By Charles P. Castellon, Esq.
© 2018, All Rights Reserved.
The law has always struggled to keep up with technology. Back in the 70’s, the legal system was not ready to address issues stemming “test tube” babies and currently, there are some gray areas involving digital assets in estate planning. [see our prior article here]. In the still-young internet age, it will continue to be difficult for the legal system to keep up. An interesting example in the real estate world relates to tenants’ use of Airbnb to earn money from their properties.
Airbnb is a wildly successful web-based company that matches visitors seeking to rent a room with lodging providers. What Uber is to the taxi industry, Airbnb is to hotels. Recently, a New York judge ruled to evict a tenant in a rent-controlled apartment for using Airbnb to rent three of the sprawling apartment’s four bedrooms to guests. The tenant earned an astounding $61,000 in nine months of rental activity.
The judge ruled this subleasing violated the lease and New York’s and rent-controlled housing laws. Though there are unique facts to this case and New York landlord-tenant laws are very different than Florida’s, all Florida real estate investors should carefully consider how the Airbnb revolution may affect them.
Perhaps the first and most important issue Florida landlords should consider is liability. The constant “revolving door of strangers” that alarmed the New York tenant’s neighbors should be a real concern to Florida property owners. As title owner to the home, the landlord is likely to be held liable in court for any harm an Airbnb guest may commit while using the property. If a guest renting one room were to sexually assault a guest in another room, it is a near certainty the victim would sue everyone–the owner, tenant and perpetrator and try to collect damages against any or all. Which one is most likely to have assets the victim could pursue?
A similar liability concern involves an injury to the Airbnb guest in the property. Though it’s not advisable, some investor owners don’t carry hazard insurance on their free and clear properties and instead suggest or require the tenant to get a renter’s policy. If the owner does have insurance, the next risk is whether the carrier may deny coverage based on the “commercial” use of the home effectively being operated as a hotel, or deny the claim for some other reason.
Fortunately, in our market economy, every problem leads to an opportunity for profit by solving it. The “sharing” economy has spawned insurance pools to cover this new category of risk.
The next question is whether the landlord wants to allow the tenant to make money off the property. Some owners may not mind and would feel more secure about collecting the rent if the tenant has an additional income source. Others may demand a piece of the action if there is extra income to be earned. Most landlords would likely be swayed by the liability concerns and as a result, try to prevent the sub-leasing.
A landlord may draft a lease clearly prohibiting using the property as a hotel with heavy penalties, but enforcement may be difficult. Periodically monitoring Arbnb for listings of the investor’s properties may be one answer, but other sites are likely to arise in the wake of Airbnb’s success, just as Lyft came along to compete with Uber for passengers. With time being the most scares resource for most investors, trying to root out such rentals (that may never occur) on all potential platforms cannot be considered a wise investment.
The best solution to this potential problem is a well-written lease with a heavy hammer of penalties for violations for landlords who don’t want their properties used as hotels. For landlords who don’t object or want to participate in the money-making opportunity, a different lease can be written.
No matter what, the tenant should sing an air-tight indemnification agreement in favor of the landlord. This means the tenant would fully cover the landlord in the event of a claim. Of course, most tenants will not have the money to protect the landlord, so insurance coverage will be essential.
The first step for landlords is to be aware of developments in our society such as Airbnb and how it affects them. The next is to make a well-considered strategic plan to contain the risk of this web-based platform and either prevent its use or share in the profits.