GENERAL LIABILITY UPDATE: SHORT-TERM RENTAL/VRBOS

B Y : M I C H A E L H R N I C E K , G E N E R A L L I A B I L I T Y C H A I R ( H R N I C E K L A W , P . L . L . C . )

Short term rentals (“STR”) (also known as vacation rentals by owner) recently received greater protection by the Arizona Supreme Court in Kalway v. Calabria Ranch HOA, LLC, No. CV-20-0152-PR. Kalway v. Calabria Ranch HOA, LLC.

Comprising a significant portion of Arizona’s economy, STR and visitor activity contributed over $6.6B to Arizona’s economic output, $2.8B of income to Arizonans, and provided 75,500 jobs (https://azrtr.org/wpcontent/uploads/2021/09/AZ-STR-Impact-Report-February-2022.pdf (“The Economic Impact of Short-Term Rentals in Arizona” Rounds Consulting Group (Feb. 2022).) Arizona recognized the role SRT plays in its economy and enacted A.R.S. §9-500.39 in 2016, providing protections for SRT (defined as typically covering stays between one night and one year). The legislature subsequently passed an additional law to further protect owners’ legal rights to rent: members of HOAs “ . . . may use [their] Property as a rental Property unless prohibited in the declaration and shall use it in accordance with the declaration’s rental time period restrictions. ” A.R.S. §33-1806.01.

Although the government may not restrict short term rentals, private parties (i.e. HOAs) had an opening to do so through deed restrictions and covenants conditions and restrictions (CC&RS). Numerous HOAs amended their CC&Rs after 2016 accordingly to impose such restrictions. Those HOA restrictions are now in jeopardy as a result of Kalway.

At issue in Kalway was whether amendments to the CC&Rs restricting members’ use of their property. Although SRTs were directly at issue, the analysis of SRT restrictions is analogous. The Arizona Supreme Court asked whether the restrictions were foreseeable to owners who bought their homes before the amendments. If the amendments were not reasonably foreseeable, the owners did not have proper notice. “The original declaration must give sufficient notice of the possibility of a future amendment; that is, amendments must be reasonable and foreseeable. ” Kalway, ¶ 10. “We hold that an HOA cannot create new affirmative obligations where the original declaration did not provide notice to the homeowners that they might be subject to such obligations.

Because of this holding, recently imposed HOA CC&R SRT restrictions are in doubt. SRT HOA members will argue that the restrictions were unforeseeable and ran contrary to the original CC&Rs to which they agreed. Certified real estate specialist Christopher Charles, Esq. of Provident Law notes, “ . . . in light of the recent Supreme Court decision, many, if not all, of the CC&R amendments which have been implemented to restrict short term rentals are void and ineffective. ” (https://www.providentlawyers.com/arizonasupreme-court-issues-new-ruling-protecting-shortterm-rentals/ (April 6, 2022).)

Key takeaway: insurance carriers should expect HOA member SRT claims arising out of lack of notice against HOA boards and executives and officers. Because the suits will likely sound primarily in contract and seek injunctive and declaratory relief, there will be coverage and damages issues.