Tennessee Supreme Court delivers partial win for Airbnb in legal disputes with HOAs

A Nashville doctor cannot rent his home in a lake resort community on sites like Airbnb or Vrbo, the Tennessee Supreme Court has ruled, even as it delivered a potential win for short-term vacation rentals in communities where homeowners associations limit properties to “residential” uses.

Citing dozens of cases in other states and picking apart the grammar of a single phrase in the governing documents of Four Seasons, a development on Center Hill Lake in DeKalb County, the court ruled unanimously that the homeowners association rules were too ambiguous to prohibit short-term vacation rentals such as Airbnb or Vrbo.

The ruling will have a “monumental impact on probably hundreds, if not thousands, of different developments throughout the state,” said Ben Rose, an attorney for the doctor.

The Pandharipande v. FSD Corporation ruling is a boost to online short-term rental companies, which are facing greater scrutiny over hidden “junk fees,” rising public unpopularity and legal challenges. New York City, a major hub for vacation rentals, has prohibited residents from renting out an entire apartment or home for less than 30 days and required registration for all short-term rentals.

Dr. Pratik Pandharipande said the governing documents of Four Seasons did not prevent him from making money by renting his home on a short-term basis, and the court agreed. He also argued a later amendment to the community’s rules did not apply to him because he bought his property before it was enacted, but the court said it did.

Most homeowners associations, commonly called HOAs, limit homes to residential use to keep people from operating businesses out of their houses. In Shields Mountain Property Owners Association v. Teffeteller, the Tennessee Court of Appeals ruled in 2006 that short-term vacation rentals are not residential, but operated more like a hotel or motel.

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HOAs have used the case for nearly two decades to prohibit vacation rentals. While Pandharipande’s attorney said the new ruling “effectively reverses” Teffeteller, the HOA’s legal counsel disagrees.

“It should be noted that the Tennessee Supreme Court never stated that the Teffeteller case was overruled,” said Gerald Wigger, an attorney for the HOA. “I think that’s because, as the Tennessee Supreme Court meticulously went through, it has to be decided upon the language of each governing document.”

Wigger represents many HOAs that have less ambiguous rules about property uses, and he said they are unlikely to be affected by the ruling.

Still, a central case HOAs used to root out Airbnbs from their communities could be weakened, forcing them to amend their association rules rather than relying on residential-only clauses. The court did not explicitly reverse Teffeteller but undermined its reasoning by joining courts in other states.

The ruling was the first for the state’s highest court focused on vacation rentals in the age of Airbnb. It tested how far the court would go either to affirm the right of associations to restrict how residents can make money renting their homes or to back their broad property rights.

Here’s how the court reached its decision in Pandharipande, and what it means for Airbnbs in Tennessee.

Tennessee Supreme Court finds ‘residential’ to be ambiguous

In its 1984 covenants, the rules property owners in an HOA agree to follow, the HOA of the community where Pandharipande bought a home in 2015 said “each Lot shall be used for residential and no other purposes.” The Tennessee Supreme Court examined dictionary definitions of key words in the document to see if it clearly prohibited short-term rentals. The court even analyzed the definition of the word “used.”

“Residential” is the most important word in the case, and in many others involving HOAs trying to enforce bans on vacation rentals. Does “residential” mean an owner lives at a home permanently, or does it refer to a set of activities typical at homes? The court ruled it was a flexible term, which could cover both short-term and permanent use.

Even though short-term rentals can generate income for a property owner, the court said they still can be considered “residential” because renters engage in residential activities in them.

“One could use a property for residential purposes, then, by employing it for aims related to residences,” Justice Sarah K. Campbell said in the opinion. “Using a property to house short-term visitors who engage in largely the same activities as permanent residents – sleeping, eating, bathing, relaxing – would seem to satisfy this test.”

On the subject of amendments, which are typically passed by a vote of homeowners, the court said they must not be “arbitrary or capricious,” but could place additional restrictions on property rights.

A 2018 amendment to Four Seasons’ rules banned rentals leased for fewer than 30 days, though Pandharipande argued it did not apply to him since it was enacted three years after he purchased his home. The court upheld the amendment and ruled that he could not continue using his home as a short-term rental. Wigger, the HOA’s attorney, said his client was “ecstatic” with the ruling.

Rose, Pandharipande’s attorney, said he expects his client will not seek further proceedings at trial court. He predicts Tennessee’s conservative state legislature, which has championed property rights, will address whether HOAs can ban short-term rentals after a person has purchased the property under rules that didn’t prohibit it.

A Tennessee law passed in 2021 gives homeowners the right to continue long-term renting until they transfer ownership of their property even if an amendment prohibits it.

What Pandharipande case means for Airbnb in Tennessee

Tennessee law walks a careful balance between allowing HOAs to enforce their contracts with property owners and affirming property rights. The Short-Term Rental Act of 2018, the only statewide law regulating Airbnbs, allows HOAs to prohibit vacation rentals in their governing documents.

But the Pandharipande ruling could significantly shift ongoing and future disputes in favor of homeowners in resort communities who rent their homes out for fewer than 30 days, the state definition of a short-term rental. It will force many HOAs to put the issue to a vote and pass an amendment rather than using generic residential use restrictions to prohibit Airbnbs.

That change is what residents who favor vacation rentals in Lone Mountain Shores, a community on Norris Lake in Claiborne County, have called for as they go to court with their HOA, which claims they violated its covenants.

HOA leadership told Knox News, part of the USA TODAY Network, in August that its covenants clearly restricted vacation rentals, but some residents disagree. The HOA sued a group of homeowners who rented out their homes on a short-term basis and the homeowners sued back in a drama that has severed the community.

The Pandharipande case is likely to influence the ruling in Lone Mountain Shores, one of several charming Tennessee lake and mountain resort communities that HOAs and residents who support them say are ruined by Airbnbs.

Daniel Dassow is a growth and development reporter focused on technology and energy. Phone 423-637-0878. Email daniel.dassow@knoxnews.com.

This article originally appeared on Knoxville News Sentinel: Tennessee Supreme Court gives partial win to Airbnb in HOA communities