Amid a recession with rising unemployment rates and an ongoing pandemic, homeowners are spending more time at home. Some have been forced to work from home due to COVID-19, while others are looking for ways to make extra money. One method some homeowners are employing to earn additional income is a short-term rental of their entire home or even just a spare bedroom. Others are attempting to start their own business or continuing to run their existing business out of their home. But what happens for those home/business owners who live in a property owners association (POA)? Are they able to host a short-term rental, or operate a business out of their home?

First, let’s address short-term rentals. In the past few years, we have seen the emergence and increasing popularity of short-term rentals services – you might recognize these services as Airbnb, HomeAway, Roomorama and VRBO – just to name a few. These websites target vacationers and out-of-towners by offering a “home away from home” feel as opposed to crowded hotels and stuffy motel rooms. Short-term rentals are becoming increasingly popular in the COVID-19 era as restrictions are eased and people look to socially distance from others and avoid the potential large crowds at a hotel. So, what’s in it for the homeowner who decides to rent out a room, or even their entire house?

The answer − a quick, easy way to put their unoccupied spaces up for rent and earn extra income. These websites also offer a little extra convenience and security because the tenants and homeowners never exchange money, or sign leases in person; however, there is more than meets the eye when it comes to short-term rentals.

What effect, if any, do short-term rentals have on property owners associations?

One concern about short term rentals is that arrivals are unsupervised. Typically, landlords are not present when tenants arrive for their stays and they usually bring more visitors than originally agreed upon in the lease agreement. With these rentals usually come increases in noise, traffic and trash which typically results in complaints from neighbors. Another concern is that because the tenants are not full-time members of the community, they are not aware of the deed restrictions put in place and may violate the rules and regulations during their short-term stay. This can be detrimental for homeowners and neighbors who are left to handle the consequences for their tenants’ actions.

Are short-term rentals allowed in property owners associations?

By now, many of us have all heard and read about the Texas Supreme Court case Tarr v. Timberwood Park. As a quick refresher, in 2014, Plaintiff Kenneth Tarr began leasing his property for periods between 1-7 days. Because his tenants created nuisances with increased noise and trash, Tarr received correspondence from the Association asking him to cease renting his home for short term rentals. Tarr responded by suing the Association, seeking a declaration that his short-term rentals were permitted under the Association’s governing documents. The restriction referenced stated, “All tracts shall be used solely for residential purposes…”.  Tarr argued that his tenants rented the home for a residential purpose, no matter how short-lived and that their use of the property did not violate the restrictive covenants. Ultimately, this was fought through the courts, eventually making it all the way to the Texas Supreme Court. The Texas Supreme Court agreed with Tarr stating the residential use of his property did not violate Timberwood Park’s restrictive covenants. However, if the restrictive covenants had included a prohibition on short-term rentals, then the outcome of the Tarr v. Timberwood Park case would likely have been different.

Case law related to short-term rentals has recently been amended further. On August 18, 2020, in the Texas Court of Appeals Case JBrice Holding LLC v.  Wilcrest Walk Townhomes Ass’n, Inc., the Court of Appeals affirmed the trial court’s judgment allowing the Association to enforce its restriction on short-term rentals. JBrice, had purchased two townhomes in Wilcrest Walk and was renting the properties on AirBnB for a term of one to ten days.  JBrice argued that the Association’s restrictions did not restrict the duration of owner or tenant occupancy. JBrice also sought to declare the Association’s rules barring short-term rentals, which were adopted after the Association sent its letters requesting JBrice to cease and desist from renting the property, were void to the extent the rules seek to regulate anything beyond use of the Association’s common area. JBrice also argued the rules concerning occupancy or leasing duration should also be voided because the Association’s restrictions grant broad leasing rights. In affirming the trial court’s decision, the Texas Court of Appeals cited Texas Property Code Section 204.010, which gives homeowners associations “broad authority” to regulate the use of its subdivision unless stated specifically in the governing documents. This means homeowners associations governed by Texas Property Section 204.010 (that is only applicable to select counties) are authorized by statute to promulgate rules and regulations regarding the use of the subdivision, such as a regulation banning short-term rentals, unless this use is otherwise prohibited in the association’s governing documents.

What are the best ways for community associations to control short-term rentals?

First, it would be in the community’s best interest to create a policy that is approved by the Board of Directors. However, these policies are not fool proof as they are subject to challenge in the courts, and if case law is any indication, the policies may not survive. Another option is to amend the Association’s declaration. For single family and townhome associations subject to Chapter 209 of the Property Code, in order for the amendment to be approved, 67% (or a two-thirds majority of the membership) must vote in favor of the new language, unless a lesser percentage is set forth in the amendment provision in the declaration[1]. This would create a new set of restrictive covenants and potential prohibitions that were approved by the requisite number of the homeowners. The new covenants would also give greater authority to the Association to take action against homeowners in the event of a violation.

Working from Home or Operating a Business from Home?

Now, let’s address those who might be running a business out of their home. Considering the ongoing pandemic, it’s no surprise to see your neighbors’ cars parked in their driveways during the day when they’d normally be at work. Working from home is a routine many Texans have settled into given the various county and city shelter-in-place/stay-at-home orders and other recommendations we have all dealt with through the COVID-19 pandemic. But, at what point does someone go from working remotely to operating a business from home in violation of the deed restrictions?

When working remotely, it is safe to say many of us have all answered work emails and phone calls or been a part of what is now the routine video conference from our home office or kitchen table.  These activities do not have a negative effect on neighbors outside of possibly slowing down the street’s internet download speed, so your neighbors aren’t able to binge watch Tiger King for the fifth time. Though, what happens if someone starts receiving regular deliveries and shipments coming to and from their home, or the neighbors start noticing a variety of cars they are not used to seeing parked on the street, or in the homeowners’ driveway that are coming and going throughout the day? These may all be signs that an owner has shifted from working remotely to running day-to-day business operations from their home.

Having clients/customers come to your home might have the same effect on your POA that renting your home would have – increased noise, trash and cars parked in the streets. But does this violate any rules? As with short-term rentals, for Boards of Directors to take any action, there must be specific policies/restrictions that prohibit these types of activities. Without these, an Association may lack the ability to seek recourse against a homeowner for these types of activities. For POAs, the right to define and enforce a violation of operating a business from an owner’s home is, much like with short-term rentals, going to depend on what is stated in the Association’s governing documents. For POAs in cities with strict zoning ordinances, the Association may be able to turn to city authorities for assistance, if a homeowner is operating a business out of their home, to enforce potential zoning violations.

Unfortunately, there is no one size fits all answer that applies to all POAs with regard to homeowners operating a business out of their home or renting their unoccupied spaces on short-term rental sites. In the 2019 Texas legislative session a bill was introduced that would have provided statewide regulations on short-term rentals. At the time it was left in committee. At RMWBH, we will be watching to see if a similar bill is released in the upcoming 2021 legislative session and provide updates on all POA related bills throughout the legislative session.

For now, POAs are dependent upon caselaw to guide them in the actions they take to prohibit both home businesses and short-term rentals. For associations governed by Section 204.010 enforcing regulations is now backed up by statute, but for associations governed by other sections of the Texas Property Code, the POA must be able to reference a specific policy or restriction in the governing documents to enforce potential violations. POAs should routinely consult with their legal counsel to ensure they are enforcing their restrictions correctly to avoid risking potential long-term expenses from litigation by homeowners.

[1] For condos subject to Chapter 82 of the Property Code, the declaration may be amended by a vote or agreement of the owners to which at least 67% of the votes in the association are allocated, or any larger majority the declaration specifies.

For condos subject to Chapter 81 of the Property Code, the declaration must be amended by the holders of at least 67% of the ownership interests in the condominium.