Supreme Court Opens the Door to More Short-Term Rentals In Tennessee
Thursday, October 19th, 2023
On October 17, 2023, the Tennessee Supreme Court ruled that homeowners have more flexibility in renting their homes on short-term rental sites like Airbnb and Vrbo. But it was only a partial victory for the homeowner in the case. While his home’s restrictive covenants did not prevent short-term rentals, his home owners association (HOA) did.
The homeowner bought a house in a resort community in middle Tennessee. Although the Court did not say it explicitly, the facts indicate that the homeowner probably planned on renting the home on a short-term rental site like Airbnb or Vrbo. But there were two obstacles: the restrictive covenants that govern all the houses in the neighborhood and the rules established by the neighborhood’s HOA.
The Supreme Court first addressed the restrictive covenants. Most neighborhoods have restrictive covenants. They are usually recorded before the homes are sold, which makes every subsequent homeowner subject to the rules in the covenants. In this case, the restrictive covenants include a requirement that the home only be used for “residential” purposes. That seems reasonable; most homeowners don’t want businesses operating in their neighborhood. But what does “residential” mean in the context of a short-term rental? If the homeowner is using the house to make money, then he is running a business similar to a hotel. But the people renting the home are living in it the same as a long-term renter, albeit for a shorter period of time. Who’s perspective controls? The Supreme Court determined that the covenants were ambiguous. Ambiguous terms in restrictive covenants are resolved in favor of the property owner. Tennessee law favors unrestricted use of the property. Based on the covenants alone, the homeowner could rent his house on a short-term basis.
But that is not where the case ends. In addition to the rules in the restrictive covenants, the homeowner also must contend with his HOA. Restrictive covenants often establish a HOA with the power to make more rules for homeowners. In this case, the HOA had a rule that explicitly prohibited short-term rentals. Because the HOA was authorized to limit rentals, the homeowner ultimately lost the case.
Before you invest in a property to be used on a short-term rental site, check the neighborhood’s restrictive covenants and HOA rules. If your neighborhood needs help limiting short-term rentals, contact our firm.