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Apr 2015
09
April 09, 2015

Legal Cloud Looms Over Michigan's Vacation Rental Industry


A growing number of states are protecting the rights of homeowners to rent out their homes as vacation rentals, but Michigan’s legal stance on the issue threatens the summer vacation rental market.

State courts in Maryland and Alabama have been the latest to rule that renting a residence as a vacation rental is not a commercial use of property. Those rulings are in stark contrast to a 2010 Michigan Court of Appeals ruling, which deemed vacation rentals a commercial use that could be banned via common deed restrictions.

The Michigan Court of Appeals ruling cast a legal cloud over the summer vacation rental market in Michigan, which is significant, especially in western and northern Michigan. Under that ruling, the vacation rental market is at risk of being shut down under a broad characterization of the term “commercial use.”

The Michigan Court of Appeals ruling stemmed from a dispute between cottage owners Thomas and Jeannie Schilling and a neighborhood association. Like many cottage owners, the Schillings entered into an agreement with a rental agency and occasionally rented their summer cottage to vacationers for periods of a week or less.

A neighborhood association called the Enchanted Forest Property Owners sought to end the Schillings’ use of their cottage as a vacation rental. The association argued that renting to vacationers was a commercial use, which the group claimed was in direct violation of a deed restriction that prohibited commercial uses in the cottage neighborhood. On these grounds, the association filed suit to enjoin the Schillings from renting their cottage.

In 2010, the Michigan Court of Appeals decided against the Schillings because it believed that renting a summer cottage as a vacation home violated a deed restriction that prohibits “commercial” use. The court reasoned that including vacation rentals within the ambit of a commercial purpose restriction was bolstered by the “clear intent” of the drafters of the deed to restrict the use of the property to private residential use. Private residential use, the court concluded, did not include private residential use by renters.

The Michigan Supreme Court had previously considered restrictions similar to those in the Schilling case in the context of commercial use, and had prohibited activities that most would consider to be more typically “commercial,” such as daycare operations and operating a convalescent home. Those cases involved the operation of actual businesses in a residential area, not the mere renting of residential properties by individuals to vacationers.

Further highlighting the peculiar nature of the Schilling ruling was a recent case in Alabama, in which the court refused to follow the Schilling decision. The Alabama court faced a similar question involving cabin owners whose property was subject to a deed restriction prohibiting commercial uses. Unlike the Michigan Court of Appeals, the Alabama court found that renting to vacationers was not a commercial use. The Alabama court focused its reasoning on the character of the use by the vacationers and found that the vacationers used the cabins in the same manner as other residents.

The Alabama court noted that “[t]he income the [owners] derive from the rental of the property derives solely from the use of the property in the same manner as the other landowners in this subdivision use their properties. The fact that the [owners] receive rental income does not transform the character of the subdivision.”

Consistent with the Alabama court’s reasoning and focus on the use of the property, the Maryland Court of Appeals likened renting property to similar arrangements that certainly do not violate commercial use restrictions. The Maryland court ruling articulated that argument, saying:
 
The owner’s receipt of rental income in no way detracts from the use of the properties as residences by the tenants. There are many residential uses of property which also provide a commercial benefit to certain persons. Both in Maryland and in a great majority of states, over 30 percent of homes are rented rather than owned by families residing therein, thus providing much rental income to landlords. In addition to conventional rentals, a commercial benefit may be realized from residential property by persons or entities holding ground rents, mortgages, or deeds of trust. When property is used for a residence, there is simply no tension between such use and a commercial benefit accruing to someone else.

If you, like many Michiganders, rent your vacation home from time to time, you should investigate the potential effect that deed restrictions may have on your right to continue using your property as a vacation rental.

Please contact Brian Lang (616.752.2612 or blang@wnj.com), Matt Nelson (616.752.2539 or mnelson@wnj.com), Anissa Hudy (248.784.5133 or ahudy@wnj.com) or Patrick Tully (248.784.5064 ptully@wnj.com) for more information on this issue.

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