A group of property owners entered into a restrictive covenant for a new subdivision that was created on a lake in the City of Hayward, Wisconsin in 1982. Among other things, the covenant prohibited “commercial activity" within the subdivision. In 2015, a new owner began operating one of the properties in the subdivision as a short-term rental, advertising in print and electronic media as a “lodge". This owner purchased the property under an IRS 1031 tax exchange (meaning it must be used for business or active investment purposes). In the first year of use, the property was rented to more than 170 individuals and the owner garnered more than $55,000. Other owners in the subdivision sought an injunction to prohibit these rentals on the grounds that they were “commercial activity."
The circuit court concurred with the Plaintiffs and enjoined the new owner from using his property for short-term rentals. The owner appealed, and the court of appeal reversed the decision, finding that reasonable minds could differ as to whether short-term rentals constituted “commercial activity" because renters used the property for “ordinary living purposes" and because the sales took place online, not on the property itself. Therefore, according to the Court of Appeals, the restrictive covenant was ambiguous and could not be used to enjoin this activity. The original plaintiffs sought a writ of certiorari from the Wisconsin Supreme Court, and the writ was granted on October 10, 2017.
Many legislatures, including in the State of Wisconsin, are overriding local zoning control over short-term rentals. The Wisconsin Legislature just passed a new law prohibiting municipalities from disallowing certain short-term rentals under zoning codes. This means that it is even more important that courts recognize the right of property owners to freely enter into restrictive covenants or association agreements that limit or prohibit such rentals. Many policymakers are viewing the matter of short-term rentals as a homeowner rights issue, which it is. But allowing neighbors to contract to disallow this activity is likewise a home owner's right.
If the court of appeals decision stands, then many agreements that were written long before the advent of AirBNB and other such services may be read to not prohibit online rentals of residential property. The Court of Appeals essentially decided that since the restrictive covenant at issue didn't specifically talk about short-term rentals that were arranged online, it was inapplicable and such rentals were allowed. This defeats the purpose of this restrictive covenant and allowing this interpretation to stand means that many other such covenants and association documents can be rendered pointless.
Given the advent of the “gig economy" and the explosion of short-term rental of residential real estate, this issue has national importance. Further, since the Supreme Court of Wisconsin is taking up the case, this court's decision will be looked upon as persuasive precedent for courts throughout the country.
The decisions of both the circuit court and the Court of Appeals are attached. Also attached is a document containing relevant court cases, both from within Wisconsin and nationwide. There are no association documents, and the Restrictive Covenant language is contained within the decisions of both lower courts.
Amicus Brief
Prior Rulings:
Brief Author:
CAI Amicus Review Committee: Robert Diamond, Esq. (VA), Chair of Amicus Committee, Jennifer Loheac, Esq. (GA), Jim Strichartz, Esq. (WA), Laurie Poole, Esq. (CA).