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What are the Issues in Involved with Short Term Rentals and HOA's

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Posted by Joseph Stengel on April 28, 2017

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Today's traveling experience and options have changed dramatically over the last five years. It was not long ago when most of us thought that low cost, no-frills airlines were quite the unseen disrupter to the travel industry. Although this change did disrupt the air travel industry, the only physical impact was seen at airports. However, the recent disruptions caused by the explosion of the new entrants into the Short-Term Rental (STRs) market is physically being felt right next door and causing problems with HOA.

The residence you live in most likely is located within the boundaries of some governmental governing body. Many municipalities adopted regulatory systems ten, twenty, even thirty years ago. These systems have proven ill quipped to handle the growth of various new technologies, sharing economy services included. As Leonard Cohen states, "undoubtedly, technological and economic developments produce better, more efficient lifestyles. All growth, however, is accompanied by pain; pain communities have not yet discovered how to alleviate. The national reaction to sharing economy services has been mixed."

What are STRs?

They can include everything from nightly rentals to thirty day rentals to six month rentals. Not only have these become a headache to governmental bodies charged with regulating housing, they have also become a glowing ember that is igniting fires requiring the attention of governing boards in Homeowner Associations (HOA) and common interest communities.

The Internet has once again proven it can deliver amazing consumer benefits on one hand while delivering pain and problems on the other. In the same instance you can personally benefit from securing lower priced and more unique housing accommodations, you can experience a multitude of problems and inconveniences from your neighbor who is now renting their residence as a STR.

Just enter a search for providers of STRs and you will find Airbnb, VRBO (Vacation Rentals by Owner), FlipKey, HomeAway, and Roomorama as examples of the companies providing this new service. These companies tout the fact that they are innovators in online vacation property rentals and market that their strengths lie in their community-based approaches. However, for volunteer boards and the managers who assist them, hotel-like lodging transactions in private residential communities can present security and privacy concerns, as well as constitute violations of a community’s governing documents. The dramatic increase in STRs has compelled many common interest communities to consider ways to restrict, or at least regulate, leasing in their communites.

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What Can You Do as A Property Owner in a HOA?

If you live in a HOA, and are concerned with this issue within your community, you should immediately contact your governing board. Find out if the board can address the concerns you have through the adoption of a new rule by the board or would the creation of a new policy have to adopted through a revision of the communities covenants. The latter is a much a tougher path as it normally requires that a certain percentage of all owners must approve the change.

How do you know if STR's are being rented in your HOA? Many municipalities require that STR owners register. However, even after passage of these requirements, it is proving difficult to get STR owners to register. Denver has been experiencing such a problem. "The city has only issued 277 short-term rental licenses as of Tuesday morning, but has estimated 2,500 to 3,000 hosts. Approximately 150 people had not finished the online application process."

The Colorado Common Interest Ownership Act, C.R.S. § 38-33.3-101 et seq. (“CCIOA”) contains several provisions regarding the use of property within common interest communities. C.R.S. § 38-33.3-205(1)(l) requires that restrictions on the use, occupancy, and alienation of units be contained in the recorded declaration. C.R.S. § 38-33.3-217(4.5) requires that no amendment may change the uses to which any unit is restricted in the absence of a vote or agreement of at least sixty-seven percent (67%) of owners, or any larger percentage specified in the declaration. Similarly, the Restatement of the Law on Property/Servitudes provides that, absent specific authorization in the covenants, an HOA does not have the power to adopt rules that restrict the use or occupancy of individually owned units.

Colorado Case Law and Banning STR's

Within Colorado, the issue of STRs has already seen a number of court cases involving them. One such case specifically involving HOA law was appealed to the Colorado Court of Appeals. In the Appeals court ruling, the court held,

“For 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.” Houston v. Wilson Mesa Ranch Homeowners Association, Inc., 360 P.3d 255 (Colo.App.Div.3. 2015).

As I mentioned previously, your first step in protecting your real estate investment and your living environment is to make sure that your HOA governing body has taken steps to create a clear policy on short term rentals that:

  • Prohibits units within the HOA from being rented as any type of STR; or
  • Allows for the rental of units within the HOA under a clear set of rules.

Besides having a clear policy one way or the other, if your HOA has adopted the policy of allowing for units to be rented as STR's then you will want to investigate and insure that they have a robust set of tools and means to enforce the rules governing renting units as STRs.

Common Provisions to Enforce Rules Regarding STRs

Most rules adopted governing the rental of units as STRs will include provisions for how to identify those units being rented and the means used to insure owners are following the rental rules for STRs. These include the creation of a registry, imposition of fines for violations, and use of the courts for injunctive relief and suspension of rights.

A. Rental registry - Most HOA boards require those owners of units within their community who are renting their units as a STR to file a report notifying the board the unit is being rented as an STR, how many nights it will be rented, how the unit will be managed and by whom if not by the owner and other related information.

B. Imposition of Fines - Under Colorado law, your HOA is required to adopt policies, procedures and rules regarding enforcement of covenants and rules, including notice and hearing procedures and a schedule of fines. Your HOA cannot levy a fine for any violations of the covenants or its policies unless it provides for notice and an opportunity for a hearing is given. This means you must be patient and allow for due process. You will want to insure that your HOA's fines are significant enough to deter the unwanted action your HOA policy should prevent. If not, you will likely find that the owner renting their unit as a STR may simply determine the economic benefits of renting it outweigh the potential costs (fines) for violating the rules or even the blanket prohibition of renting a unit as a STR.

Some owners will not pay fines unless required to by court order. If an HOA is required to file a lawsuit to collect delinquent fines, there is additional delay as well as the HOA having to incur legal fees. Luckily for the HOA, most STR violations are easy to prove, since the STR listing or advertisement is persuasive evidence of a violation. Upon establishing that the violation occurred, the HOA should be entitled to an award of attorney’s fees and costs.

C. Injunctive Relief - If your HOA's process and fine levels are not strong enough to get another unit owner from violating its policy, your board may have to seek the action of a court to legally enforce its policy and fines against those who violate it. Since the violator is a property owner, they are entitled to seek redress in the courts if they disagree with the board's determination and action. Your board cannot just evict the owner of the property as one might be able to do in the case of a hotel guest violating the stated rules and the hotel owner being able to evict them immediately.

The process to obtain a court order is lengthy and can often be complicated or expensive. By the time an order can be obtained, the STR tenants are likely to be long gone. Nonetheless, a court order should help prevent the violating owner from continuing to commit STR violations.

D. Suspension of Use Rights -Suspension of use rights can be a more effective tool in terms of regulating the behavior particularly as negative reviews from customers who have not been allowed to use the common areas can impact future returns.

In this disruptive age of the Internet, as a property owner, STRs aren’t going away any time soon. Owning property in a common interest community will require additional diligence by property owners. STR's may not be the last "disruption" the Internet will unleash upon property owners whose properties are within common interest communities. As you see potential new disruptions, you as an owner must be vigilant in insuring that your HOA board is taking the necessary actions to protect your investment and your right to peaceful enjoyment of your property. The rental of a property within your HOA can have far reaching implications beyond how you are able to enjoy living in your unit. Other issues such as what STR's may do to overall insurance rates on properties, crime, etc. should be considered. If you don't act, then who will act to protect your investment?

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This information is provided for educational purposes only and cannot be taken as legal advice. Neither I, nor the other attorneys at Evans Case, LLP, nor any person or entity that I or any such firm represents, has agreed to enter into any agreement, or to incur any obligation, nor has any attorney/client relationship been created by e-mail, fax or other electronic means unless specifically and expressly so provided. No attorney/client relationship exists in the absence of an executed engagement letter or fee contract.

Topics: Real Estate Management and Ownership, Homeowner's Association (HOA)

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