The Valley of the Sun and Tucson are increasingly attractive to snow birds who fall in love with our fall and winter weather. Around the State seasonal attractions for sporting, recreation and special events abound. The combination of awesome weather and activities makes for a vibrant short-term leasing industry.
The vacation rental industry has exploded over the past few years. However, in Arizona, there is much misunderstanding regarding the legal restrictions and extent to which individuals can engage in the practice of vacation (short-term) rental/leasing and management. This article is a rewrite of an article I first authored in 2015.
This short-term leasing activity falls into three legal categories:
1. Licensed Leasing & Property Management
2. Owner Vacation Rentals/Transient Lodging
3. Short-Term Unlicensed Leasing Exemption (the main subject of this article)
“Licensed” Leasing & Property Management
Although vacation rental activity constitutes only a minor portion of overall licensed leasing and property management in Arizona, most vacation rental activity is conducted through licensed brokerages. This short-term leasing, as conducted by real estate licensees or homeowners, falls primarily under the transient/innkeeper statutes.
Owner Vacation Rentals and Transient Lodging
Vacation rentals for transient lodging less than 30 consecutive days in length are exempt from the requirements of the Arizona Residential Landlord Tenant Act (“ARLTA”) A.R.S. See §§33-1308 and 42-5070. Consequently, owners arguably have much greater drafting flexibility and latitude under the transient occupancy exemption, and more robust owner protections than provided under ARTLA.
The Short-Term Unlicensed Leasing License Exemption
This article addresses Short-Term Unlicensed Leasing. Specifically, it addresses how a person without an active real estate license may legally conduct short-term leasing of residential real property on behalf of others. The unlicensed “31-Day Rental Representative” is almost exclusively involved in what we call “vacation leasing.” The legal authority to conduct this restricted leasing activity on behalf of owners is found in the real estate licensing exemption statute:
§ 32–2121. Applicability of article; exemption
A. The provisions of this article do not apply to:
15. A person who, on behalf of another, solicits, arranges or accepts reservation or money, or both, for occupancies of thirty-one or fewer days in a dwelling unit in a common interest development. [original language].
15. A person who, on behalf of another, solicits, arranges or accepts reservation or monies, or both, for occupancies of thirty-one or fewer days. [revised language effective 8-30-19].
Like most licensing exemptions, this exemption should be considered carefully, as much by what it doesn’t say, as by what it does say. The exemption language clearly implies that an unlicensed person is authorized to conduct short-term leasing through the advertising, transacting and handling of monies in connection with the short-term leasing. As a license exemption, when legally practiced, this activity falls outside the jurisdiction of the Department of Real Estate (“ADRE”) and is not subject to regulation.
As introduced above, a short-term or vacation lease in Arizona, also called transient lodging, cannot exceed 29 consecutive days. Any rental term greater than 29 days falls under ARLTA, the requirements of which differ radically from the transient/innkeeper leasing requirements. Further, although the 31-day Rental Representative exemption permits an extra two days for a person to act in an unlicensed capacity, any vacation rental activity for a term of 30 or 31 days must be transacted pursuant to the ARLTA. This incongruity may create confusion, but it is harmless if one can limit the lease term to 29 days.
This real estate licensing exemption was added to statute in 1997. At that time, unlicensed rental marketing in Arizona on behalf of Rocky Point (Puerto Penasco) property owners was widespread (and still is). The ADRE decided to deregulate this activity in a practical way by exempting from regulation the representation of rental property owners under certain circumstances. Thus, the 31-day Rental Rep exemption was enacted into law.
This license exemption was modeled after California’s exemption in Section
10131.01 of the Business and Professions Code, which reads in pertinent part:
10131.01. (a) Subdivision (b) of Section 10131 does not apply to… (2) any person or entity, including a person employed by a real estate broker, who, on behalf of another or others, solicits or arranges, or accepts reservations or money, or both, for transient occupancies described in paragraphs (1) and (2) of subdivision (b) of Section 1940 of the Civil Code, in a dwelling unit in a common interest development, as defined in Section 4100 of the Civil Code, in a dwelling
unit in an apartment building or complex, or in a single-family home….
Definition of “Common Interest Development”
Because Arizona law lacks a definition for “common interest development,” other
definitions are helpful.
1. California Civil Code §4100 defines a common interest development as:
(a) A community apartment project (AKA “own-your-owns”).
(b) A condominium project.
(c) A planned development.
(d) A stock cooperative (AKA “co-op”).
2. A clearer definition, better facilitating discussion of the 31-Day Rental Rep exemption, is found in Nolo’s Plain-English Law Dictionary:
A type of housing, composed of individually owned units, such as condominiums, townhouses, or single-family homes, that share ownership of common areas, such as swimming pools, landscaping, and parking. Common interest developments (AKA “community interest developments” or “CIDs”) are managed by homeowners associations.
HOWEVER, as indicated above, the 2019 legislation eliminated the language that restricted the 31-Day Rental Rep license exemption to residential properties within a CID. Therefore, a 31-Day Rental Rep may now lease any type of residential property, anywhere in Arizona.
How the 31-Day Rental Representative Exemption Works
1. May the unlicensed Rental Rep negotiate a 32-day lease?
NO. The maximum term is 31 days. Leases of more than 31 days require a real estate broker’s license. Further, consecutive 31-day leases for the same tenant would be an abuse of the exemption.
2. A 31-Day Rental Representative may be paid commissions.
YES. There is no restriction on how a 31-day Rental Rep may be paid. Commission, flat fee, salary – anything goes. That’s assuming the 31-day Rental Rep’s activities are within the exemption.
3. ADRE has jurisdiction over exempt 31-day Rental activity.
NO. ADRE has no regulatory jurisdiction over 31-day Rental Rep activity. Most license exemptions, like this one, are self-executing. But ADRE will have jurisdiction over any improper use of the exemption authority.
4. May the 31-day Rental Rep conduct property management?
YES. The exemption clearly authorizes handling of monies and does not limit either the way monies are handled or the length or the nature and scope of the service relationship the 31-day Rental Rep has with an owner. Although a real estate license is required for conduct listed under A.R.S. §32-2101(49), the activity of the 31-day Rental Rep is exempt from the license requirement if the Rental Rep’s activities are limited to residential leasing of no more than 31 days.
5. Must a 31-day Rental Rep place tenant deposits into a trust account?
NO. Although a licensed broker who holds owners’ monies must place the monies into a trust account regardless of the circumstances, there is no such requirement for the 31-day Rental Rep. The Rental Rep can deposit monies she holds into her operations account. While a licensed broker has a high duty to
secure monies belonging to others that the broker holds, the 31-day rental Rep has no such duty.
6. Prior to August 30, 2019, the “common interest developments” within which a 31-day Rental Rep’s leasing activities were permitted, included a condo community, planned development community, stock cooperative, timeshare development and rental community.
NO. An important characteristic of a CID is ownership of an identifiable unit or home, within a property owners association. There is no individual ownership of units or common property in a rental community, thus a rental community is not a CID. Conducting leasing for residences not a part of a CID would have constituted unlicensed real estate activity. However, the CID restriction is totally gone as of August 30, 2019, so any kind of residential property is now fair game.
7. May a licensed real estate broker employ 31-day Rental Reps to conduct vacation leasing?
NO. An unlicensed person employed by a brokerage is an agent of the brokerage. Except for a license exemption that clearly permits an unlicensed person to engage in limited activities while in the employ of a brokerage, for instance, A.R.S. §32-2121(A)(6) or (7), brokers may not employ unlicensed
persons to conduct real estate-related activity that otherwise requires a license. Real estate conducted by a real estate broker is subject to regulation by ADRE.
8. May an actively licensed salesperson practice vacation leasing (moonlighting) under the 31-day Rental Rep exemption?
YES. Assuming the salesperson is not acting on behalf of the brokerage, the salesperson may independently act as a 31-Day Rental Rep. However, the salesperson may not imply that he or she is acting in a licensed capacity, and note that such activity may violate the salesperson’s independent contractor agreement with the salesperson’s brokerage.
9. A 31-day Rental Rep is limited to the number of units or homes for which the Rental Rep provides vacation leasing/property management services.
NO. There is no limit on the number of owners of units/homes with whom the 31-day Rental Rep may conduct business.
10. May a 31-day Rental Rep conduct vacation leasing as an L.L.C.?
YES. The exemption language refers to “a person.” By definition, “person” includes “any individual, corporation, partnership or company….” A.R.S. §32-2101(45).
11. Is E&O insurance available to cover the negligent conduct of a 31-day Rental Rep?
POSSIBLY. A miscellaneous professional liability policy might be available. However, a better question is how many 31-Day Rental Reps have any kind of liability insurance at all? Most licensed real estate property management brokers have E&O as well as general liability insurance coverage.
12. May a 31-day Rental Rep originally draft her own leasing forms, owner lease agreements, and property management agreements?
NO. Although Article 26 of Arizona’s Constitution authorizes a licensed broker or salesperson to draft real estate transaction instruments, this authority is not granted to unlicensed persons. This would constitute the unlicensed practice of law.
13. May a 31-day Rental Rep pay a finder fee to a licensed real estate brokerage that refers to her new owners or tenants?
YES. The brokerage is licensed and can legally receive a finder fee.
14. May a 31-day Rental Rep receive a referral fee from a brokerage in return for a referral that resulted in a tenancy or property management agreement?
NO. The brokerage cannot legally pay a finder fee to a 31-day Rental Rep. This would be illegal activity.
15. May a 31-day Rental Rep engage in short-term commercial leasing?
PROBABLY. Referring back to the exemption language, the provision now states solely “for occupancies.” The former version included modifying language after for occupancies that further enumerated that the “for occupancies” were to be within “in a dwelling unit in a common interest development.” This language that was stricken from the law. Occupancies can refer to any legal right to use a property, including commercial property. The plain language of the exemption is no longer limited to “a dwelling” in a common interest development.”
The 31-Day Rental Representative license exemption provides a legal but limited way for an unlicensed person to represent homeowners in offering and managing their homes for vacation leasing. For reasons I have pointed out, hiring an unlicensed person to conduct vacation leasing has greater limitations and higher risks than hiring a real estate broker. However, notwithstanding the existence of the unlicensed 31-Day Rental Rep exemption since 1997, there does not appear to be a notable incidence or frequency of problems resulting from this exemption.
NOTE: Do not rely on the contents of this article for legal advice. I am not your attorney or your broker. Seek legal counsel if you have an important question.
Ed Ricketts is an instructor, consultant, expert witness, wannabe author and DB for Guardian Property Services. 602-478-0832 or Ed@EdRicketts.com.