Consider the following facts: a couple owns a single-family waterfront residence on a private dead-end road. The lots on the road are subject to the following restrictive covenant (among others): “there shall be no commercial activity allowed on any of said lots.” They begin renting out the residence on a short-term basis, advertising the property as “Lake Point Lodge.” A listing for the Lake Point Lodge on the vacation rental website vrbo.com specifies it is available for minimum stays of two to seven nights, for a maximum of fifteen overnight guests. In one year alone, the couple rented the residence to over 170 people and received over $55,000.00 in rent. But the neighbors are not happy and sue the couple for injunctive relief, complaining that the short-term rental of the property violates the prohibition on commercial activity in the restrictive covenant. Does the restrictive covenant effectively prohibit short-term rentals?
No, according to the Wisconsin Court of Appeals in Forshee v. Neuschwander, No. 2016AP1608 (Wis. Ct. App. June 13, 2017) (recommended for publication). The decision reaffirms the long-standing rule that in order to be enforceable, property restrictions must be expressed in clear and unambiguous terms and that when the meaning of language in a restrictive covenant is doubtful, all doubt should be resolved in favor of the property owner’s free use.
The Court’s analysis focused on the term “commercial activity” and whether the covenant was susceptible to more than one reasonable interpretation. Because the term “commercial activity” was not defined in the restrictive covenant, the Court considered dictionary definitions to discern the ordinary meaning. Applying the dictionary definitions, the Court held that the restrictive covenant prohibits property owners from “engaging in activity on their lot that is concerned with the activity of buying and selling, or activity by which they make or intend to profit.”
The Court then concluded that reasonable minds could differ as to whether short-term rentals of property met this standard. On the one hand, the Court noted, the couple made money (and presumably a profit) by renting their home to others on a short-term basis. By selling the right to use the home, the couple engaged in the activity of buying and selling. On the other hand, the Court observed, the actual use of the property by short-term tenants was residential in character. Additionally, the Court found it significant that there was no evidence that the actual “activity” on the lot was anything other than residential: there was no evidence that any actual exchange of money occurred “on” the lot or any goods were purchased or sold “on” the property, quoting the covenant. Based on these considerations, the Court concluded that short-term rentals did not constitute commercial activity “on” the property.
Because reasonable minds could differ as to whether the restrictive covenant prohibits short-term rentals, the Court held the covenant was ambiguous. The Court then analyzed whether, despite the ambiguity, the intent of the restriction could be clearly ascertained to render the covenant enforceable. The Court rejected the contention that the intent was to ensure a quiet neighborhood where people would know their neighbors, finding that the other restrictive covenants did not support this intent. One covenant prohibited the erection of any dwelling with fewer than 1,000 square feet of living space and another limited subdivision of existing lots. The Court found that none of the restriction had any effect on whether lot owners know their neighbors.
Supported by cases from North Carolina and Oregon, the Court concluded that the covenant was ambiguous with respect to whether short-term rentals were prohibited. Because the restriction was ambiguous, it could not be enforced against the couple to prevent them from renting out their property on a short-term basis.
Forshee provides instructive guidance for drafting restrictive covenants. If you are looking to protect land, Stafford Rosenbaum LLP’s Real Estate Team can assist in drafting enforceable restrictive covenants and in evaluating the enforcement of such covenants if and when they are violated.