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Airbnb’s Home-Sharing Economy: A New Frontier for Real Estate Attorneys

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Airbnb’s Home-Sharing Economy: A New Frontier for Real Estate Attorneys

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Airbnb’s Home-Sharing Economy: A New Frontier for Real Estate Attorneys

by: Paulo Coelho
Intern at Morici & Morici, LLP

By: Getty Images, From: New York Post

Airbnb is a company that provides an internet-based-platform connecting individuals who offer accommodations, with individuals who are seeking accommodations. Stated differently, Airbnb provides individuals with the means by which they can rent out their house, apartment or other real property for hotel-like purposes. Like hotels, Airbnb hosts can charge their guests a significantly high per-night rate. However, unlike Airbnb hosts, hotels are subject to business taxes and an array of laws, regulations and codes that govern its industry’s customs and practices. Due to its novelty, legislative bodies have yet to enact new laws or amend old laws that regulate or oversee the home-sharing market.

However novel the company may be, Airbnb has experienced record-breaking growth since its inception in 2008. In 2017 alone, the company, which has vowed to remain privately owned through 2018, realized almost $100 million on its $2.6 billion in revenue. Currently, Airbnb’s internet platform is used by homeowners and travelers in more than 191 countries. Like Uber, Airbnb is part of the so-called sharing economy, which has fostered many legal challenges of first impression.

While Airbnb has been praised for its financial successes, it has also faced intense scrutiny from residents and elected officials in major cities like New York and San Francisco. In New York, critics claim that Airbnb and other internet-based, home-sharing platforms are exacerbating an already serious housing shortage. Additionally, hotel operators complain to city officials that they comply with higher standards and charge higher rates because of local taxes and are losing business to companies like Airbnb who, for the most party, are not subject to similar regulations.  Other legal concerns range from discrimination to land-lord tenant and contractual issues. Proponents claim that the only way they can afford to pay New York’s high rents is by the income they earn from Airbnb. In addition, tourists who rent accommodations via Airbnb usually will pay less than they would for a hotel and get amenities like kitchens that most hotels do not offer.

Recently, Airbnb has been the subject of litigation involving an array of issues, including, alleged housing discrimination, regulatory, landlord-tenant, privacy, and restrictive covenant issues. Below, we examine some of the prominent legal dilemmas that real property owners, home sharing companies, and real estate lawyers are facing in the wake of the Airbnb’s home-sharing market. In addition, we offer some suggestions in which municipalities and Airbnb hosts may take to ensure that the home-sharing market is competitive, innovative, and fair. In sum, this column explores the legal impact that internet-based, home-sharing platforms have on property owners, tenants, and real estate attorneys alike.

Discrimination

Courts in the United States have been hearing cases involving discriminatory housing practices on part of landlords or property owners since the early 1900s. In the landmark United States Supreme Court Phenq case Shelly v. Kraemer, it was held that the Equal Protection Clause of the United States Constitution prohibits racially restrictive housing covenants, and that such covenants are unenforceable in court.

Today discrimination in housing is before courts in a different and often disguised form. Technologies such as the Airbnb platform provide landlords and sublessors with a means discriminate without facing the repercussions that would typically arise in a face-to-face transaction. For example, in Selden v. Airbnb, an African-American man who was denied housing on the basis of race, filed a class action law suit against Airbnb. The plaintiff created a profile on the platform, including his face, full name and other background details. He was planning a vacation to Philadelphia and used the platform to seek and book accommodations. The owner of a unit that the plaintiff sought to rent from denied the plaintiff’s request almost immediately after he sent it, indicating that the unit had been booked. Perplexed that the unit he was seeking was still listed as available on Airbnb, the plaintiff suspected he was denied by the owner because of his race. The plaintiff in Selden, an African American man, create two imitation Airbnb profiles that featured photos of anonymous white individuals. When the plaintiff used these two profiles to inquire on the same you which he was denied, the owner responded immediately with the good news of availability. The court in Selden dismissed the cause of action because when the plaintiff created his profile, he agreed to abide by the Airbnb terms of use, which states that disputes will be settled by arbitration. The Selden case is only one example of how the use of arbitration clauses in terms of use for internet-based platforms, preclude the development of precedent on the issues of discrimination in the sharing economy.

Restrictive Covenants

            Another area of growing concern is that of restrictive covenants in real property whereby homeowners are prohibited from using their homes as short-term rentals. Observant neighbors and community boards are taking action to prevent the emergence of bed-and-breakfasts in residential zones. In Community Services Association, Inc. v. Wall,(“Wall”) the South Carolina Court of Appeals set one of the first appellate precedents surrounding such issues. In Wall,the Court of Appeals, in finding for the Airbnb host (the homeowners) appears to require specificity that addresses clearly when there is a prohibition. Id. The relevant provision of the restrictive covenant in Wall stated that “guest suite or like facility without a kitchen . . . may not be rented or leased except as part of the entire premises[,] including the main dwelling”. Id.The court found that said provision did not expressly prohibit the owners from staying in the guest suite whilst renting out the rest of the home. Id.Conversely, the court held that the covenants simply require the owners of a home with a guest suite to rent it in its entirety and that the plaintiff did just that. Id.

The Wallcase serves as a signal to homeowners and their respective associations that covenants must be drafted specifically to address the issues of short-term rentals. While the covenants at issue in Wall, on their face, may seem to apply broadly to the new home-sharing market, the court did not think this to be so. Accordingly, new as well as existing covenants should be scrutinized to ensure prohibitions on short-term rentals via internet-based home sharing companies are specific and clear.

Government Regulation: New York and San Francisco

Due to the aforementioned and other unique issues, opponents of Airbnb and the home-sharing industry generally, have called upon government officials to intervene.

Much of the media attention surrounding the home-sharing industry is attributable to a 2014 report published by the New York State Attorney General’s office. The report said that as many as seventy-two (72) percent of the city’s Airbnb rentals “appeared to violate” state and local laws. It also said that twelve (12) percent of New York City Airbnb hosts make up thirty (30) percent of all of the city’s listings. Significantly, the report said that eighty (80) percent of New York City rentals require The New York State Multiple Dwelling Law (the “MDL”), the New York City Housing Maintenance Code (the “HMC”), and the New York City Administrative Code (the “NYC Admin. Code”) restrict owners or tenants from leasing or subleasing an apartment for less than thirty (30) consecutive days. The HMC is more relevant to Housing Court because it concerns maintenance and safety conditions of a NYC multiple dwelling. The HMC allows “[a] family [to] rent one or more living rooms in an apartment to not more than two boarders, roomers or lodgers”. The HMC, together with the MDL and NYC Admin. Code make almost any ‘home-sharing’ arrangement via Airbnb unlawful. Violation of these laws can result in fines of $1,000 to $5,000 for a first offense.

Furthermore, a report published by the city’s comptroller, Scott Stringer, said the company was responsible for about 10 percent of rent hikes from 2009 to 2016. In response, Airbnb claimed the city’s comptroller “manipulated data” in his report and was influenced by the hotel lobby.

Shortly thereafter, members of the New York City Council, including the city’s mayor, called for legislative action. The primary reason city officials wanted to pass a law regulating Airbnb and other home sharing companies is because of the increased difficulty in enforcing the HMC and MDL without knowing which units are being illegally rented and by whom. As a result, the City of New York was utilizing vast amounts of capital and other resources to locate only a limited number of illegal short-term rentals. According to the Attorney General’s report, most of the illegal rentals brought to the city’s attention are attributable to tips which come from tourists or guests using Airbnb accommodations who report other problems.

In an effort to ease the city’s financial burden due to enforcement of the MDL, a bill was unanimously enacted by the New York City Council that requires booking companies like Airbnb to share the names, addresses and other private information of its customers offering accommodations with the city. N.Y.C. Admin. Code §§ 26-21. Specifically, Chapter 21: Short-Term Residential Rentals of Title 26 of the N.Y.C. Administrative Code requires home-sharing platform companies like Airbnb, to share the following information: (1) the full “physical address of the short-term rental”; (2) “The  full legal name, [] address, phone number and email address of the host of such short-term rental, [including,] the [company’s internal filing number] and the individualized name of such host on such booking service’s platform”; (3) the website link to such short-term rental; (4) a statement as to whether the short-term rental was of the “entirety of a [] unit” or  “of a part of such unit or housing.” N.Y.C. Admin. Code §§ 26-2102 (a) (1-7). Failure to comply with the new municipal law may result in the imposition of fines on part of the owner and the home-sharing company, like Airbnb.

In reaction, Airbnb filed suit in the United States District Court for the Southern District of New York seeking injunctive relief, claiming that the city’s new ordinance violates the First Amendment, the Fourth Amendment, and the Federal Stored Communications Act. The case is currently pending before Judge Engelmaye in the Southern District. We have yet to see which way the court will decide on the matter. Various amicus briefs have been submitted in support of Airbnb’s position; some asking the court to consider the chilling affect that the ordinance has on start-up companies attempting to enter the home-sharing market. The chilling affect may, as some have pointed out, wholly deter industry innovation.

Similarly, in 2014 the City of San Francisco lifted a 1981 ban on short-term rentals, so long as residents who offer such rentals complied with certain regulatory requirements, including: (1) proof of liability insurance; (2) compliance with municipal codes; (3) Usage reporting requirements; (4) tax payments; and (5) registration with the city as a short-term rental provider. The requirements are part of a city ordinance which also established an Office of Short-Term Residential Rental Administration and Enforcement (OSTR) for handling registrations and enforcement. Unsurprisingly, there was a substantial discrepancy between the number of listings received by OSTR and the number of San Francisco listings on Airbnb’s platform. In turn, it was increasingly difficult for the OSTR to enforce the regulation because Airbnb and HomeAway (another home sharing platform) would not disclose the addresses or booking information about its San Francisco based host properties.

Accordingly, San Francisco passed a new ordinance prohibiting home-sharing companies from accepting listings until they had verified that such listings were registered and licensed by the OSTR. If an unregistered unit was published on Airbnb’s or HomeAway’s respective platforms, the new ordinance imposed criminal penalties for their failure to so verify before publishing. In reaction to the ordinance, Airbnb and HomeAway brought sought an injunction against the city and county of San Francisco on the basis of a First Amendment Constitutional claim and under the Communications Decency Act. Both theories were dismissed by the California court in Airbnb Inc., v. City and County of San Francisco. The impact of the court’s upholding the ordinance is that home-sharing companies will not make any money from commissions and face criminal charges, unless they comply with the ordinance.

As is evident in New York and San Francisco, home-sharing platforms have fostered the sort of market disruption that brings about resistance from the already-established market players. (i.e. Hotel industry). The use of government intervention has proven to be an effective means for their maintaining the status quo and preventing innovators from entering the market. In comparing the New York City model to that of San Francisco, New York’s is seemingly more intrusive and demanding of home-sharing companies like Airbnb and HomeAway.

Practical Suggestions & Considerations

Homeowners, landlords, sublessor and their respective real estate attorneys must take heed the above-mentioned warnings and call to action. Furthermore, the controversies and case law suggest that there is still a substantial amount of work to be done on part of legislative bodies, to strike a balance between supporting new and innovative real estate technologies and mitigating their negative effects on the real estate and hotel markets. Indeed, there is little precedent on the issues surrounding the home-sharing economy, which leave real estate attorneys with the daunting task of drafting real estate documents in such a way as to avoid its negative implications. There are certain precautions that real estate attorneys can take to avoid such.

In drafting real estate contracts, specifically a lease contract on behalf of a landlord, a real estate attorney should include specific language prohibiting subleasing via Airbnb, HomeAway or other “internet-based home-sharing platforms). Furthermore, provided that the MDL in New York imposes penalties on homeowners and not tenants, lease agreements should indemnify the landlord for tenant’s engagement in home-sharing activities. The indemnification section should protect against penalties, fines, and claims made by those renting the subject unit via Airbnb. The lease should also state that a tenant’s use of Airbnb to advertise or rent the subject unit is a breach of contract. Lastly, the lease should require the tenant to carry insurance and that the insurance should list the landlord as a beneficiary of the policy. Said policy should also include coverage of tenants’ violation of the home-sharing laws and prohibition on short-term rentals.

In sum, real estate attorneys, through contract drafting, consulting and subsequent litigation, will play an integral part in shaping the law affecting the home-sharing economy.


Non-Legal Sources:

[i] Julie Bort, Airbnb made $93 million in profit on $2.6 billion in revenue, but an internal clash sent the CFO out the door,Business Insider, Technology Section, (Feb. 6, 2018), https://www.businessinsider.com/airbnb-profit-revenue-2018-2

[ii] Airbnb, About Us, https://press.airbnb.com/about-us/, (last visited November 12, 2018)

[iii] Zoe Greenberg, New York City Looks to Crack Down on Airbnb Amid Housing Crisis, New York Times, New York Region Section, (Jul. 18, 2018), https://www.nytimes.com/2018/07/18/nyregion/new-york-city-airbnb-crackdown.html

[iv] Gerrit De Vynck and Olivia Zaleski, New York City Will Force Airbnb to Disclose Information on Hosts,Bloomberg, Technology Section, (Jul. 18, 2018), https://www.bloomberg.com/news/articles/2018-07-18/new-york-city-will-force-airbnb-to-disclose-information-on-hosts

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