The Valley will be the entertainment hub of the world in January/February 2015. Phoenix will host not only the Super Bowl, but also the NFL Pro Bowl, the Waste Management Phoenix Open, the Fiesta Bowl, and the Barrett Jackson Collector Car Auction. Short-term rentals are already in high demand and many people have already rented their homes and investment properties for January and February of next year.
Short-term rentals trigger unusual legal issues. For example, what law governs the rental agreement? What happens if the guest doesn’t pay or fails to leave by the agreed-upon date? Are vacation rentals authorized in Maricopa County? Can HOAs prohibit vacation rentals? This article answers each of the above questions.
Are Vacation Rentals Legal in your neighborhood?
Short-term rentals, also known as “transient lodging” or “vacation rentals, are outlawed in some neighborhoods. They can be prohibited in three ways: (1) county zoning ordinances; (2) city zoning ordinances; or (3) deed restrictions (CC&Rs). Good news for investors: short-term rentals are authorized in the vast majority of neighborhoods in Maricopa County.
Short-term rentals are legal in Maricopa County. Similarly, short-term rentals are lawful in most cities within Maricopa County, including, but not limited to, Phoenix, Tempe, Scottsdale, and Glendale. Thus, as long as the rental property is located in one of these cities, it may be utilized as a vacation rental as long as it’s not located in a planned community that prohibits vacation rentals.
Most planned communities contain CC&Rs that authorize rental properties. And most CC&Rs don’t distinguish between long-term rentals and short-term rentals – instead, most CC&Rs simply limit the properties’ use for “single-family use.” In an unreported decision, the Arizona Court of Appeals confirmed that short-term rentals qualify as “single-family residential use.” In Horton v. Hartsook, a group of homeowners in the Rainbow Cove community in Payson, Arizona attempted to prevent their neighbors from utilizing their properties as vacation rentals. The Rainbow Cove CC&Rs didn’t expressly prohibit vacation rentals, but the CC&Rs limited the properties’ use to “single-family residential use.” The vacation rental naysayers argued that vacation rentals don’t qualify as residential use. The Arizona Court of Appeals disagreed. The Court ruled that the duration of the occupancy is irrelevant and that the CC&Rs authorize rentals regardless of the duration of stay. See Horton v. Hartsook, 2009 WL 2244503 (App. 2009).
The take-away from Horton is that HOAs probably can’t prohibit vacation rentals unless the CC&Rs expressly prohibit “vacation rentals, short-term rentals, or transient lodging.” Most CC&Rs aren’t so restrictive to flat-out prohibit vacation rentals, but at least one community in Glendale expressly precludes vacation rentals and many communities in Sun City forbid short-term rentals. As a result, owners are advised to carefully review their CC&Rs before placing an ad on VRBO®.
The Arizona Residential Landlord Tenant Acts vs. The Inn Keeper Statutes
The Arizona Residential Landlord Tenant Act (LLTA) provides tenants with significant rights and protections. For example, the LLTA limits security deposits to 1.5 times the monthly rent amount and the landlord can’t require the tenant to repay the rent. Also, the LLTA requires that if the tenant breaches the lease for non-payment or other violations, the landlord must first provide the tenant with written notice before any breach may occur. And perhaps most important, if the LLTA applies, then the landlord must file a judicial eviction action to remove the tenant in the event of holdover or non-payment.
None of the above protections make much sense in short-term rental situations. As a result, owners who rent their properties for abbreviated terms should aim to avoid the LLTA. Fortunately, “transient lodging” is exempted from the LLTA. According to A.R.S. §42-5070(F), “transient” means any person who either at the person’s own expense or at the expense of another obtains lodging space or the use of lodging space on a daily or weekly basis, or any other basis for less than thirty consecutive days.” (Emphasis added). Therefore, those seeking to avoid the LLTA’s application should limit the rental term for under 30 days.
As long as the rental term is less than 30 days, the rental agreement should be governed by Arizona’s Inn Keeper statutes A.R.S. § 33-301, et seq. Notably, according to the Inn Keeper statutes, the landlord may non-judicially reenter and take possession in the event of a hold over or breach of the rental agreement.
Property owners seeking to avoid the LLTA should probably avoid using the AAR Residential Rental Agreement. Instead, owners should use a custom, short-term rental agreement that expressly provides that the agreement is governed by the Inn Keeper statutes and not the LLTA. The short-term rental agreement should also provide that the rental term shall not exceed 29 days. Further, the rental agreement should provide that the owner has the right to perform a non-judicial lockout if the renter breaches the agreement or holds over. And finally, the rental agreement should advise the renters that they are to comply with all local ordinances and laws, including any HOA rules and regulations and CC&Rs.
The Valley’s vacation rental market is heating up. Vacation rentals can be lucrative: single family homes in the Valley are renting anywhere from $500 to $15,000 per week. But before entering the vacation rental market, owners should consider two things. First, whether vacation rentals are lawful in the area; and second, whether their goal is to be a “landlord” under the LLTA or an “inn keeper” under Arizona’s Inn Keeper statutes. Owners who take the time to process these issues will thank themselves later.
If you or someone you know has questions about vacation rentals, call or email Mr. Charles today. This article does not address tax implications of short-term rentals.  For the purpose of this article, “short-term rental” is defined as residential rentals for less than 30 days.  Since the Super Bowl will be hosted in Glendale, Arizona, this article focuses on Maricopa County.