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Court Rules HOA’s Restrictive Covenants Prohibit Short-Term Rentals Even Though Leasing Was Allowed

Kayleigh Long of Hirzel Law, PLC represented the Apache Hills Property Owners Association, Inc. in the short-term rental case in this article.

HOA short-term rental restrictions continue to remain a hot button issue for municipalities, property owners, and homeowners associations in Michigan.  During the 2021-2022 legislative session, numerous short-term rental bills, specifically HB 4722, HB 4985, HB 5465, HB 5466, HB 5605, SB 446, and SB 547, were introduced in the Michigan legislature that attempted to define short-term rentals for zoning purposes, prohibit municipalities from completely banning short term-rentals, or regulate the ability of property owners to engage in short-term rentals in some fashion.  However, HB 4722 was the only short-term rental legislation that gained any traction.  HB 4722 (2021), proposed to amend the Michigan Zoning Enabling Act to indicate that short-term rentals constituted a residential use, as opposed to a commercial use of property, for zoning purposes.  HB 4722 would have prevented municipalities from enforcing zoning ordinances that prohibited short-term rentals, aside from regulating nuisances created by short-term rental properties.  HB 4722 passed the Michigan House of Representatives, but was not passed by the Michigan Senate, so it did not become law.  However, it is possible that similar legislation will be proposed in the 2023-2024 legislative session. While HB 4722 would not have precluded the enforcement of short-term rental restrictions contained in restrictive covenants for homeowners associations, as restrictive covenants are private contracts, HOA’s have faced similar short-term rental enforcement issues in recent years.  In Michigan, there have been several court cases in recent years, such as John H Bauckham Trust v Matthew Petter, unpublished opinion of the Court of Appeals, issued September 19, 2017 (Docket No. 332643), Eager v Peasley, et. al., published opinion of the Court of Appeals, issued November 30, 2017 (Docket No. 336460), Cherry Home Association v. Keith Barker, et. al., unpublished opinion of the Court of Appeals, issued October 21, 2021 (Docket No. 354841),  that have interpreted whether or not short-term rentals are permitted, and have largely concluded that residential use and commercial use restrictions preclude short-term rentals. Recently, the Michigan Court of Appeals issued another opinion in Apache Hills Property Owners Association, Inc, v Sears Nichols Cottages, LLC, issued December 22, 2022 (Docket No. 360554), in which the court interpreted whether short-term rentals  were permitted under restrictive covenants that allowed “leasing”, but did not permit a business use of a property and required all properties to be used as a “single family private residence.”  While the trial court concluded that the short-term rentals were allowed under the leasing provision of the restrictive covenants, the Michigan Court of Appeals reversed, and held that the restrictive covenants must be read as a whole, and that the business use and single-family private residence restrictions precluded short-term rentals.

Short-Term Rental Restrictions Contained in the Restrictive Covenants

The restrictive covenants for the homeowners association provided in pertinent part: The covenants commenced by noting that plaintiff previously imposed “restrictive covenants for the purpose of limiting the use thereof to desirable residential, recreational and other purposes.” The covenants contain the following provision governing use:

  1. USE.

A. Each lot in the Premises shall be used only for a single-family private residence. Only one structure may be used as a dwelling on any such lot, except that additional living quarters, to be occupied only temporarily or seasonally, may be constructed over a garage.

* * * No business of any sort, other than home office activities, shall be conducted from or on any lot within the Premises, and no signage advertising any such business shall be placed on a lot.

B. A lot owner may lease his/her property to a third party, but he/she has full liability for any breach by the tenant of these covenants.

C. No nuisance shall be conducted on any lot within the Premises, nor shall anything be done on said Premises which is or may become a nuisance.

The HOA’s restrictive covenants further provided that each lot owner was “bound by the obligations set forth in these covenants” and in the corporate bylaws for the homeowners association. If the homeowners association or lot owner found it necessary to file suit to enforce any covenant, the court “shall award the prevailing party its/his/her reasonable attorney’s fees and expenses of litigation.”

Overview of Michigan Short-Term Rental Case Law

In interpreting the restrictive covenants, the Court of Appeals started by providing a general overview of prior court cases related to short-term rentals. The Court of Appeals stated that in Eager, this Court set forth the following principles to interpret restrictive covenants:

In construing restrictive covenants, the overriding goal is to ascertain the intent of the parties. Where the restrictions are unambiguous, they must be enforced as written. The language employed in stating the restriction is to be taken in its ordinary and generally understood or popular sense, and is not to be subjected to technical refinement, nor the words torn from their association and their separate meanings sought in a lexicon…

The court then opined that, in O’Connor, 459 Mich at 337-338, the defendant developer constructed a home located in the Valley View subdivision of Shanty Creek. After it was unable to sell the home, it marketed shares of “interval ownership;” this meant a purchaser bought occupancy rights in one or two week-long intervals. An interval owner could submit their occupancy rights to a commercial pool and trade with individuals who had occupancy rights in homes at other resorts. Interval ownership was not expressly permitted by the governing documents. However, Shanty Creek did facilitate daily and weekly rentals of Valley View homes. The plaintiff property owners sued to enjoin the defendant from selling interval ownership interests. Our Supreme Court reversed this Court and reinstated the trial court’s decision, stating:

What’s a residential purpose is the question. Well, a residence most narrowly defined can be a place which would be one place where a person lives as their permanent home, and by that standard people could have only one residence, or the summer cottage could not be a residence, the summer home at Shanty Creek could not be a residence if the principal residence, the place where they permanently reside, their domicile is in some other location, but I think residential purposes for these uses is a little broader than that. It is a place where someone lives, and has a permanent presence, if you will, as a resident, whether they are physically there or not. Their belongings are there. They store their golf clubs, their ski equipment, the old radio, whatever they want. It is another residence for them, and it has a permanence to it, and a continuity of presence, if you will, that makes it a residence.

In further analyzing Eager, the Court of Appeals noted that the restrictive covenants in that case were similar, and stated as follows:

…that 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 dwelling shall face the lake unless otherwise specified; that no commodities shall be sold or offered for sale upon said premises and no commercial use made thereof….

This Court discussed the law governing restrictive covenants and then concluded:

We reject [the] defendant’s tortured attempt at reading an ambiguity into the restrictive covenant that simply does not exist. The defendant’s transient, short-term rental usage violates the restrictive covenant requiring “private occupancy only” and “private dwelling.” The defendant, who lives in a neighboring county, does not reside at the property. She rents the property to a variety of groups, including tourists, hunters, and business groups. Those using the property for transient, short-term rental have no right to leave their belongings on the property. Rentals are available throughout the year and are advertised on at least one worldwide rental website. This use is not limited to one single family for “private occupancy only” and a “private dwelling,” but is far more expansive and clearly violates the deed restrictions.

After concluding that transient, short-term rentals violated the restrictive covenant, this Court nonetheless also determined that the rentals violated the commercial use prohibition, stating:

In denying [the] plaintiffs’ request for injunctive relief, the trial court focused primarily on the term “private dwelling” and spent little time discussing whether [the] defendant’s actions amounted to “commercial use” of the property. We conclude 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 most assuredly violated the restrictive covenant barring “commercial use” of the property.

The Court of Appeals then discussed another Michigan Supreme Court case, Terrien v Zwit, 467 Mich 56; 648 NW2d 602 (2002), which held as follows:

The operation of a “family day care home” for profit is a commercial or business use of one’s property. We find this to be in accord with both the common and the legal meanings of the terms “commercial” and “business.” “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 Court of Appeals concluded that under the definitions set forth in Terrien, the act of renting property to another for short-term use is a business or commercial use, even if the activity could be potentially construed as residential in nature. Finally, the Court of Appeals indicated that it would adopt the reasoning of Enchanted Forest Prop Owners Ass’n v Schilling, unpublished opinion of the Court of Appeals, issued March 11, 2010 (Docket No. 287614), in which the court previously held that occasional short-term rentals, typically for one week or less, for a fee, constituted a prohibition on commercial use of a property when the property was rented for 33 days in 2005, 29 days in 2006, 34 days in 2007, and 31 days between January 1 and March 31, 2008.

Michigan Court of Appeals Holds That Private Occupancy and Business Use Restrictive Covenants Preclude Short-Term Rentals Even Though “Leasing” is Permitted

In analyzing the restrictive covenants for the Apache Hills Property Owners Association, Inc., based on the above short-term rental case law, the Court of Appeals held as follows:

The restrictive covenants state that each lot “shall be used only for a single-family private residence” and no “business of any sort” shall be conducted from or on any lot. The covenants further provided that a lot owner may lease the property to a third party, but had full liability for tenant breach of any covenants, and no nuisance shall be conducted on any lot or any activity be done thereon to constitute a nuisance. The restrictive covenants must be examined as a whole and cannot be examined in a manner that renders part of the covenants nugatory.

Although the covenants admittedly permit the lot owner to lease the premises to a third party and there is no qualification on the duration of the lease, this provision must be examined in conjunction with paragraphs 6(A) and (C). Even if leasing is permissible, the premises still “shall be used only for a single-family private residence” and “no business of any sort” shall be conducted from the premises except home office activities. If continuous, year-long short-term leasing is conducted from the premises, the property is not being used as a single-family private residence. Indeed, defendant did not submit any evidence that the principals of the corporate entity resided at the home or stored items there evidencing a continuous presence or use as another residence. O’Connor, 459 Mich at 345-346. Moreover, a business or commercial use from the property was occurring. “Use of the property to provide temporary housing to transient guests is a commercial purpose, as that term is commonly understood.” Eager, 322 Mich App at 190. Commercial activity is defined as business activity operated for a profit. Id. In the present case, read as a whole, the leasing to third-parties that was permissible under the restrictive covenants was long-term leasing as a single-family residence. Furthermore, because the leasing was transient, short-term leasing without any permanent agent at the home, the property was solely used as a business. Indeed, defendant created a website and advertised the home’s availability for short-term rentals limited to 16 occupants and five vehicles. The Court of Appeals further noted that the short-term rental activity violated the restrictive covenants based on the following facts:

The advertisement for the lot at issue identified as Hazelnut Haus and described it as “family friendly,” but it contained no caveat that the rental was limited to single-family private residential. Additionally, the lease agreement also did not advise that it was limiting its rental to families…. Contrary to the trial court’s conclusion, defendant did not require and enforce a single-family residence provision. Rather, it apprised its lessees that the rental property was limited to 16 people and that family members were included in the computation of 16 people. The lease did not seek to enforce the single-family private residence requirement of the restrictive covenants. There was no indication that lessees were required to identify and name their “single-family” members or certify that single-family occupancy occurred…. Although leasing of the premises was permitted, it did not allow a lot owner to deviate from using the premises as a single-family residential home. Advertising the property on the worldwide web for lease to up to 16 people on a year-round basis changed the character of the use from single-family residential into a business operation of the premises…. Accordingly, the trial court erred in granting summary disposition to defendant under MCR 2.116(C)(10), and summary disposition was appropriate in favor of plaintiff under MCR 2.116(I)(2).

 

Conclusion

The holding in Apache Hills Property Owners Association, Inc, v Sears Nichols Cottages, LLC, issued December 22, 2022 (Docket No. 360554) is important for both homeowners associations and property owners when determining whether the restrictive covenants permit short-term rentals.  Specifically, even if “leasing” is permitted under the restrictive covenants, other provisions of the restrictive covenants, such as a restriction on residential use, commercial use, violating a zoning law, or limited use to single family residences may still preclude short-term renting within a homeowners association.  Accordingly, property owners should carefully ready all pertinent provisions of the restrictive covenants when determining whether to purchase a particular property for short-term rental purposes or engaging in short-term rentals.  Similarly, homeowners associations should be aware that there are a wide variety of restrictive covenants that preclude short-term rentals, even if long-term leasing is permitted under the governing documents. Kevin Hirzel is the Managing Member of Hirzel Law, PLC and concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association law 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. Mr. Hirzel has been recognized as a Michigan Super Lawyer’s Rising Star in Real Estate Law by Super Lawyers Magazine, a Leading Lawyer in Condominium & HOA law by Leading Lawyers Magazine, and as a Best Lawyer in Real Estate Law by U.S News and World Report’s Best Lawyers Publication. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan. He may be reached at (248) 450-0339 or kevin@hirzellaw.com.

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kevin@hirzellaw.com

Kevin Hirzel is the Managing Member of Hirzel Law, PLC. Hirzel Law has offices in Farmington, Grand Rapids, and Traverse City, Michigan with a fourth office location in Chicago, Illinois. Mr. Hirzel focuses his practice on condominium law, homeowners association law, and real estate law. He is a fellow in the College of Community Association Lawyers (“CCAL”), a prestigious designation given to less than 175 attorneys in the country. Mr. Hirzel formerly served on the CCAL National Board of Governors and is a former member of the Community Associations Institute’s (“CAI”) Board of Trustees, an international organization with over 40,000 members worldwide that is dedicated to improving community associations. Mr. Hirzel has been recognized as a Leading Lawyer in Michigan by Leading Lawyers, a distinction earned by fewer than 5% of all lawyers licensed in Michigan. He has been named a Michigan “Rising Star” in real estate law by Super Lawyers Magazine, a designation is given to no more than 2.5% of the attorneys in Michigan each year. Mr. Hirzel was also named as a “Go-To-Lawyer” in condominium and real estate law by Michigan Lawyer’s Weekly. Hirzel Law was also voted the best law firm in Metro Detroit in the Detroit Free Press Best of the Best awards. He is the Co-Chairman of the State Bar of Michigan’s Real Property Law Section Committee for Condominiums, PUDs & Cooperatives. Mr. Hirzel has authored numerous articles on community association law for publications such as the Michigan Community Association News, Michigan Real Property Review, Macomb County Bar Briefs and the Washington Post. He is also the author of “Hirzel’s Handbook: How to operate a Michigan Condo or HOA”, which is available for purchase on amazon.com. Mr. Hirzel has been interviewed on community association legal issues by various media outlets throughout the country, such as CBS, CNBC, Common Ground Magazine, Community Association Management Insider, the Dan Abrams Show on SiriusXM Radio, the Detroit News, Dr. Drew Midday Live on KABC Radio, Fox Business News, Fox News, HOALeader.com, the Law & Crime Network, Michigan Lawyer’s Weekly, NPR, WWJ News Radio and WXYZ. Mr. Hirzel is a dynamic speaker and frequently lectures on community association law throughout Michigan, as well as nationally at the CAI National Law Seminar, and is a two-time winner of the best manuscript award at the CAI National Law Seminar.

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