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Short-Term Rentals: A Brief History of Innovation, Annoyance, and Uncertainty

02/01/2020 3:27 PM | CAI Rocky Mountain Chapter (Administrator)

By Marcus T. Wile, Esq.

Denver, Colorado played host to the 2008 Democratic National Convention and with it fifty thousand plus media members, politicos, supporters, and demonstrators descended upon a city unable to accommodate the crowd.  The confluence of convention attendees and the lack of available lodging gave a fledgling little start up the perfect opportunity to soft launch what would become the juggernaut booking site Airbnb.  In the intervening years, innumerable alternative sites have sprung to life and forever changed the hotel and lodging industry.  Meanwhile, community associations across the state have struggled to keep up.

Short-term rentals, typically encompassing everything from nightly stays to leases of six months or less, result in a number of issues.  Boisterous parties, parking issues, common area abuses, and “stranger danger” have left boards of directors attempting to regulate the issue while legislation catches up.  The piecemeal municipal codes vary wildly.  Many municipal codes require little more than registration and payment of relevant taxes.  Others are more onerous.  Denver’s code, for example, requires that the property owner occupy the property as their principal residence.  If facing an issue with a short-term rental, it never hurts to consult the association’s attorney and determine whether the short-term rental is compliant with local law.  With a little luck, the local authorities may be able to address the issue.  However, most short-term rental issues fall outside the scope of the local municipal code and regulation is left to the association.  

One of the primary problems associations face in attempting to regulate short-term rentals is that the covenants restricting property use were often drafted long before there ever existed the technology to make the short-term rental industry possible.  Without language in the declaration specifically addressing short-term rentals, associations have attempted to rely in its stead on “residential use” and “commercial use” declaration provisions or by amending the association’s rules and regulations.  Colorado courts have explicitly rejected these approaches. 

The Colorado Supreme Court addressed such a situation in Double D Manor, Inc. v. Evergreen Meadows Homeowners’ Association.  The Double D Manor case involved a group home for developmentally disabled children in a single-family residential dwelling.  The association argued that the group home violated the declaration’s residential use restriction because the property owner generated revenue from the property.  The court, however, reasoned that the group home was consistent with the residential use restriction because the children had beds of their own, shared chores, cooked and ate meals, and otherwise undertook activities at the property classically associated with residential use.  

The Colorado Court of Appeals, in Houston v. Wilson Mesa Ranch Homeowners Association, Inc., endorsed the conclusions of Double D by stating, “that receipt of income does not transform residential use of property into commercial use.”  The Houston case involved an association that argued its declaration’s commercial use prohibition effectively prohibited short-term rentals.  The Houston court disagreed, ruling that “short-term vacation rentals such as Houston’s are not barred by the commercial use prohibition in the covenants.”  The receipt of money is insufficient to transform the character of the use from residential to commercial.  The Houston court ruled further that, “[f]or short-term vacation rentals to be prohibited, the covenants themselves must be amended … the board’s attempt to accomplish such amendment through its administrative procedures was unenforceable.”

Unable to rely on existing commercial or residential use restrictions in their declarations, and knowing that administrative procedures such as amending the rules and regulations is insufficient to address the issue, associations have only one viable option to address short-term rentals - amending the declaration.  This recourse is mirrored in the language of the Colorado Common Interest Ownership Act (“CCIOA”).  §38-33.3-205(1)(l) of CCIOA requires that, “[a]ny restrictions on the use, occupancy, and alienation of the units [must be contained in the declaration].”  

Once an amendment to the declaration is in place, associations are not yet in the clear for enforcement of short-term rental restrictions.  Reporting and confirmation of suspected short-term rental violations and the subsequent trials create their own level of uncertainty that associations should approach with caution.

Unless an association discovers an owner is advertising his or her unit as a short-term rental, proving that an owner has violated a prohibition against short-term rentals can be very challenging.  There are many theoretical explanations of a suspected short-term rental violation that do not run afoul of the covenants.  Were friends simply coming to visit for the weekend?  Was someone housesitting for the owner?  This means that, if it gets to that stage, actually litigating short-term rental violations can be a discovery heavy process with subpoenaing records, bank statements, and witnesses thereby driving up the cost of the litigation and the potential liability to the association if it is wrong as to the nature of the alleged violation.

In the coming years, municipalities will undoubtedly continue to refine their regulations of short-term, and the courts will also provide more insight on the regulation of short-term rentals.  In the meantime, associations must proceed with caution in their enforcement efforts.  Like with so many issues in associations, clear guidelines through a declaration amendment, structured procedures, and thoughtful and serious communication with suspected violators will go a long way to avoiding headaches for all persons, and association budgets, involved in uncertain litigation.

Marcus T. Wile, Esq., has been representing and advising community associations since 2018. His experience includes counseling associations in the areas of collection, interpreting and amending governing documents, contract negotiation, and covenant enforcement.

1 D.R.M.C. § 33-48(f) (2019)

2 Double D Manor, Inc. v. Evergreen Meadows Homeowners’ Ass’n, 773 P.2d 046 (1989).

3 Houston v. Wilson Mesa Ranch Homeowners Association, Inc., 360 P.3d 255 (2015).

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