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Vacation and short-term rentals pose unique legal and other risks for property owners engaging in that business in Arizona
The owner-renter relationship and applicable laws for short-term rentals can be complex, confusing and uncertain.
Renting out a home for a vacation or short-term rental has become quite desirable and created an entirely new rental industry. However, many homeowners and investors (hereinafter, “property owners”) involved in this business concept are not considering the legal implications of their rental activities. Merely marketing a property through a marketplace such as AirBnB®, VRBO® or others is only the beginning and does not protect property owners against various liabilities and legal issues.
Renting out a house is a business transaction. Every business transaction must comply with the law. The owner-renter relationship and applicable laws for short-term rentals can be complex, confusing and uncertain. To date, virtually every short-term rental agreement I have been asked to review has been legally deficient and subjected the property owner to unnecessary risks.
Vacation and short-term lodging (collectively, “short-term rentals”) have traditionally focused on hotels, bed-and-breakfasts, time shares and similar lodging. The concept of regularly renting out homes for short-term rentals is still relatively new. In 2017, Arizona adopted legislation that limited the ability of cities, towns, and counties to prohibit or regulate short-term rentals of residential properties. This law opened the floodgates for short-term rentals in some areas where they were previously prohibited or strictly regulated by the local government.
Even though the State of Arizona removed many of the obstacles to short-term rentals, it has not adopted rental laws specifically tailored for the residential short-term rental industry. Likewise, Arizona has yet to identify which existing laws, if any, specifically apply to short-term rentals. This creates many issues and serious potential risks for property owners.
Similarly, there are no lawfully recognized standardized “forms” in Arizona for vacation and short-term rental relationships. Unfortunately, many property owners are simply using leases for conventional apartment or home rentals or pulling rental documents off the internet (without understanding the legal implications and risks), and merely making modifications and incorrectly assuming the documentation is lawful and protects them. As a result, many property owners who are vacation and short-term residential landlords are failing to consider:
- which laws might apply;
- whether the property owners are lawfully undertaking their rental transactions;
- the extent of the owners’ legal obligations;
- the potential liabilities and claims to which they are subjecting themselves; and
- whether the form of rental documents they are using exposes them to unnecessary legal risks.
Unfortunately, most of the short-term rental documents I have reviewed are based on forms created for traditional long-term residential landlord-tenant relationships governed by the Arizona Residential Landlord and Tenant Act (“Landlord-Tenant Act”). Those documents were not appropriate for short-term rentals and caused the short-term rentals to be subject to the Landlord-Tenant Act. The use of improper rental documents opens the door for the property owner to be subjected to liabilities and lawsuits when they do not strictly comply with the burdensome requirements under the Landlord-Tenant Act. Persons engaging in any business, including the business of vacation and short-term residential rentals, must understand which laws may apply and draft their rental documents accordingly. I recommend that individuals engaging in short-term rentals of their residential property do everything possible to avoid the application of the Landlord-Tenant Act.
Some people believe the Landlord-Tenant Act (A.R.S. § 33-1301 et seq.) applies to vacation and short-term rentals. The Landlord-Tenant Act applies to the “rental of dwelling units”; therefore, some could argue that short-term rentals are subject to the Landlord-Tenant Act even though the Landlord-Tenant Act was long ago drafted without any contemplation of short-term or vacation rentals. However, as a property owner, you do not want the Landlord-Tenant Act to apply to your short-term rentals!
The Landlord-Tenant Act imposes on landlords numerous costly, time-consuming, time-sensitive and burdensome administrative and legal obligations, such as move-in and move-out inspections, lead paint and other disclosures, and requirements to issue formal violation notices and to give renters an opportunity to cure violations, etc. If the Landlord-Tenant Act were to apply, it could make short-term rentals legally and practically problematic, a management headache, a liability risk, and financially impractical for many property owners. Yet, many property owners are inadvertently subjecting themselves to the burdens and liabilities under the Landlord-Tenant Act because they do not understand the laws and are using inappropriate rental forms.
So, how does a property owner avoid the application of the problematic Landlord-Tenant Act? That question is not easy to answer and requires some careful planning and drafting. For example, the Landlord-Tenant Act does not apply to “[t]ransient occupancy in a hotel, motel or recreational lodging” (the “Exemption”). It is therefore, in my opinion, important to use the Exemption to attempt to keep the Landlord-Tenant Act from applying to short-term rental arrangements. This is not necessarily easy, particularly when the Landlord-Tenant Act fails to define “transient occupancy” or what constitutes “recreational lodging.”
Arizona property statues also do not define transient occupancy. However, the Arizona tax code provides some context for the word’s meaning. Under the tax code, transient occupancy is occupancy for less than 30-days in qualified lodging, which includes homes or houses. As of this writing, there is no court guidance addressing whether the short-term rental of a home qualifies for the Exemption. However, drafting the rental documents in an effort to qualify for the Exemption should be an important first step.
Since Arizona has not identified any specific laws governing short-term home rental relationships, property owners are left to guess which laws might apply and what they must do to be in legal compliance. Because of this ambiguity, I recommend that short-term rental documents be purposefully drafted by an attorney in a manner that seeks to qualify for the Exemption from the Landlord-Tenant Act. When I draft vacation and short-term rental agreements, I seek to distance the unique short-term rental relationship from traditional residential rentals governed by the Landlord-Tenant Act. For example, I:
- select terminology that is not typically found in residential rental agreements governed by the Landlord-Tenant Act;
- use concepts that indicate that the arrangement is short-term transient lodging (as opposed to a traditional residential rental) and;
- implement concepts that are not typical of traditional residential rentals.
Property owners must also be aware of insurance and liability issues. Some property owners’ insurance policies do not provide coverage for a dwelling that is used for business purposes, such as short-term rentals. A homeowner may need a rider or endorsement on their policy to cover this type of business activity or an entirely different policy of insurance. Some of the more prominent online rental marketplaces may also provide liability coverage for certain types of claims, such as bodily injury and certain property damages. The extent and details of those policies and their coverages must be carefully evaluated, and property owners should obtain any additional insurance needed to fill the liability gaps. I recommend speaking with an insurance agent to determine the specific type of insurance needed.
Although cities, towns and counties in Arizona cannot outright prohibit vacation and short-terms rentals, the law still allows cities, towns and counties the right to require the owners of short-rentals to:
- provide their contact information to the local government;
- maintain a transaction privilege tax license;
- issue violations or citations to property owners for certain offenses caused by their short-term occupants; and
- prohibit non-residential uses (such as large parties, live music, and special events that would otherwise require a government issued permit or license), etc.
Property owners must confirm with their local government that they comply with the governmental requirements.
The owner of a property subject to restrictive covenants or governed by a property owners or homeowners association (“HOA”) must also ensure that their short-term rental activities are not contractually restricted or prohibited by their HOA. Many HOAs prohibit or restrict short-term rentals, so compliance with lawfully adopted HOA requirements is also important. It is not uncommon for an HOA to fine or sue a homeowner for violating its short-term rental policy. Most of the HOA prohibitions and restrictions I have examined appeared to be legally enforceable, but some were not. Even where an HOA does not have any restrictions on short-term rentals or has adopted legally invalid prohibitions or restrictions, the HOA might still adopt legally enforceable prohibitions or restrictions in the future. A homeowner must evaluate this risk when engaging in short-term rental activities. As a precaution, legal advice should be sought before engaging in short-term rentals in a community subject to deed restrictions or governed by an HOA.
If an HOA permits short-term rentals, or if there are deed restrictions pertaining to the types of conduct that are prohibited or regulated on a property, then it is also important to ensure that the rental documents require the short-term occupants to comply with the HOA’s rules or deed restrictions, which commonly address matters like noise, parking, and personal conduct. Even where an HOA or deed restriction allows short-term rentals, non-conforming conduct by the short-term occupants could result in significant fines being levied on the property owner by the HOA or even result in a lawsuit or the revocation of the opportunity to engage in short-term rentals. A short-term rental agreement must address these types of situations, to ensure that the occupants are aware of and comply with the applicable HOA requirements and also give the property owner recourse against the occupants in the event they do not comply.
Short-term rentals can potentially be a lucrative financial venture for property owners. However, property owners must exercise caution, use carefully crafted documents, and fully understand the implications and risks of this type of business activity. This article addresses only some of the many issues that may apply. Those seeking to engage in the vacation and short-term residential rental business should seek qualified legal assistance to minimize risks and problems and to help ensure legal and HOA compliance.
This content of this article is for informational and educational purposes, contains the current opinions of the author and should not be considered as rendering legal advice. The specific facts of a matter, legal interpretations and changes in the laws could materially affect the opinions contained in the article. Current legal advice should always be sought on any particular matter.