no commodity shall be sold or offered for sale upon said premises and no commercial use made thereof . . . .

After reviewing the stipulated facts, the trial court denied Plaintiff’s request for an injunction without an explanation and the Plaintiff appealed.

The Majority Opinion

The majority opinion relied on several Michigan Supreme Court cases to conclude that that transient use of property as a short-term rental did not constitute “private occupancy” under the restrictive covenant. Additionally, the court relied on O’Connor v Resort Custom Builders, Inc, 459 Mich 335, 336; 591 NW2d 216 (1999), which held that interval ownership did not constitute a “residential purpose” under another similar restrictive covenant. The majority opinion held that defendant’s transient short-term rental usage violates the restrictive covenant requiring “private occupancy only” and “private dwelling” and that the language was unambiguous.

The court also held that even if the short-term rentals did not specifically violate the deed restrictions limiting the property to “private occupancy only” and “private dwelling,” the rentals violated the restrictive covenant barring “commercial use” of the property. Specifically, the majority opinion held that the act of renting property to a third party for short-term use is a commercial use, even if the activity is also residential in nature. Accordingly, the majority opinion remanded the case to the trial court to enter an injunction against the defendant that prevented further short-term rentals.

The Dissent

The dissenting opinion indicated that it found it impossible to discern whether the common grantor, by employing the terms “private occupancy” and “private dwelling,” intended to preclude an owner from renting out premises located in the subdivision, especially in the context where a house is leased to a family, as is mostly the case with respect to defendant’s rentals. The dissent reasoned that it would have been simple to include language that expressly barred short-rentals or mandated owner occupancy so it found the language was ambiguous.  Accordingly, the dissent held that the “private occupancy” and “private dwelling” language does not bar defendant from using her lake house for short-term rentals.

The dissent also argued that the prohibition against the “commercial use” of property also lacks clarity in relationship to divining whether short-term rentals to transients are permitted. The dissent reasoned that the house itself retained its residential and familial character while being rented and that since no services were provided on site, as would be the case with a hotel or bed and breakfast establishment, that it was not “commercial.”

Conclusion

Eager v Peasley, et. al., published opinion of the Court of Appeals, issued November 30, 2017 (Docket No. 336460) is consistent with the court’s prior ruling in John H Bauckham Trust v Matthew Petter, unpublished opinion of the Court of Appeals, issued September 19, 2017 (Docket No. 332643) and 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 combat 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 a Michigan Community Association attorney that concentrates his practice on commercial litigation, community association law, condominium law, construction law and real estate law. Mr. Hirzel has been a Super Lawyer’s Rising Star in Real Estate Law from 2013-2017, an award given to only 2.5% of the attorneys in Michigan each year. He was named an Up & Coming Lawyer by Michigan Lawyer’s Weekly in 2015, an award given to only 30 attorneys in Michigan each year. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a designation given to less than 175 attorneys in the country. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan. He may be reached at (734) 261-2400 or khirzel@cmda-law.com.