To B&B or Not to B&B: The Legal Question of Short Term Rentals

A reader of Words of Conveyance recently suggested I write about use of internet sites such as Airbnb, HomeAway, CraigsList and VRBO that help homeowners make short term rentals.

Some cities with affordable housing shortages want to regulate or shut down short term rentals as “illegal hotels.” This week, Urban Turf reports that the New York Attorney General filed an Affidavit stating that 2/3 of Airbnb’s NYC listings are illegal. The Attorney General and Airbnb are litigating over access to sales data. See Mr. Turner’s April 22, 2014 Urban Turf article. This controversy may spread to urban or vacation communities in Virginia. As NY State Senator Liz Krueger points out, use of condominiums and apartments as vacation rentals impacts the local real estate market by decreasing housing inventory.

This issue also caught my interest on a personal level. In 2000-2004, I rented a room from an Arlington landlord who let each room in an apartment to unrelated tenants instead of having one or more co-tenants sign one lease for the entire three bedroom apartment. I had some horrible roommate experiences in the last couple years there. In January 2009, I attempted to rent out my old condominium to people in town for the Presidential Inauguration. I was unsuccessful – came too late to the action.

The economics of short-term rentals makes sense to homeowners who want to turn empty space into cashflow without the commitment of a year-long lease. The customers seek nice places at a discounted rates. See Lark Turner’s Jan. 31, 2014 article in Urban Turf. Many owners make significant supplemental income with short term rentals. Others have horror stories. Mashable.com reports that New York City comedian Ari Teman thought he found good customers on AirBnB in town for a family wedding. To his shock, he came home to find his building superintendent shutting down a “XXX Freak Fest” (as Teman described it) that damaged his apartment. Mashable also reports that in 2011, an Airbnb host in San Francisco had her property stolen and vandalized. These websites also present convenient opportunities for criminal enterprises involving narcotics or prostitution. Perhaps the most common headache that vacation rental hosts experience is navigating tax and regulatory burdens. Before taking photos and putting them up on one or more of these websites, a responsible owner wants to know how to avoid legal snags. The threshold question for the owner is, are you:

A Landlord renting out property to tenants? or
An Innkeeper lodging guests at daily or weekly rates?

Put another way, what is the boundary between residential landlord-tenant law and the law of innkeepers?

Airbnb and HomeAway have only been around for a few years. However, charging visitors to stay in one’s own home on a short-term basis has a long history. Nowadays, chain motels dot roadsides at convenient, planned intervals. In the colonial period, hotels were only in large towns and cities. In rural areas, travelers had to look for private homes advertising lodging to the public. Since this tradition of short-term lodging in private homes is so old, there is some Virginia law on this. Consider the following legal differences between renting and lodging:

Definition of Hotel. The Virginia Code defines a “hotel” as, “any place offering to the public for compensation transitory lodging or sleeping accommodations, overnight or otherwise, including but not limited to facilities known by varying nomenclatures or designations as hotels, motels, travel lodges, tourist homes, or hostels.”
Lodgers vs. Primary Occupants. Some Courts, such as those in Massachusetts, define “lodgers” as those who occupy rooms within a house owned by another who remains the “primary occupant.”
Thirty Continuous Days. Unless a hotel room is let continuously to a tenant for more than 30 days, the Virginia Residential Landlord Tenant Act does not apply.
Transfer of Interest in Real Property. The distinguishing features of a “lodger” are his lack of interest in real property and his contract with the owner. On the other hand, a landlord demises to the tenant a property interest. Because of this transfer of land, the landlord has to conduct formal eviction proceedings if the residential tenant defaults on the lease.
Continuous Control Standard. An innkeeper, unlike a landlord, is in direct and continuous control of his guest rooms. A tenant, on the other hand, maintains possession and control of the property during the term, subject to the provisions of the lease.
Standard of Care. Innkeepers are held to a higher standard of care regarding the health and safety of their guests than landlords. They must have suitable locks on all windows and doors in each room. Most short term rental hosts don’t want to install hotel-style locks and peepholes.
Presence of a Written Lease. Lawyers always recommend that landlords and tenants agree to written leases. However, a landlord-tenant relationship may arise even without a written lease. Hotel guests receive an invoice, not a lease agreement.
Hoteliers Must Obtain a Proper License. Landlords don’t need a hotel license.
A hotelier must post the room rates. A landlord is not required to post rental rates.
Disclaimers conspicuously posted within a hotel. Hoteliers need them, landlord’s don’t.
Taxes. Innkeepers must charge sales tax. Landlords are not required to charge sales tax. Contact your tax advisor about these and other tax obligations.
Land Use Restrictions. In addition to licensing, a hotelier must abide by zoning and HOA restrictions. Neighbors tend to prefer to live in communities with other permanent occupants. They can pressure HOAs to fine owners who violate the association rules. Many communities restrict use of properties to “residential” use. Virginia courts resolve any ambiguity in restrictive covenants in favor of free use of property. However, operating a hostel or B&B is considered a “business.”

Virginia law discourages homeowners from running a B&B or hostel business as a side business – too many compliance and tax issues. Many Airbnb hosts offer lodging at lower rates because they have avoided these added obligations. Owners who want to rent out their homes during their own annual vacation aren’t really competing with hotel chains. As Airbnb argues, “Short term rental laws were never meant to apply to New Yorkers occasionally renting out their own homes.” See Apr. 22, 2013 Urban Turf article. Guests who stay while the owners are on their own vacation aren’t creating a substantial parking or traffic burden. They contribute more to the local economy than an empty house.

Is the short term rental of an entire apartment or condominium an “unlicensed hotel?” Consult with a qualified attorney regarding the unique circumstances of your property. For many owners, simply renting out an extra room to a long-term tenant may make more sense.

Select Bibliography:

Scott v. Walker, 274 Va. 209 (2007)(whether a covenant restricting property to residential use prohibits short term rentals)

In Re Oceanview/Virginia Beach Real Estate Assoc., 116 B.R. 57 (Bankr. E.D. Va. 1990)(lodging rate income vs. tenant rents)

City of Worchester v. College Hill Properties, LLC, 465 Mass. 134 (2013)(lodging vs. renting in Massachusetts)

Va. Code Sect. 35.1-1, et seq. (Virginia’s statutes regulating hotel operation)

Va. Code Sect. 55-248.2, et seq. (Virginia Residential Landlord Tenant Act)

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