Sharing Space by Ashley M. Peterson

Article Published in January 2017 edition of Los Angeles Lawyer Magazine

To counteract the impact on long-term rental availability various jurisdictions are restricting the ability of homeowners and tenants to offer short-term vacation rentals.

The concept of blindly renting a room, an apartment, or an entire house to a complete and utter stranger for a day, a week, a month or longer would have been unthinkable until several years ago. However, as the hospitality industry has evolved from traditional hotels and motels to home-sharing rentals, landlords, homeowners, communities, and local and state governments now face the issue of whether a tenant or owner has a right to engage in short-term rentals and, if so, how the duties and obligations associated with that right should be defined.
The evolution is reflected in the fact that “Airbnb’s global inventory grew from 3,000 units in February 2009 to 2.3 million units—houses, condos, apartments—in 2016….”1 In financial terms, Airbnb generated $340 million in revenue during the third quarter of 2015 based on bookings of $2.2 billion, and the number of nights booked that quarter increased from 11.3 million the previous year to 23.8 million.2 Given these circumstances, the legal issues associated with home-sharing rentals are hardly inconsequential.

Today, this innovative concept created not only by Airbnb, but also VRBO and Home Away (collectively, hosting platforms), enable property owners and tenants to offer their apartments or homes for rent on the hosting platforms for a sum and on terms described on their individual postings. Hosting platforms charge a fee on every booking arranged through their websites by acting as middlemen. No background checks are performed on hosts or guests who use the companies’ websites. Hosting platforms only require that a user provide a valid email, phone number, or active Facebook, Google, or LinkedIn account. Hosting platforms do not conduct in-home inspections to verify whether a home is safe or sanitary nor do they confirm that the host owns the property or has authority to rent it.

The latter presents an immediate legal issue with short-term rentals in which there is a landlord-tenant relationship. Since hosts are not required to be the actual property owner, tenants with a valid lease may sublease their units to hosting platform guests without the landlord’s consent or knowledge, provided there is no prohibition against assignment or sublease in their leases.

In 2015, the California legislature amend­ed the Business and Professions Code to en­sure tenants were aware of this requirement.3 The legislature adopted the term “hosting platform” to describe Internet websites like Airbnb that list properties available for transient occupancy.4 Hosting platforms must post a warning notice to tenants that they may be violating their lease by listing a unit on the website and that they could be evicted by the landlord for doing so.5

As hosts, tenants and property owners must also be cognizant that the rental of properties falls outside the scope of most renter and homeowner insurance policies. Since hosts do not generally have commercial liability insurance, they need to be concerned about coverage when accidents and property damage occur with guests. In late October 2015, Airbnb began offering host protection insurance, which provides hosts with commercial liability coverage in an amount up to $1,000,000 per occurrence per policy year for third-party claims for bodily injury or property damage arising during an Airbnb stay.6 This coverage is subject to a per-location limit of $1 million with an aggregate limit of $10 million; however, this coverage ex­cludes acts arising from of assault and battery, sexual abuse or molestation, loss of earnings, personal advertising injury, fungi or bacteria, Chinese drywall, communicable diseases, acts of terrorism, product liability, pollution, or asbestos, lead or silica.7 Home Away and VRBO do not yet provide commercial liability coverage for hosts using their websites.

Hosts must also be prepared to address situations in which guests overstay their booking period. Over 70 years ago, two California courts established criteria distinguishing between a lodger and a tenant;8 however, there is no case law addressing this issue in the
context of short-term rental guests. The factors identified by the courts in Roberts v. Casey and Edwards v. City of Los Angeles in­clude who has direct control over the premises; who is responsible for maintaining, cleaning and caring for the unit; who has the keys and a right of access; whether the unit is furnished; and whether rent is fixed regardless of the number of occupants.9

The Roberts court acknowledged that it can be difficult to ascertain whether an individual is a tenant or lodger in situations in which some or all of these criteria may apply. In Roberts, plaintiffs offered the defendant a fully furnished room for rent on a monthly basis. Plaintiffs retained the keys and right of access, and also maintained and cared for the unit, all of which suggested the defendant was a lodger. At the same time, however, each room had its own amenities and private right of access, the unit was rented for the month, and rent was fixed regardless of the number of occupants, which supported the proposition that the defendant was a tenant. The court determined that in weighing these criteria, the balance should be struck in favor of the defendant’s being classified as a lodger and not a tenant.10

The difficulties that the court in Roberts experienced in striking this balance apply equally to short-term rental guests. On the one hand, a host maintains and cleans the unit and fixes the fee regardless of the number of occupants. Conversely, a guest is given the keys and exclusive right of access, and rents the property for less than 30 days.

Given these competing circumstances, a question exists whether a guest who exclusively rents an entire property from a host for less than 30 days is a lodger or a tenant. A lodger is considered a mere licensee who is granted a nonexclusive right to use and occupy a portion of the premises while the owner maintains primary control and right of access like a hotel. Lodgers who stay for periods of less than 30 days are not generally afforded the same protections granted to tenants11 and are required to pay transient occupancy taxes.12 Thus, a short-term rental guest who rents a single room in an owner-occupied dwelling for less than 30 days would likely be considered a lodger under Civil Code Section 1946.5.

If a guest does not leave, the host would be within his or her rights to have the lodger arrested for trespassing under Penal Code Section 602.3, provided the lodger is given the required notice under Code of Civil Procedure Section 1162. However, it must be noted that Section 602.3 only applies in situations where a single guest rents a room in an owner-occupied dwelling. If there are multiple guests or the guest rents the entire unit, this right to oust a guest without notice would not apply.

In contrast to a lodger, a tenant has an exclusive right to possession of the premises for a specified term which is typically 30 days or more. Tenants generally pay rent and maintain the premises. A tenant has all the rights and protections granted under Civil Code Sections 1940 et seq. The host would likely be obligated to ensure that termination notices are properly served on the guest in accordance with the Civil Code even if there is no formal lease and the stay is less than 30 days. If a homeowner is forced to evict the guest, the hosting platform will not reimburse legal fees incurred by the homeowner or cover the loss of use during lengthy eviction proceedings.

Unless the legis­lature elects to enact a statute establishing a clear line between a lodger and tenant in short-term vacation rentals, the present circumstances may lead to inconsistent outcomes and create uncertainty as to what actions hosts must take to remove an unwanted person from their home.

Short-term vacation rentals present other significant issues for both local government and the legislature. A key issue is the conflict between the current lack of inventory of rental properties available for long-term tenants and how that shortage is exacerbated by the conversion of units into vacation rentals. Beach cities and major metropolitan areas like Los Angeles, Palm Springs, San Diego, and San Francisco are particularly desirable locations for these vacation rentals. Many property owners are now converting their long-term rentals into short-term ones because of the opportunity to earn greater fees from the latter. This is particularly true for homeowners who have high mortgage payments and who could use additional rental income to help cover their mortgages.

Cities are only now starting to realize the impact that home sharing is having on the availability of long-term rental properties and thus taking actions to counteract these unintended consequences. In San Francisco, owners of residential units that are subject to the Inclusionary Affordable Housing Program and units designated as below market rate or income restricted are not permitted to be used for short-term rental purposes.13 The Palm Springs Municipal Code expressly restricts multifamily property owners from evicting a tenant or breaking a lease to convert the property to vacation rentals.14

Regulation of the home sharing industry falls under the jurisdiction of each city and county. California cities have only gradually begun to update their municipal codes to restrict the ability of homeowners and tenants to offer short-term vacation rentals. In 2008, Palm Springs was one of the first cities to enact a Vacation Rental Ordinance,15 which regulates short-term rentals of 28 consecutive days or less.16 The Palm Springs ordinance requires an owner or tenant to register the property with the city, pay transient occupancy fees and taxes, obtain a valid business license, and provide a 24-hour call number in response to any neighbor complaint.17 To combat the housing crisis, Palm Springs expressly restricts owners of apartment complexes from evicting a tenant or breaking a lease in order to convert the property to vacation rentals.18 The city has realized millions in revenue annually from enforcement of these regulations.19

Within the last year or two, other major cities have begun to follow Palm Springs in enacting new restrictions on vacation rentals. Santa Monica, for example, adopted the Home-Sharing Ordinance, effective in June 2015.20 This ordinance distinguishes between two types of short-term rentals—home sharing and vacation rentals.21 “Home sharing” is defined as the rental of a room in a host’s home to a guest for a period of less than 30 days while the host remains in possession of the property.22 A “vacation rental” is defined as the exclusive rental of an entire residential property to a guest for periods of less than 30 days.23 Under the ordinance, home sharing is permitted but vacation rentals are not. Also, hosting platforms are held responsible if they allow hosts to list their properties on the website without complying with the city registration and tax requirements.24 Violations of this ordinance by hosts and hosting platforms can result in fines of up to $250 per occurrence, or a misdemeanor punishable by a fine of $500 or imprisonment of up to six months in jail.25 To enforce this ordinance, the City of Santa Monica requires the hosting platforms to regularly disclose each listing located in the city, the name and address of each host with a listing, the length of the stay, and the fee paid for each stay.26 Finally, neighbors may report any violations to the city code enforcement.

The New York state legislature also went on the offensive against Airbnb and other hosting platforms by restricting advertisements of dwelling units in Class A multiple dwelling units in New York City from being available for rent for less than 30 days.27 Under New York law, “[a] class A multiple dwelling unit shall only be used for permanent residence purposes.”28 Violations of this law carry a hefty penalty of up to $1,000 for the first violation, $5,000 for the second, and $7,500 for subsequent ones that can be imposed against the host and hosting platforms.29

Airbnb has taken two actions to respond to these legislative initiatives. The first is adopting a policy in San Francisco and New York named “One Host, One Home.”30 Ac­cording to Airbnb, it is removing listings of hosts who violate this requirement.31 Also, Airbnb has filed legal actions challenging the validity of the ordinances adopted by San Francisco, Santa Monica, and Ana­heim and the statute enacted by New York in federal courts.32 Airbnb alleges these laws violate the First and Four­teenth Amend­ments to the U.S. Consti­tution because they impose an impermissible content-based regulation on commercial speech and criminal liability without proof of mens rea.33 Airbnb claims that the cities cannot show that the ordinances are narrowly tailored to achieve a substantial governmental objective and that the ordinances impose civil and criminal penalties on hosting platforms for unlicensed listings without any requirement that those platforms have knowledge of the property’s status. Further, Airbnb argues that these ordinances violate the 1996 Com­munications Decency Act (CDA) by re­quiring Airbnb to monitor, review, and verify content associated with third-party rental advertisements and that by imposing criminal and civil liability on Airbnb to comply with the ordinance treats Airbnb as the publisher or speaker of third-party content.

U.S. District Court Judge James Donato for the Northern District of California denied Airbnb’s request for a preliminary injunction against the City and County of San Fran­cisco.34 Judge Donato rejected Airbnb’s argument under the CDA because he determined that the city’s ordinance merely regulates Airbnb’s conduct as a booking service and does not restrict what listings can or cannot be featured on its website.35 Thus, Airbnb was not being treat­ed as the publisher or the speaker of the content. The judge also disagreed with Airbnb’s First Amendment argument, holding that since Airbnb is not the speaker of the content, it is not being targeted for disparate or unfavorable treatment under the ordinance because enforcement is not limited solely to online platforms.36 The law was not enacted by a motivation to suppress speech but was intended to manage business transactions and practices.37 Nevetheless, Judge Donato noted that Airbnb raised a viable issue in oral argument that San Fran­cisco does not currently have a procedure in place for prompt and effective registration and verification of hosts.38 In response, the city and its Board of Supervisors are working to develop a registration system. Airbnb has indicated that it would comply with this system, including providing the names and addresses of hosts and information on guest stays.39

While this litigation is pending, the City of Los Angeles has ordinances pending to regulate short-term vacation rentals. Los Angeles zoning restrictions currently prohibit a homeowner from operating a “bed and breakfast”40 for a period of less than 30 days in most residential zones.41 This bed-and-breakfast restriction could arguably apply to homeowners engaged in short-term vacation rentals because the unit being rented likely contains a kitchen and no more than five guest rooms. In June 2016, the Los Angeles Planning Commission voted to ap­prove a proposed home-sharing ordinance that would amend Sections 12.03, 12.22, 12.24, 19.01 and 21.7.2 of the Los Angeles Municipal Code.42 The ordinance is currently pending a vote by the City Council.43

The proposed Los Angeles ordinance follows Santa Monica’s lead by allowing home-sharing for less than 30 days with certain restrictions but completely bans vacation rentals. Under the proposed law, home-sharing would be limited to a maximum of 120 days each year; require hosting platforms to disclose the host name, length of stay, and price paid for each booking; and completely disallow the use of residential apartments for short-term rentals.44 These new laws may help increase the number of properties that could be available for long-term tenants, as well as appease neighborhood groups who have strongly opposed vacation rentals in residential zones.

Finally, certain California cities are recognizing that significant financial benefits can accrue by enforcing and collecting transient occupancy taxes from hosts. Each city sets its own transient occupancy tax rate which can range from 10 to 15 percent. Historically, this tax has been imposed by hotels on their guests and is calculated based on guest booking fees. It applies to stays for less than 30 consecutive days and is required to be paid by the transient, including guests who book short-term rental properties.45 The host is ultimately responsible for payment of this tax to the city regardless of whether it is collected from the transient or not.46 Many Airbnb hosts neglect to pay these taxes and are now facing audits by the cities of San Diego and Palm Springs.47 Generally, a four-year statute of limitations is imposed on a city’s ability to collect unpaid transient occupancy taxes; however, this does not apply if a host has never paid these taxes.48 In those situations, a city can audit the homeowner for as many years as necessary to ac­count for and collect all unpaid taxes. Most municipal codes only require a homeowner to maintain records for a period of three years regarding payment of these taxes. However, if the homeowner is audited by the city, the burden is on the homeowner to refute the numbers proposed by the auditor, and without any records, that is difficult to accomplish. If there are no records, the auditor is permitted to estimate the number of rentals conducted over the period that the taxes were due and payable based on the current number of bookings for that particular host. Although it is the host’s responsibility to pay these taxes, Airbnb recently changed its policy so the company now automatically charges guests the tran­sient occupancy tax in the booking fee. Airbnb then remits the tax to the city on behalf of the host. This currently applies to several Cali­f­ornia cities, including Los Angeles, Mal­ibu, Santa Monica, San Diego, San Francisco, and Palm Desert.49

Hosting platforms have dramatically chang­ed how people think about travel by providing guests with the comforts of home at competitive prices. Hosts also benefit by having a new source of income. Although many positive effects exist from home sharing, homeowners, tenants, neighbors, hosting platforms, and local and state governments will need to work together to navigate the unanticipated consequences and legal ramifications of this relatively new service. While the initial response to home sharing by certain cities has been to enact more restrictive laws, the likelihood is that there will be an evolution within the next few years towards creating a more symbiotic relationship between each of these constituencies through the adoption of laws that balance their respective interests.

1 Tom Rogan, The Ridiculousness of New York’s Airbnb Ban, OL (Oct. 25, 2016), http://www.opportunitylives
.com.
2 Rolfe Winkler, Airbnb Raises over $100 million as it Touts Strong Growth, Wall St. J. (Nov. 20, 2015), available at http://www.wsj.com.
3 Bus. & Prof. Code §§22590, 22592, 22594.
4 Bus. & Prof. Code §22590.
5 Id.
6 Host Protection Insurance, https://www.airbnb.com /host-protection-insurance (last visited Nov. 25, 2016).
7 Id.
8 Roberts v. Casey, 36 Cal. App. 2d Supp. 767 (1939); Edwards v. City of Los Angeles, 48 Cal. App. 2d 62 (1941).
9 Roberts, 36 Cal. App. 2d Supp. at 772.
10 Id. at 773.
11 Civ. Code §1946.5
12 Rev. & Tax. Code §7280
13 City and County of San Francisco, Office of Short-Term Rental & FAQs, http://sf-planning.org/office
-short-term-rental-registry-faqs.
14 Palm Springs, Cal., Mun. Code §5.25.075.
15 Palm Springs, Cal., Mun. Code ch. 5.25.
16 Palm Springs, Cal., Mun. Code §5.25.40(a).
17 Palm Springs, Cal., Mun. Code §§5.25.40, 5.25.60.
18 Palm Springs, Cal., Mun. Code §5.25.075(c).
19 City of Palm Springs, Comprehensive Annual Financial Report, Fiscal year ended June 30, 2015, available at http://www.palmspringsca.gov/home
/showdocument?id=41136.
20 Santa Monica, Cal., Mun. Code ch. 6.20.
21 Santa Monica, Cal., Mun. Code §6.20.010.
22 Id.
23 Id.
24 Santa Monica, Cal., Mun. Code §6.20.030.
25 City of Santa Monica, Overview of the Home Sharing Ordinance, available at https://www.smgov.net (last visited Nov. 25, 2016).
26 Santa Monica, Cal., Mun. Code §6.20.050.
27 S. 6340-A, Jan.-June 2016 Leg. (N.Y. 2016) [hereinafter S-6340-A].
28 N.Y. Mult. Dwell. Law §4.8.
29 S-6340-A, supra note 27.
30 Airbnb v. San Francisco, No. 3:16-cv-03615-JD (N.D. Nov. 8, 2016) (order granting preliminary in­junction); see also Kia Kokalitcheva, Here’s How Airbnb Says It’s Curbing Illegal Hotels in San Francisco, Fortune (October 11, 2016), available at http://fortune.com.
31 Id.
32 The acting Anaheim City Attorney sent a letter to Airbnb stating that “it would not try to punish hosting sites….” Hugo Martin, Anaheim Won’t Fine Short-Term Rental Companies For Hosts’ Violations, L.A. Times (Aug. 22, 2016), available at http://www.latimes .com. Airbnb subsequently sent a letter to the U.S. District Court in Santa Ana stating that it was dropping its lawsuit against Anaheim. Id. Airbnb recently dropped the suit against New York City. See Katie Benner, Airbnb Ends Fight With New York City Over Fines, N.Y. Times (Dec. 3, 2016), available at http: //www
.nytimes.com.
33 Ivan Penn, Airbnb Sues Santa Monica Over Short-Term Rental Ban, L.A. Times (Sept. 2, 2016), available at http://www.latimes.com.
34 Airbnb, No. 3:16-cv-03615-JD.
35 Id. at 6.
36 Id. at 12.
37 Id.
38 Id. at 17.
39 Carolyn Said, Airbnb, Under The Gun, Is Ready To Cooperate With SF, S.F. Chronicle (Nov. 14, 2016), available at http://www.sfchronicle.com.
40 L.A., Cal., Mun. Code ch. I, art. 2, §12.03.
41 L.A., Cal., Mun. Code §§12.08, 12.21; Chen v. Kraft (2016) 243 Cal. App. 4th Supp. 13, at 21.
42 Emily Alpert Reyes, L.A. Takes Step Toward New Rules On Short-Term Rentals, L.A. Times (June 23, 2016), available at http://www.latimes.com. See also Los Angeles Department of City Planning Recom­mendation Report, available at http://planning.lacity
.org/ordinances/docs/HomeSharing/StaffRept.pdf.
43 Id.
44 Los Angeles Department of City Planning Recom­mend­ation Report, available at http://planning.lacity .org/ordinances/docs/HomeSharing/StaffRept.pdf.
45 Rev. & Tax. Code §7280.
46 L.A., Cal., Mun. Code ch. II, art. 1.7.
47 Information provided to author in client telephone conversations regarding being audited.
48Rev. & Tax. Code §7283.51
49 Airbnb Occupancy Tax Remittance Policy, available at https://www.airbnb.com/help/article/653/in-what
-areas-is-occupancy-tax-collection-and-remittance-by
-airbnb-available. (last visited on Nov. 25, 2016).

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