August 12, 2014

The 4 Most Important Legal Considerations for Every Vacation Rental Home Owner

August 12, 2014

The 4 Most Important Legal Considerations for Every Vacation Rental Home Owner

Without a doubt we are embarking on a new journey into the short term and vacation rental marketplace that has left people both wealthier from the new cash flows and totally exposed from the variety of legal liabilities that lurk in just about every direction you look. This post will run through the 4 most important legal considerations that every vacation rental homeowner should be aware of.  And their guests too.  


1. Your Rental Agreement - The Most Important Clause: "Cancellation Clause"

I would be shocked and awed if there were ever, in this day and age, any home that was booked that was not attached to a rental agreement. Even a boilerplate one.  So let's assume that every person that books their home includes a rental agreement.  We should then look at the most important clause to ensure your rental agreement is protecting you.

The Cancellation Clause: When we say cancellation we don't only refer to the period leading up to the rental period in which the traveler may terminate the visit, but also the usually unaccounted for period during the stay. The "during-stay" period in which the traveler cancels. Why would a traveler cancel during their stay?  Here's some reasons we've seen just this summer: ant problem in master bedroom, no air conditioning, a broken pool heater and finally, the neighboring home with the barking dog and ongoing construction.  

So what do you need for your rental agreement?  A clearly laid out clause that walks the traveler through the protocol (and by protocol we mean return or non-return of the rental fee and/or deposit) and how that is treated.  You'll want to consider including language that addresses "acts of god" - or events beyond the control of the property or home owner.  Likewise you may also think about a clause that denotes the payment schedule in the event the traveler is forced to leave the property (broken water pipe) and how they will get their rental fee (prorated?) back (wire, check) and when (next day, 10 business days? e.g.). 

Finally, you should know that if you are collecting a 'security deposit' it is not allowed to be kept without just cause.  However, your rental agreement can easily incorporate language that expressly holds that a 'deposit' converts to a 'security deposit' at the time of final payment and that those funds may be retained in the event of a cancellation prior to arrival. Lastly, a progressive schedule based upon when the cancellation occurs may also make sense.   


2. Premises Liability (personal injury)

Premises liability is the liability of a homeowner for certain 'events' that take place on his property. The event that takes place is most commonly when someone slips and falls, or otherwise injures themselves (fall down stairs, e.g.), while on the premises of another.  The immediate legal consideration is, who is at fault.  In the event the injury occurred in the normal course of activity (walking, slip and falls e.g.) then the next question becomes what are the damages (economic) and then what is the method for covering/paying for those damages (insurance, out of pocket, e.g.).  

Laws covering premises liability focus a great deal on the status of the person on the property.  Were they an invitee? social guest? trespasser? licensee? 

If you are like many newbie homeowners to the vacation and short term rental market, you may think that you are covered under your homeowners policy, specifically the personal liability coverage clause.  Reality check: you are not.  Your homeowners policy (assuming there's not an addendum or rider to the policy) will not cover acts on the property that pertain to 'business activities'.  A home doubling as a 'hotel' most certainly will be viewed as a business and the homeowner policy will not cover the economic and non-economic damages of the aggrieved party, who is not a "person" but instead an "invitee" acting under the guise of "commercial activity".  Additionally, a personal umbrella policy will likewise not cover business activities on the premises.   

We have been advising our clients that engage us for consulting on such issues to obtain, at a minimum a $1,000,000 of liability coverage per occurrence.  If you require more coverage, then purchasing excess commercial liability insurance is an option. 


3. Damage Insurance (small face property damage)

The Damage Protection Policy:  

If you are collecting a security deposit prior to arrival, you are protecting your home but did you also know you're losing on out many reservations?  Why, you might be asking. The reason is simple - in today's competitive booking landscape, most homeowners are foregoing a cash/credit security deposit and opting to require travelers to utilize the independent third party damage protection policy promoted by CSA.  The policy, costing between $49 and $89 per policy (a one time fee, paid by the traveler direct to the insurer) can cover up to $5,000 in damage to the property. Please note, this does not cover personal injury as discussed above.  If you're renting out your home and you notice damage or missing items, a claim on this policy allows bypassing the legal ramifications of keeping a security deposit or charging a credit card.  

How efficient is this system?  We've filed 3 claims this summer on behalf of our clients (for amounts of $1123.35, $757.00, and $2994) and the longest period of time from when we filed the claim until our client received a reimbursement check: 24 days.   

But back to the security deposit vs. damage protection policy issue above, we would rightfully contradict ourselves by saying, people who do collect a security deposit tend to carry additional leverage against the safekeeping of the home.  For those guests paying the one time $89 damage protection fee, they have shifted the responsible paying party from themselves to their insurer (CSA).  You know, assuming something does go wrong on the property.  

Once the damage incurred has exceeded the limits on the policy - the homeowner is without further recourse against the carrier, and instead will have to reach to other means (credit card, personal liability, etc.) in order to recover the balance due. 


4. Transient Occupancy Tax

The transient occupancy tax ("TOT") is one of the hottest issues surrounding the short term and vacation rental industry right now.  Whether the TOT applies to your vacation home will depend on what region/locale/jurisdiction your property is located in.  The TOT is also known as the hotel tax and essentially is a tax that applies to all properties that are rented out for less than a term of one month.  The tax not only needs to be collected by the proprietor of the property, but also remitted on a specific and timely schedule.  

For properties in locales that do not permit short term occupancy (Coronado or Carlsbad, California, e.g.) there is no need to collect or remit the tax as it is deemed illegal to rent out your home for less than 30 days.  Therefore any guest stay past 30 days is not considered 'transient' and no tax applies.  If you do choose to let your home in violation of a local ordinance, be prepared for fines and penalties that can be many times the rental amount. Additionally, even if your locale does authorize less than 30 day stays, most condominium associations do not, as these tend to be regulated by the association, which very often have strict and clear restrictions on who can occupy the property. Rules may even go as far as to restrict whether children can stay overnight, whether pets can be on the premises, even whether the owner must be present at all times that anyone occupies the dwelling.  Other rental agreements may supercede a regions TOT requirement.  In San Francisco for example, a hornets nest of activity regarding this issue of late, is not only the less than 30 day requirements, but the actual language in a lease agreement which may prevent sub leasing.  In other words, even if your city approves short term rentals, if your rental agreement holds that such 'sub-leasing' is illegal, you may find yourself in a much worse position (eviction) than if you simply violated a local city ordinance.

Potential Hosts: To protect yourself, not only do you need to know your local city laws, but also pull up the rental agreement with your landlord and check it for sublease language. That clause will control your destiny.  

For Travelers: Ask the question directly of the host before signing your agreement: Do you have legal right to rent the apartment to me for the contracted dates?  In the event the host does not, you may find yourself locked out of the property as the crack down on these illegal sublets are taking the short term and vacation rental market by storm.


We have just covered the 4 most important legal considerations for any vacation rental home; the rental agreement and its cancellation clause, the premises liability (personal injury) issues and proper insurance, the damage protection policy (property injury) and the transient occupancy tax issues.  We believe these are the 4 most important legal issues surrounding the short term and vacation rental market and something that every vacation homeowner and in some cases guest needs to be aware of.  You must take all precautions before any of these issues become actual liabilities of you or your home. Please consider consulting with a firm that specializes in these various arenas so that you and your home are well protected.  

Tagged: vacation rental, vacation rental laws