Mountain Law: Colorado HOAs can now restrict short-term rentals (column)
January 20, 2016
Can HOAs restrict short-term rentals? Until the Colorado Court of Appeals addressed the issue last year, in a case called Houston v. Wilson Mesa Ranch Homeowners Ass'n, Inc., there were no Colorado decisions directly on this subject. Houston involved an HOA in San Miguel County whose restrictive covenants stated that properties within the subdivision had to be used for residential purposes and could not be used for commercial purposes. The HOA's executive board adopted a rule interpreting these covenants to the effect that they banned short-term rentals, and the court ultimately struck down the rule. As explained below, Houston confirmed three of my previous conclusions about the law in this area while raising questions about another.
To begin with, I have concluded that covenants allowing residential use only do not prevent owners from renting out their units because such uses are residential in nature. I based this conclusion in part on a Colorado Supreme Court decision called Double D Manor, Inc. v. Evergreen Meadows Homeowners' Ass'n, which held that a group home for developmentally-challenged children did not violate a residential use only covenant. Houston cited Double D Manor and confirmed that covenants allowing residential use only do not restrict short-term rentals.
I have also concluded that covenants disallowing commercial use do not prevent owners from renting out their units because such uses are not commercial in nature even though money changes hands. On this topic, there were no Colorado cases before Houston, but there were numerous cases from other jurisdictions that supported my conclusion. Houston cited some of those cases in confirming that covenants restricting commercial use do not prevent short-term rentals.
I have further concluded that rentals can be restricted through an appropriate amendment of the covenants — no matter what the covenants previously stated. I based this conclusion largely on a case called Good v. Bear Canyon Ranch Ass'n. In Good, the covenants initially allowed accessory apartments, and a number of owners built accessory apartments in reliance on those covenants. Then the owners amended the covenants to ban accessory apartments, and one owner, Mr. Good, challenged the amendment in court. The Colorado Court of Appeals ultimately held that the amendment was valid because the covenants said that they could be amended by an appropriate vote of the owners, so Mr. Good knew what he was getting into when he bought his property subject to the covenants. Houston cited Good and confirmed that a covenant banning short-term rentals likely would have been successful in lieu of the rule that was at issue.
That brings us to the part of Houston that is a problem (pun intended). Houston stated that amending the covenants was the only way for the HOA to accomplish the objective of banning short-term rentals in light of the existing covenants. This part of the decision seems to contradict the general principle that HOAs' executive boards can adopt rules that are more restrictive than the covenants provided that they do not contradict the covenants. In Houston, the covenants did not disallow short-term rentals for the reasons given above, but they also did not specifically allow short-term rentals such that a rule banning short-term rentals would contradict them. Therefore, the HOA should have been able to restrict short-term rentals by an appropriate rule.
In sum, Houston confirmed three of my previous conclusions in this area, but I disagree with Houston to the extent it held that the HOA could not restrict short-term rentals by appropriate rule. In any event, it has always been the case for various reasons that restricting rentals by amendment of the covenants is less subject to legal challenge than doing the same by rule. That is especially true now in light of Houston.
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Noah Klug is owner of The Klug Law Firm, LLC, in Summit County. He may be reached at (970) 468-4953 or Noah@TheKlugLawFirm.com.
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