Local Government Law Bulletin September 7, 2016

Reshaping Regulation for Short-Term Rentals in the New Sharing Economy

The technology enabled “sharing economy” is an increasingly significant social and economic phenomenon changing the basic framework for how we conduct business and exchange goods and services. Consumer-to-consumer platforms for home-sharing (defined as renting part or all of a host’s owned primary home), for example, have scaled an informal activity into a whole new category of lodging. Recent reports indicate the size and scale of companies like Airbnb, VRBO and HomeAway, now rival or even surpass those of some of the world’s largest hotel chains. Residential property owners in most municipalities across Michigan are increasingly taking advantage of these platforms, which is prompting many community leaders to rethink how they regulate short-term rentals.

Traditionally, short-term rental issues in Michigan have primarily concerned residential properties in waterfront communities with high volumes of tourism. That is no longer the case. While communities in high tourism areas continue to make up the epicenter of the short-term rental market, online direct home-sharing is occurring everywhere. Home-sharing appeals to travelers of all kinds looking for different and more cost effective lodging experiences outside of a traditional hotel room. Business travelers, patients and family members traveling for medical treatments, large groups, and especially millennials, are increasingly turning to services like Airbnb and HomeAway for accommodations whenever and wherever they travel. Odds are, if you visit any one of the major home-sharing websites mentioned above, you will find a number of residential properties in your community listed for rent.

The problem with home-sharing is that, to date, it has largely been flourishing in an unregulated gray area. Most zoning ordinances do not contemplate, and in many cases prohibit, short-term renting in residentially zoned districts. Moreover, home-sharing does not neatly fit the mold of traditional bed and breakfast establishments which generally require a special use permit. While there are policy reasons for why municipalities should embrace the new home-sharing phenomenon, continued passive acceptance of the practice without any applicable regulatory checks and balances can have negative consequences.

Advocates claim that home-sharing provides a vital economic lifeline to property owners by allowing them to generate additional income, pay down their bills, and make their mortgage payments. They also claim home-sharing leads to increased tourism spending in the local economy. Conversely, critics of the practice claim that unchecked home-sharing incentivizes unlawful renting and removes affordable housing from the market by turning residential properties into unofficial and unregulated year round hotels. Home-sharing also increases the potential for nuisances in residential communities where sudden surges in population and strangers who are unfamiliar with and/or insensitive to the residential character of the neighborhood can upset residents.

In an effort to figure out how to embrace the sharing economy and strike a proper balance between protecting homeowners’ private property rights and promoting tourism on the one hand, and preserving the residential integrity of neighborhoods on the other, many community leaders all over the world and here in Michigan have begun to grapple with how to handle the home-sharing phenomenon. San Francisco, for example, enacted a controversial ordinance, which took effect in late July that requires all Airbnb hosts to register with the city. If they do not register, Airbnb would be fined up to $1,000 a day for each listing, putting the burden on the company to make sure each listing is in compliance with the law. Less controversially, Amsterdam wanted to welcome services like Airbnb, but also wanted to ensure that people only occasionally rent out their homes rather than run permanent, unregulated hotels. Accordingly, the city, among other things, placed limits on the number of days residents could rent out their home to 60 days per year.

Closer to home, Grand Rapids city leaders approved regulations in 2014 that require any residence being used as an Airbnb rental to be owner occupied. The regulations also require a permit from the City to rent out a room, and limit the number of rooms that can be rented and the number of people allowed in each room. Just this month, Holland’s City Council also voted to allow short-term rentals under the condition that the residence be owner occupied. Holland further decided to restrict the total number of consecutive days a residence can be rented to 30. Smaller municipalities, including several townships in Michigan, are also enacting ordinances to regulate short-term rentals in light of the sharing economy. These ordinances by and large allow for the practice of home-sharing, but require hosts to go through a permitting process which imposes certain health and safety obligations and holds property-owners accountable for nuisances.

Michigan municipalities that have not yet considered specific ordinances for short-term rentals may be wise to do so in light of recent developments in case law. A ruling by the Allegan County Circuit Court in April rendered short-term rentals in a residential subdivision near South Haven illegal under existing zoning regulations. While this case is not binding on other municipalities, it has far reaching implications. The case, Bauckham, et al. v James and Linda Skarin, et al, (April 5, 2016), involved a dispute between 20 homeowners in a subdivision bordering Lake Michigan in Casco Township against four of their neighbors who were renting out their homes on a regular basis. The plaintiffs complained that the ongoing rentals were creating a “non-stop party-like atmosphere.” The court found that the defendants’ short-term rentals were a “commercial sale of personal recreational services,” and thus were impermissible under the zoning ordinance in the low density residential district where the subdivision is located. In his ruling, the judge reasoned that the rental activity did not constitute a single family residential use.

The Bauckham case may be an example of how other courts across the State who are presented with similar situations will rule. Thus, the case casts a legal cloud over the short-term rental market in Michigan by muddying the waters of whether home-sharing is consistent with single family residential use. If home-sharing constitutes commercial activity which is impermissible in most residentially zoned districts, municipalities will need to choose whether they want to expressly allow for short-term rentals via an ordinance. Without such an ordinance, the private property rights of homeowners may be threatened under existing zoning regulations, and conversely, the passive allowance of home-sharing could jeopardize the residential character of local neighborhoods.

Please contact us if your municipality would like assistance in creating a short-term rental ordinance tailored to address home-sharing in your community.

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