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SHORT-TERM RENTALS MAY BE HERE FOR THE LONG-TERM

 

The Texas Supreme Court recently issued its opinion in the much-anticipated Tarr v. Timberwood Park Owners Association, Inc. case.[1] The case addressed the issue of whether a property owners association (POA) can restrict an owner’s ability to rent out his/her property on a short-term basis. Ultimately, the Court’s opinion fell on the side of the individual owner and held that short-term rentals were not prohibited under the Timberwood Park Owners Association’s (the Association) deed restrictions.

Kenneth Tarr purchased a house in 2012 located within the Timberwood Park subdivision in San Antonio. After being transferred to Houston by his employer, Tarr began advertising his former home for rent on websites such as VRBO (Vacation Rentals by Owner). Tarr entered into thirty-one short-term rental agreements between June and October of 2014. Tarr went as far as organizing his own limited liability company to manage his new short-term rental business and even paid local and state hotel taxes for each rental.

The dispute arose in 2014 when the Association informed Tarr that his short-term rentals violated the restrictive covenants governing his property. The Association imposed fines on Tarr, which were appealed to the Association’s Board of Directors. The Board eventually denied the appeal in September of 2014.

Tarr sued the Association and sought a declaration from the court that the deed restrictions did not impose a minimum duration on occupancy or leasing. The trial court ruled in favor of the Association. This ruling was affirmed by the San Antonio Court of Appeals. Tarr then appealed his case to the Texas Supreme Court.

The Supreme Court noted a split of authority in rendering its opinion. Under common law principles, restrictive covenants are to be construed strictly, and all doubts are to resolved in favor of the free and unrestricted use of the land. In 1987, however, the Texas Legislature enacted what would come to be Section 202.003 of the Texas Property Code. This section provides that “A restrictive covenant shall be liberally construed to give effect to its purposes and intent.” Notably, this section was made applicable to all restrictive covenants, regardless of when they were created. A conflict was thus created between the old common law rule and the newer legislative mandate. The Supreme Court noted that several appellate courts have grappled with which standard to apply in construing restrictive covenants. The Court noted that many appellate court opinions are in conflict with each other, and occasionally, conflicting decisions are issued by the same court. While many hoped that the Court would finally resolve this conflict, it declined to do so noting that their conclusion “would be the same regardless of which interpretive standard prevails.”

The Court construed two restrictive covenants in its opinion. The first restriction is the oft observed single family residence restriction. The text of the restriction at issue read as follows:

No building, other than a single family residence containing not less than 1,750 square feet, exclusive of open porches, breezeways, carports and garages, and having not less than 75% of its exterior ground floor walls constructed of masonry, i.e., brick, rock, concrete, or concrete products shall be erected or constructed on any residential tract … and not garage may be erected except simultaneously with or subsequent to erection of a residence. No less than a 300 lb. per square asphalt or fiberglass shingle shall be sued in any construction in Timberwood Park Unit III.

The Association argued that the covenant prohibited the use of tracts in the subdivision for any purpose other than single-family residences and for residential purposes. In essence, the short-term rentals amounted to a “multi-family” use in violation of the restrictive covenant.

The Court noted that the “single family” requirement of this restriction was a structural restriction and not a use restriction. This restriction simply limits the type of structure (single-family house, duplex, townhome) to be erected on the property and does not affect the activities that can permissibly take place within that structure. The Court declined to read the restriction together with another restriction that restricted the land to residential purposes. The Court opined that reading the two restrictions together into one “mega-restriction” would have been a bit of a stretch.

The second restriction construed by the court is the commonly used “business use” restriction, which read as follow:

All tracts shall be used solely for residential purposes, except tracts designated…for business purposes, provided however, no business shall be conducted on any of these tracts which is noxious or harmful.”

The Court gave special weight to the words “conducted on” as they appeared in this restriction. By referring to the activities “conducted on” the tracts, the covenant made the relevant inquiry the conduct taking place on the physical property itself (as opposed to how the owner is using the property.) The Court noted that the restrictive covenants failed to define the terms “residential” and “business” purpose. The Court held that the term “residence purposes” merely required the use of the property for living purposes as distinguished from uses for business or commercial purposes. The Court noted that the restrictive covenants failed to address leasing, use as a vacation home, short-term rentals, minimum-occupancy durations, or the like. The Court did not assess any significance to  the fact that Tarr formed an LLC and pays hotel taxes.

Ultimately, the Court held that “so long as the occupants to whom Tarr rents his single-family residence use the home for a ‘residential purpose,’ no matter how short-lived, neither their on-property use nor Tarr’s off-property use violates the restrictive covenants in the Timberwood deeds.”

The Court’s opinion, while not ideal for Texas POA’s, provides some guidance for POA’s seeking to prevent short-term rentals within their neighborhood. The Court noted that a different decision may be reached by other courts if the covenants at issue define “residential” or “business” uses by specifically enumerating prohibited conduct. If a POA wishes to ban short-term rentals in their neighborhood, the sound approach would involve reviewing the relevant restrictive covenants, and possibly adopting an amendment, which specifically defines “residential” and “business” uses, and expressly prohibits  short-term rentals.

 

[1] The Court’s opinion was released on May 25, 2018 and is currently available at http://www.txcourts.gov/media/1441730/161005.pdf.

 
Philip Segura