by Clifton Beech
Airbnb has been an incredible innovation in the hotel and travel industries, and the Texas courts are just now starting to catch up. On May 25, 2018, the Supreme Court of Texas ruled in Tarr v. Timberwood Park Owner’s Ass’n. that a homeowner did not violate a homeowner association rule that restricted all property to “residential purposes” when the homeowner leased his property nightly through Airbnb.
Innovation meets HOA rules
The homeowner (“Tarr”) formed a company to manage the property, advertised the home for rent on various rental websites, and rented out the property for 102 days in just four months. The other homeowners, unhappy with the short-term leasing, informed Tarr that all of their deeds restricted use of their homes to “residential purposes” only. The homeowners association (the “Association”) argued that Tarr’s short-term leasing, along with Tarr paying the Texas and county Hotel Tax, should be considered a business purpose, not residential purpose.
Nothing in the deeds or Association documents defined “residential purpose.” Tarr, seeking a declaration that his use was a residential purpose and that he could not be fined by the Association, lost at the trial court and appellate court before the Supreme Court of Texas reversed the prior opinions in his favor.
Why did the court side with the homeowner?
The first point of contention for the two parties was whether restrictive covenants should be construed liberally or strictly. Texas Property Code 202.003(a) (enacted in 1987) states that restrictive covenants are to be construed liberally, while common law has historically held them to be construed strictly. The Court refrained from answering the effect of 202.003(a) on the long employed construction principles, stating that the restrictive covenant of “residential purpose” was unambiguous.
Tarr argued that “residential purposes” should be viewed from the light of those in possession of the property: whether those individuals are partaking in residential or business activities. He concluded that since the short-term renters were merely staying the night, they were partaking in a residential purpose.
The Association argued that since the tenants had no intent to remain beyond the short term for which they had leased the property, their use was merely transient as opposed to residential. The Association added that since Tarr pays hotel taxes and formed an LLC to manage the property, it must be a business use.
The Court, noting that the deeds and covenants affecting the property failed to address leasing, use as a vacation home, short-term rentals, minimum occupancy durations, or the like, the Court declined to add restrictions onto the property by adopting an overly narrow reading of “residential purpose.” The Court held as long as the tenants to whom Tarr rented his home used the home for a “residential purpose,” Tarr’s use qualified as a residential purpose, no matter how short—lived the tenants’ stayed at the property.
“Residential purpose” clause may not be sufficient by itself
While this is a narrow holding affecting only this particular deed restriction, any other deeds or documents with substantially similar restrictions will be read the same way. Limiting the use of a home to a “residential purpose” is a popular restriction found not only in deeds and CC&Rs, but also in city and municipal ordinances.
It is also important to note that the Supreme Court of Texas is fine with allowing the right to lease one’s property to be restricted, assuming the language doing so is properly written. Developers, homeowners, and associations alike should be extraordinarily careful in the drafting and reading of restrictive documents as it is highly possible that a restriction that you intended to exist or thought existed may very well be read differently by the courts.
More changes to come? Keep an eye on the courts
Finally, with the boom of owners renting their own property for short-term use, the State and Cities wanting their hotel taxes, and the hotel industry fighting back, property owners rights are likely to have vast upcoming changes in the courts and legislature.