PRESS RELEASE
Predatory Arbitrage Leases: Don’t Be Blamed For Failed Business Endeavors of Arbitrage Lease Companies
By: Tyler Stine
Provident Law® recently delivered a huge win for a client that was sued by a commercial rental arbitrage company for alleged breach of the lease agreement.
Rental arbitrage companies lease properties from owners on a long-term basis and then sublease them to third parties, usually on a short-term basis. The idea is that this arrangement allows the owner to receive increased rents vs. a traditional long term lease, but avoid having to hire a property manager or handle all of the work and risk that comes with personally managing a short term rental property.
Sometimes these arrangements go poorly though. Provident Law’s client was solicited by one of these rental arbitrage companies to lease his property to then manage as a short-term rental. Provident Law’s client, seeing the potential for convenience, agreed to this arrangement.
Shortly after the arbitrage company began to operate its rentals on Provident Law’s client’s property, the Homeowners Association approached the owner notifying him that short-term rentals were not permitted under the community’s CC&Rs which were recently amended to restrict short term rentals. Seeing no applicable purpose to the lease agreement with the arbitrage company, the owner attempted to work with the arbitrage company to terminate the useless lease agreement.
Rather than being reasonable, the arbitrage company stopped paying rent to the owner but continued to conduct rentals on the property. This forced Provident Law’s client to retake possession of the property by changing the locks.
After that, the arbitrage company sued the property owner for violation of the Arizona Residential Landlord-Tenant Act (“ARLTA”), breach of the lease, and unjust enrichment.
In turn, Provident Law® attorneys Christopher Charles and Tyler Stine filed their Answer to the Complaint and then promptly filed their Motion for Summary Judgment arguing that ARLTA did not apply because the company’s use of the property was not “residential.” Indeed, under A.R.S. § 33-1308(4), the ARLTA does not apply to transient occupancy (short term rentals). Because the company was using the property for transient occupancy, these claims did not survive.
The company’s claim for breach of the lease agreement also failed because the contract (1) was for an illegal purpose of running short-term rentals in that community, and (2) both parties made a mistake as to the legality of short-term rentals on the property. Both an illegal purpose and a mutual mistake are ways a contract can become void even after execution.
The Court saw the merit in these arguments and granted Provident Law’s Motion for Summary Judgment. The judgment also awarded Provident Law’s client recovery of his attorneys’ fees and costs incurred in defending the futile suit brought from the company.
Arbitrage companies may seek to recover from their contract partners when an endeavor fails but they are not entitled to the same protections as a tenant in a residential dwelling. Such protections are for residents home life, not a vehicle for arbitrage companies to recover from a bad deal.
If you or someone you know has questions arbitrage leases, short term rentals, or any other real estate issue, call or email us today to schedule a consultation with Mr. Charles and Mr. Stine or one of our other real estate attorneys.
Christopher J. Charles is the Founder and Managing Partner of Provident Law ®. He is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS ® (the “AAR”). In 2017, Mr. Charles obtained one of the Top Ten Civil Verdicts for his client in a real estate dispute. Mr. Charles holds the AV ® Preeminent Rating by the Martindale-Hubbell Peer Review Ratings system which connotes the highest possible rating in both legal ability and ethical standards. He serves as an Arbitrator and Mediator for the AAR regarding real estate disputes; and he served on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions. Christopher regularly teaches continuing education classes at the Arizona School of Real Estate and Business, and he can be reached at Chris@ProvidentLawyers.com or at 480-388-3343.
Tyler S. Stine is an Associate Attorney at Provident Law®. He is a graduate of the University of Arizona James E. Rogers College of Law where he served as the Senior Articles Editor for the Arizona Journal of International and Comparative Law and a Student Editor of the Journal of Appellate Practice and Process. He formerly served as a judicial law clerk to Hon. Jennifer M. Perkins on the Arizona Court of Appeals, Division One. Today, Tyler’s practice focuses on real estate and commercial litigation matters. Tyler can be reached at Tyler.Stine@ProvidentLawyers.com or at 480-388-3343.