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Short-Term Rentals: What You Need to Know

September 2020

“Short-term rentals” (“STRs”) generally refer to houses offered for temporary rental occupation, often facilitated by websites such as Airbnb, HomeAway and VRBO. The issue has gained significance in many communities, creating a hotly debated discussion over whether these uses are already allowed throughout various residential districts, and, if they are not allowed, whether a township should adopt regulations allowing them. The battle over STRs reached the highest court in Michigan in June 2020. The court system, however, is not the only area where STRs are being contested. Legislation has been actively introduced to preempt local control on the issue, and many groups are working with their local officials on developing ordinances that apply to STRs. This E-Letter highlights the various issues surrounding STRs, the ways that municipalities can regulate such uses, and recent legislation proposing to preempt local control on the issue.

What is a Short-Term Rental?

Short-term rentals (“STRs”) describe the use of a dwelling to provide rental accommodations to short-term guests. In recent years, STRs have become far more commonplace with the growing popularity of sites like Airbnb, HomeAway and VRBO. While there are several variations on STRs that may be encountered—some are owner-occupied while others are remotely operated, and some involve the rental of an entire dwelling, an accessory dwelling, or just a dwelling unit (i.e. a room)—STRs all share the common feature of converting a residential use to a quasi-commercial rental use. This change in use is often lucrative for the owner and controversial to neighboring residents, which makes it an excellent subject for municipal regulation.

Why are Short-Term Rentals Controversial?

Though STRs can be a boon for homeowners, neighbors are often less than excited about commercial rental property being close to their homes. This lack of enthusiasm stems from a variety of factors.

Sometimes, those who rent STRs can disturb the day-to-day life of the community in which the STR is located. If left unchecked, STRs can be accompanied by partying, drinking, late night music, garbage accumulation and other boisterous conduct that disturbs neighboring residents. This problem may be especially prevalent when an STR is situated in a typically quiet community or when an STR allows large numbers of renters or fails to limit the number of guests that renters can invite to the STR.

Renters may also invite guests and visitors, which can further compound the problem. Opponents of STRs cite increased traffic and parking issues as a concern. STR operators may seek to maximize profit by increasing the sleeping capacity of a dwelling to accommodate more renters, but do not always provide a corresponding amount of parking, which can lead to excessive street parking and congestion.

Safety concerns are also cited as evidence against STRs. These problems can arise from the conduct of the renters—things like unattended bonfires, carelessly used fireworks, or the operation of watercraft or other recreational vehicles under the use of alcohol, but can also arise from the owner of the STR if the dwelling fails to comply with applicable fire or building codes.

Further, STRs may have a negative impact on home values. Some studies have revealed that homes or condos adjacent to STRs may take longer to sell or bring in lower offers. However, the impact STRs have on property values depends on a variety of factors, and in some communities STRs can actually increase, rather than decrease property values as explained in greater detail below.

Benefits of Short-Term Rentals

Despite the controversy surrounding STRs, some municipalities have seen benefits from such uses within the community. STRs can increase the municipality’s tax revenue. More available rental lodging in an area also tends to aid tourism, which in turn can benefit local restaurants, stores, and public services.

Some Michigan communities, especially near lakes, rely on tourism to sustain businesses in their area. Tourism is a huge draw for the entire state and generates billions in state and local taxes. If the community in question is in a tourist heavy area, permitting STRs could actually increase, rather than decrease property values. Whether or not to limit STRs within a community is a community specific decision and depends on various factors, including the local economy, availability of local tourist destinations, or other physical items, such as lakes or beaches.

Regulating Short-Term Rentals

To balance the potential harms of STRs against their benefits, many local governments choose to regulate STRs within their communities. These restrictions can take a variety of forms, but typically fall into two major categories: zoning ordinances and police-power ordinances.

A zoning ordinance regulates the use of land and buildings according to districts, areas, or locations. Examples of “land use” regulations include, among others, setbacks, parcel size, maximum structure height, building form and principal and accessory use of the land or use within buildings allowed within particular locations. Another aspect of zoning is the requirement that the regulation can never be retroactive—existing land uses and activities that are currently lawful under the zoning ordinance must be allowed to continue. Those are called “nonconforming” uses, buildings or “parcels.” Such an allowance is colloquially known as “grandfathering.” Notably, if a use is not allowed before a new regulation is enacted, it will not be “grandfathered” in just because it predates the new regulation.

A police power ordinance does not regulate the “use of land,” rather; it regulates an “activity.” Examples of areas typically regulated by police power include motor vehicle use, parking, food safety, boats and marina use, blight, noise and junk. Unlike zoning ordinances, police power ordinances do not have to have a grandfather clause and can apply to existing uses. However, police power ordinances cannot be restricted to a single zoning district—they must apply to the municipality as a whole.

In the context of STRs, these two approaches offer different advantages. Generally speaking, zoning ordinances allow for STRs to be confined to a particular district and can regulate dimensional aspects of STRs but will not apply to existing STRs that are lawful under the municipality’s current regulations. On the other hand, police power ordinances will apply to existing STRs and can more fairly focus on conduct of the renters, but they will not be able to limit STRs to a certain location within the municipality. These two approaches can be also combined depending on the needs of the community.

Reaume v Township of Spring Lake

STRs were recently the subject of a case before the Michigan Supreme Court in Reaume v Tp of Spring Lake, 943 NW 2d 394 (2020). In Reaume, the Michigan Supreme Court examined whether STRs were a permitted use in defendant Spring Lake’s residential district. The plaintiff landowner claimed that STRs were permitted use of residential property as a single-family dwelling, while Spring Lake argued that STRs did not meet its zoning ordinance’s definition of single-family dwelling because Spring Lake’s zoning ordinance defined a “family” to exclude “transitory or seasonal” relationships.

The Reaume Court rejected both of these arguments, but nevertheless found that STRs were prohibited in Spring Lake’s residential districts. The Court reasoned that STRs closely matched the zoning ordinance’s definition of “motel,” which were defined to include a “[b]uilding ... containing sleeping ... [u]nits which may or may not be independently accessible from the outside with garage or [p]arking [s]pace located on the [l]ot and ... occupied by transient residents.” Because this definition accurately described STRs, the Court concluded that STRs were subject to the same regulations as motels for the purposes of Spring Lake’s zoning ordinance and would only be permitted in zoning districts in which motels were a permitted use. The Reaume Court further noted that even though a STR might not fit the commonly understood meaning of a “motel,” the definition set forth in the zoning ordinance was controlling.

The Reaume case illustrates the importance of examining whether existing land use definitions accurately describe STRs. If so, a municipality can regulate STRs even if the term “short-term rental” is not included in its zoning ordinance.

Regulating Short-Term Rentals

While some municipalities opt to ban STRs outright, and in other municipalities  STRs are banned by virtue of fitting into an existing definition of a land use that is tightly regulated (such as “motels” in the Reaume case above), it may be worthwhile to develop a regulatory scheme for STRs if there is a desire for STRs within a community. Such regulations could include any combination of the following controls:

•      Crafting zoning regulations to allow STRs only in a particular zoning district. While several Michigan courts have construed STRs to be “commercial uses” of land, STRs can certainly coexist in residential districts with the appropriate protections and regulatory limitations.

•      Regulating STRs as a “special land use” under a municipal zoning ordinance. This classifies an STR as permissible only under a certain set of circumstances predetermined by the municipality and subject to review by the Planning Commission.

•      Creating a distinct, specific definition for STRs in the zoning ordinance. Express exclusions such as, “not including a hotel, motel, BNB, etc.” are recommended because this lends clarity to the ordinance. Such language carves out a specific subsection and definition for STRs that differ from hotels, motels, or bed and breakfasts. Another good practice is to amend other definitions to expressly exclude STRs (i.e. “Single family dwellings do not include STRs”).

•      Building in an application procedure, permitting, or licensing scheme for STRs in the zoning ordinance or police power ordinance. Requiring a permit or license fee will help defray the cost of administration and enforcement for the STRs.

•      Create temporal limitations for STRs in the zoning ordinances. For instance, the municipality could specify a maximum stay or the number of rentals per year or the months/season that STRs can rent.

•      Limit the number of guests that can stay at the STR. Limiting the number of guests can help with noise regulation, overcrowding, and safety concerns for the community. Limiting the number of vehicles in a driveway is also an effective way to restrict occupancy without having to enter the rental to confirm.

•      Prohibit the use of STRs for events, weddings, parties, etc. This will help with occupancy or crowd control concerns.

•      Distribute copies of the STR ordinance provisions to neighbors and the community. This can make the neighbors feel less powerless about the STR next door.

•      Establish a procedure for revocation of STR licenses under defined, specific circumstances.

•      Enact and enforce police power noise ordinances. One of the most common complaints about STRs is that guests renting the STR are inconsiderate to the residential nature of the neighborhood and fail to regulate the volume of their activities while they are renting. Enforcing quiet hours for the entire community and enforcing noise ordinances equally in the community can help restrict noise levels and ensure that the process of enforcement is fair for all.

Pending Legislation

There is a bill pending in the Michigan House and Senate that would deprive townships of a significant amount of local control over STRs. HB 4503 and 2017 SB 329 would make STRs a “residential use of property and permitted in all residential zones.” Troublingly, this bill would be contrary to a significant number of Michigan cases which have concluded that STRs are commercial, rather than residential in nature. These bills would also exempt STRs from special or conditional use permit requirements different from those applicable to other dwellings, subject only to regulations on noise, advertising and traffic. Further, these bills define an STR as a “rental of 1-4 family house or dwelling unit for less than 28 days at a time.” If this bill were to pass, it would significantly impact the analysis that courts have used to uphold STR regulations and restrictions in Michigan communities.

STRs and their authorization should remain under local control as each community should be permitted to decide how STRs exist within their community.

Conclusion

STRs can be economic boons to the communities they are in. They can drive up property values, increase tourism, and ultimately result in increased revenue for the community. However, some local communities may find STRs disruptive to residential areas and generally undesirable due to many potentially negative side effects, which can occur if STRs are allowed to operate without local oversight and control.

Regulation is the key to community success where STRs are concerned. Before implementing any regulation, consider what kind of regulation you are trying to implement. Review your existing ordinances and consider whether existing definitions fit STRs. If not, it is important to expressly define what STRs are, under what circumstances they are allowed, and where they are allowed. Precise language and definitions at the drafting stage will help avoid ambiguity and ultimately costs, should litigation arise.  

 

By: Christopher S. Patterson and Jacob N. Witte

 

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Fahey Schultz Burzych Rhodes PLC, Your Township Attorneys, is a Michigan law firm specializing in the representation of Michigan townships. Our lawyers have more than 150 years of experience in township law and have represented more than 150 townships across the state of Michigan. This publication is intended for our clients and friends. This communication highlights specific areas of law and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.

 

Copyright © 2020 Fahey Schultz Burzych Rhodes PLC

 

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