The North Carolina Court of Appeals waded into territory that has become increasingly challenging for developers and homeowners' associations (HOAs) to navigate: the regulation of short-term rentals.

In an opinion released August 6, the court affirmed a trial court’s ruling that an amendment by an Asheville, NC-area HOA that banned short-term rentals was unreasonable and, therefore, unenforceable.

The covenants, conditions, and restrictions (CC&Rs) governing the neighborhood originally recorded in 1992 were silent on short-term rentals, as they pre-dated modern short-term rental business platforms. In June 2019, the plaintiffs, who were homeowners in the neighborhood, began renting their residences. A few months later, the HOA, following the proper procedures, passed an amendment stating that any rental lease term could not be shorter than 90 days or, in some cases, 30 days. The HOA held a hearing several months later and determined that the plaintiffs were in violation of the new amendment. The plaintiffs filed suit and a trial court found the amendment to be "unreasonable, invalid, unenforceable, and with no binding effect" on the plaintiffs or their properties.

The HOA argued on appeal that the original CC&Rs included language that barred a "commercial, business, or trade venture" and was intended to prohibit short-term rentals. The HOA further argued that a prohibition on short-term rentals "is compatible with the nature and character of the subdivision, a quiet residential neighborhood with large lots, exclusive for single-family homes."

Whenever a covenant amendment approved by the proper procedure is challenged, the revision is presumed to be valid and enforceable. The challenging party must show that the amendment is unreasonable, the Court of Appeals explained in its recent opinion. It cited previous case law that strictly construes restrictive covenants, with ambiguities to be resolved in favor of unrestricted use of land. The court further explained that an amendment "should not exceed the purpose of the original declaration." The Asheville-area HOA’s original CC&Rs expressly provided for the development of single-family homes for residential use and did not restrict or regulate the rental of those single-family homes. Therefore, the court held that the amendment purporting to restrict short-term rentals was unreasonable.

The use of short-term rentals in communities across North Carolina has increased dramatically in recent years, so regulation will continue to be an issue. The August 6 opinion does not prohibit regulation of short-term rentals if the restrictions are included in the original CC&Rs recorded at the time of initial development. However, if a rental restriction is not included in the original CC&Rs, then any attempt to later create such a restriction may face a strong challenge on the grounds that it is unreasonable.

Going forward, developers and HOAs should consider the reasonableness standard for CC&Rs. Developers should draft the original CC&Rs to provide for flexibility for amendments on key issues, particularly where changes are foreseeable. Any amendments should be drafted in a way that makes them more likely to be interpreted as reasonable by a court.

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