Peer-to-peer rental networking sites, such as Airbnb and VRBO, provide homeowners with the tools with which to rent out all or part of their properties on a short-term basis. Homeowners may wish to rent out their properties occasionally in order to supplement their income, or they may have purchased the property entirely for income purposes. On its face, this seems like a simple way for a homeowner to make additional income. Only it is not that simple.
Although there is an almost infinite variety of types of rentals facilitated by peer-to-peer rental sites (rooms, apartments within homes, entire homes, condominium units, cottages, camping spaces, parking units, etc.), at the core of the matter is the fact that the homeowner/host is changing the nature and use of a property from purely residential to mixed use residential/commercial. As a mixed use property, there are regulations with which the host and property may need to comply. For instance, if rented, the property may no longer comply with municipal zoning by-laws, building codes, condominium declarations, by-laws and rules, terms and conditions of insurance policies, taxation rules, or with the law governing hotels or rooming houses. The recent proliferation of peer-to-peer rental sites (and pressure created by the interest groups wanting to either expand or ban this kind of activity) has left municipalities, governmental agencies and condominium corporations scrambling to properly regulate this hybrid mixed property use. As part of the new sharing economy, these issues are only going to increase in importance.
So what should you do if clients inform you that they intend to list their property on a peer-to-peer rental site? Clients may be factoring short-term rental income into their decisions about purchasing properties, and may seek your legal opinion with respect to this. Some clients may be purchasing a property with the sole intention of earning income from it by renting it out on a short-term basis. If asked for a legal opinion with respect to the ability of a client to rent out his or her dwelling for short-term rental, a lawyer can only explain the various implications and areas of concern, and advise the client that the rules may change in the future.
The first and most overriding concern is that of zoning. Properties are often zoned for residential use only, and short-term rental can be considered a commercial use. Each municipality may attempt to deal with this in its own way. For example, Collingwood, Ontario, a popular place for residents, seasonal residents, and tourists, has revised its zoning by-laws to permit short-term rentals in certain areas of the town, and to ban them entirely in other areas. In other municipalities, if the use can be classified as a “rooming house,” the municipality may require the property to undergo inspection and obtain licences in order to operate. This may include compliance with applicable fire code and electrical safety regulations. Finally, simply advising a client as to the current permitted uses under the zoning may not be sufficient. If a property is residential, but occasionally used for short-term rental, it is debatable as to whether or not such use would qualify as legal non-conforming if the zoning changes. The client should be advised that, even if it is not forbidden now, short-term rental of the property may be prohibited by future zoning changes.
Condominium corporations regulate their buildings and communities with declarations, rules, and regulations. Some condominiums may be specifically set up for short-term rentals, including rental management and rental pooling agreements. Purchasers are made aware of this fact, and in many cases it is a selling point. These condominiums must have the appropriate facilities, submit to municipal inspection, and maintain insurance as required by law.
Most residential condominiums, however, are structured for long term residents. There may be restrictions on the number of units which can be leased out, and the terms under which they can be leased. In Ontario, section 83 of the Condominium Act requires unit owners to notify the condominium corporation within 30 days of entering into a lease. Many newer condominium corporations specifically prohibit short-term rentals in the declarations. Older condominium corporations’ declarations often restrict the use of units to those permitted by municipal by-law. The condominium corporation, which is owned by the unit owners, has a vested interest in enforcing these rules. Aside from maintaining the residential character of the condominium, pursuant to the Ontario Occupiers’ Liability Act, any damage or liability associated with the common elements could fall upon the corporation if it does not adequately enforce the rules against short-term rentals. This could result in increases to common expenses and/or special assessment levies against the individual units.
Clients considering renting out their dwellings for short-term rental income must also consider the tax implications. The taxation of residential dwellings is vastly different from the taxation of commercial properties. As we move towards a greater sharing economy, the government will want to maintain its tax revenue from this new hospitality industry. This will likely be felt at several levels. Property tax rates are different for commercial versus residential properties. At what point does the short-term leasing of a property mandate the commercial property tax rate? As a provider of services, HST may be applicable, and remittance required. Short-term rental income may be taxable income for personal income tax purposes. Finally, at some point the use of a property for short-term rental could have an impact upon the capital gains tax exemption status for the definition of “primary residence” when a property is sold.
Clients must also be advised about considering their insurance coverage. A residential homeowners’ insurance policy covers far fewer risks for a lower premium than a commercial policy. Residential and commercial title insurance policies may also contain different coverages. Some of the peer-to-peer rental networking sites provide hosts with an additional level of insurance, but is this adequate and something on which the host can rely? Governments and regulatory agencies may soon require that host homeowners obtain and maintain a higher level of insurance coverage.
The sharing economy is not going away. Given the rapid proliferation of peer-to-peer sites and usage, there is an obvious demand. Those wishing to enter into the peer-to-peer rental market must be made aware that they may be changing the legal use of the property from residential to mixed use commercial, and should be prepared to deal with the consequences. When advising clients wishing to enter into the peer-to-peer rental market, lawyers should make them aware of the issues and potential implications outlined above, while carefully documenting all advice and discussions.
By D. Bruce Heakes, Underwriting Counsel at LAWPRO