Restricting short stay letting in residential developments

Not as easy as you might think

The global popularity of private short-stay letting as an alternative to booking hotel rooms has increased significantly in recent times.  Online platforms such as AirBnB and Stayz dominate the short-stay market.  The accessibility of short-stay letting may be a welcome development in many circumstances.  For example, short-stay probably has a role in smaller holiday locations with insufficient hotel accommodation, or heritage areas which are not suitable for hotel development.  However, short-stay in CBD residential apartment blocks can be more problematic.  Private apartments being used as a surrogate for "regular" hotel rooms creates an unfair playing field for hotels, as hotel businesses tend to pay more by way of taxes, OH&S compliance, insurance and other overheads.  Owner-occupiers and long-term tenants of apartments and residential units also often object to having an ever-changing array of temporary neighbours.

Statutory regulation of short-stay letting is in its infancy in many cities, and hasn't really caught up with short-stay.  Principles relating to the inviolability of private property continue to run strong – if someone wants to let their house for the weekend, why shouldn't they?  Perhaps because the principle of a "person's home being their castle" developed in an age before 50 story apartment blocks, all-night parties and heavy duty sub-woofers. 

In the absence of adequate statutory regulation of short-stay letting in Melbourne, Australia, Ashurst was recently instructed by developer Capital Alliance Investment Group to devise a creative solution using existing legal principles to cover the shortcomings in the existing statutory regime – more on this later.  

The problem of short-stay letting in apartment buildings

An increasing number of residences are available for short-stay letting in many cities.  In Melbourne, Australia, according to independent data tool Inside AirBnB, 14,379 entire apartments/homes and 8,116 private rooms were listed as available for short-stay in 2018.  

Apartment owner-occupiers and long-term tenants have voiced concerns in respect of short-stay letting in their buildings.  These concerns include fears for safety and security, as well as apprehensions of damage to common property (pools and gyms) and interference with amenity.  Mohan Du, Founder and Chief Executive of Ashurst client Capital Alliance Investment Group, commented that "having unsanctioned 'quasi-hotels' operating out of residential developments is unsafe and undesirable because the buildings are not designed for it and it exposes long-term residents to unruly behaviour one would not expect in and around their homes".  

In one central Melbourne apartment building, the damage to communal areas caused by short-stay tenants became significant enough to warrant the installation of fingerprint locks in communal areas.  Newspapers in Melbourne have reported residents complaining of mess, theft, loud parties, damage to common property and other disruption.  Such incidences are not restricted to Australia.  An English newspaper labelled short-stay apartments in one Central London apartment block as "pop-up brothels" – with apartments being rented on a daily basis by local sex-workers.  There were also reports of drug-use and loitering.   The extent to which these problems are attributable solely to short-stay letting is hard to say.  Nevertheless, it is clear that short-stay letting in these circumstances is not helpful.

Traditional solutions to short-stay letting in apartment buildings

The "traditional" solution for restricting short-stay letting in apartment buildings has been to include restrictions in the owners corporation rules prohibiting short-stay letting.  However, recent Australian case law has called into question the enforceability of such rules. 

In Owners Corp PS 501391P v Balcombe,¹ the Supreme Court of Victoria held that the Owners Corporation could not prohibit short-stay letting.  The rule passed by the Owners Corporation by special resolution, was held to be outside the scope of the relevant legislation.²   Similarly, the NSW Civil and Administrative Tribunal (NCAT) in Estens v Owners Corp SP 11825 held that a by-law passed by the Owners Corporation, designed to exclude short-stay letting, was invalid.³    NCAT held that short-stay letting via AirBnB is a devolution of a lot by way of a lease.  As a result, the rule was invalid for being inconsistent with the applicable law.⁴  

On the other hand, in Byrne v Owners of Ceresa River Apartments Strata Plan 55597 ⁵, the Western Australia Supreme Court held that the Owners Corporation could reasonably restrict use by way of by-laws because that was consistent with the relevant statute. ⁶   The United Kingdom Privy Council adopted the same approach in O'Connor (Senior) and others v The Proprietors, Strata Plan No. 51. ⁷   The case was concerned with by-laws in the Turks and Caicos Islands.  The Privy Council held that the relevant legislation did not prevent reasonable restrictions on use being made.  Interestingly, the legislation under consideration in O'Connor was modelled on the NSW strata legislation.

Less traditional approaches

The solution that we designed essentially involved using a traditional legal concept (a restrictive covenant) in a novel way.  In particular, we included in the plan of subdivision a restrictive covenant preventing short-stay letting in favour of the owners corporation on the title to each unit in development.  The restrictive covenant runs with the land, is apparent from a search of the title, and is relatively easy to put in place – it is a simple addition to the plan of subdivision.  For good measure, we also included a contractual restriction in the contract for sale, and we included a prohibition in the owners corporation rules (despite current questions about the enforceability of prohibitions in the owners corporation rules, the law is moving swiftly in this space).  Any concerns that such measure might impact the marketability of the apartments have been unfounded – in fact, quite the opposite.  Mohan Du notes that these restrictions have received positive responses from buyers: "what we had not expected was the level of support and commendation from owner-occupiers who noted that short-stay accommodation next door to their principal place of residence was one of their number one concerns".

Now the law needs to catch-up

The device described above is appropriate for new developments, but would not be suitable for existing buildings.  This means the law need to catch-up and fill the gap.

Australian legislatures now appear to be alive to the issue and are better regulating short-stay letting.  In the last year, the Victorian Government passed laws regulating short-stay letting.⁸ Upon the occurrence of certain conduct, in buildings managed by owners corporations, applications may be made to the Victorian Civil and Administrative Tribunal (VCAT).  The relevant conduct includes that which causes excessive noise, hazards, interference with the use of common property, or damage to common property or a lot.  VCAT may make a prohibition order, compensation order, or an order for a civil penalty.  The applicant has the burden of providing evidence of the conduct and the harm it caused.  

The Victorian framework does not enable owners corporations to prohibit or restrict short-stay letting.  Rather, action must be taken in VCAT each time specified conduct occurs.  This may not be practical – particularly where there are large volumes of short-stay letting arrangements in a building.  

The NSW Government has also recently passed to two key pieces of legislation, which have not yet commenced.  The legislation authorises the declaration of a Code of Conduct.  The Code of Conduct will establish a complaints system, appoint independent adjudicators and create an exclusion register. The Code will entail a "2 strikes and you're out" policy.  Additionally, the legislation empowers owners corporations to pass by-laws to prohibit short-term letting upon a 75 per cent majority vote – but only in lots that are not the principal place of residence of the host.  

Changes to the NSW planning laws have also been proposed.  The amendment would restrict short-stay letting in Greater Sydney to 180 days per year, where the host is not present.  Short-stay letting in all other areas of NSW would not be restricted, unless the governing Council restricted it (to no less than 180 days per year).  

The proposed NSW planning law amendment aligns with the approach taken in England.  Short-term renting in London is permitted for up to 90 nights in a calendar year.  However, we understand these restrictions have been difficult to enforce.  Many owner-occupiers have complained of illegal arrangements in contravention of the planning laws.  It seems that such restrictions are ineffective at managing arrangements in inner city apartments.

Developing a regime which strikes a balance between respecting a person's right to deal with their property, but also protects the legitimate interests of neighbours to avoid the problems associated with short-stay letting, is clearly not easy.  We suggest the recent changes in Victoria and NSW should be closely monitored to see what works, and what does not work.

Co-authored by Briony Dance

1. [2016] VSC 384. 2. Subdivision Act 1988 (Vic); Owners Corporation Act 2006 (Vic). 3. [2017] NSWCATCD 63 (6 July 2017). 4. Strata Schemes Management Act 2015 (NSW) s 139(2). 5. (2017) 51 WAR 304. 6. That is, the Strata Titles Act 1985 (WA). 7. [2017] UKPC 45 (21 December 2017). 8. Owners Corporations Amendment (Short-stay Accommodation) Act 2018 (Vic).