Note: A version of this article has been published by U.S. News
It’s no secret that rental properties can be a great investment. However, just like all entrepreneurs, landlords need to adapt to changes in the market in order to minimize risk and remain profitable. In this age of rental sites such as Airbnb, landlords are increasingly faced with the issue of tenants trying to make extra money by listing properties as short-term rentals. These short-term rentals can expose landlords to significant risks. Even though this practice by tenants may be a lease violation, it is unrealistic for even the most diligent landlords to identify and put a stop to these violations before they occur. In order to avoid potential liability, landlords need to anticipate the possibility of short-term rentals happening on their property and take necessary precautions.
Liability for violations of local laws
Some cities have laws that place restrictions on short-term rentals. These laws are often part of a city’s zoning or administrative codes. Some cities completely prohibit any type of short-term rental. Others require you to register, get a permit or obtain a license before listing a short-term rental. Some jurisdictions also require an occupancy tax to be paid on short-term rentals. Violating local laws, or failing to collect and pay taxes, can result in fines and other penalties against the owner of the property or the property itself (such as a lien being placed on the property).
Landlords can gain some protection against this potential liability by including a lease provision requiring tenants to indemnify and defend the landlord from any adverse consequences resulting from the tenant listing the property as a short-term rental. However, such a lease provision will only be binding between the landlord and the tenant -- it will not be binding between the landlord and the local government. So, if the city decides to take adverse action against the landlord, or the landlord’s property, the lease agreement won’t stop them. Still, having this provision in the lease agreement will give the landlord an avenue to go after the tenant for any damages suffered.
Additional insurance coverage
Perhaps the most obvious risk for landlords when it comes to unapproved short-term rentals, is that additional people will be living in the property for whom the landlord had no opportunity to conduct a background check, credit check or other method of approval. Any experienced landlord knows that failing to properly screen tenants often results in increased damages to the property.
To help protect against this risk, landlords should require tenants to secure additional coverage on their renter’s policy specifically covering any damage caused by short-term renters. This additional coverage needs to list the landlord as an additional insured third party on the policy. Landlords should write this requirement into their lease along with a method for obtaining proof that adequate insurance coverage is in place.
Sharing the profits
Landlords are in the business of getting paid for letting other people reside on their property. It’s only fair that landlords should get to share in the profits if they find their tenants making money off the property as a short-term rental.
When drafting this requirement into the lease, landlords need to carefully consider the percentage of profits they claim. If the goal is to prevent short term rentals altogether, setting a very high percentage may be enough to deter the tenant from engaging in short-term rentals at all. However, if the landlord is enticed by the potential of making some extra money, setting a lower percentage may encourage short-term rentals and even provide a steady stream of additional profit. In either case, this provision should be carefully thought through and drafted to have the intended effect.
The considerations above are only a few of the many potential issues landlords need to consider when it comes to their properties being used as short-term rentals. Be sure to contact a licensed attorney in your state to help you think through these issues and make any necessary changes to your lease. If done properly, landlords can take significant steps in limiting their liability and maybe even creating a win-win scenario with their tenants that can be profitable for everyone.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice. Individual situations will differ and should be discussed with a licensed attorney. For specific legal advice on the information provided and related topics, please contact the author.