As HOAs and homeowners spar over Airbnb rules, state Supreme Court will weigh in

One Tennessee homeowner has taken a short-term vacation rental dispute with his homeowners association to the state’s highest court in the first Tennessee Supreme Court case specific to short-term rentals in the age of Airbnb and Vrbo.

It reflects a growing number of court disputes between homeowners who list their homes as short-term rentals online and the HOAs that say rentals change the character of their communities.

The case comes at a perilous time for the giant vacation rental companies, which are facing stricter regulations in tourist destinations like New York City and pushback online over scam listings and high prices.

In Pratik Pandharipande vs. FSD Corporation, a Vanderbilt University anesthesiologist claims the HOA in his DeKalb County lake resort community tried to retroactively take away his right to rent his home.

The HOA, which won its case both in a trial court and in an appeals court, says short-term vacation rentals were never allowed to begin with.

The Tennessee Supreme Court has not ruled specifically on short-term rentals. The Pandharipande case will test how far the court is willing to go either to exempt short-term rentals from residential use restrictions and amendments or to affirm an HOA’s ability to prohibit them.

At stake is the question of what “residential” even means.

“This case presents this court with the opportunity to uphold Tennessee jurisprudence that strikes a careful balance when weighing a property owner’s prerogative to use their property against the respect that the law in Tennessee affords to a party’s right to a contract,” said Emmie Kinnard, a lawyer for the HOA, in oral arguments before the court in February.

The story of a doctor and his HOA

Pandharipande bought a home in Four Seasons, a resort community on Center Hill Lake, in 2015. The property was subject to the community’s 1984 declaration of covenants, which stated that “each lot shall be used for residential and no other purposes,” according to the Court of Appeals ruling.

From the time he bought the property, Pandharipande rented it out on a short-term basis. He hired a management company to clean the home and listed it on up to 25 vacation rental sites, for stays between two and 28 days. While this fact is undisputed, Pandharipande said in court documents he also lived at his home periodically, a claim that could set his case apart from prior cases.

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Then, in 2018, a majority of property owners in Four Seasons voted to amend the community covenants to allow short-term rentals, but only for 30 days or longer. State law defines a short-term rental as a property rented out for fewer than 30 days.

Pandharipande continued to rent his home for less than 30 days and received a letter from the FSD Corporation’s lawyer in March 2019 informing him that his rental violated Four Season’s covenants, according to a brief his lawyer filed with the state Supreme Court.

By June 2019, he had filed a lawsuit against the HOA and the association filed its response a month later, kicking off a years-long legal dispute between the two.

Pandharipande asserted the amendment should not apply to him since he bought his property before it went into effect. He also argued the community’s residential-use restriction did not apply to him because he also occupied the home.

A trial court in DeKalb County ruled in favor of the HOA in July 2020. Pandharipande appealed the decision to the Court of Appeals, which affirmed the trial court’s ruling.

In June 2022, he appealed the case to the state Supreme Court, which agreed later that year to hear his case. The court heard oral arguments in February, though it is unclear when it will release an opinion. The court releases opinions most months of the year.

Neither Pandharipande and his legal counsel nor FSD Corporation and its legal counsel agreed to speak about the pending case.

What the law already says about Airbnb, Vrbo

Tennessee law allows HOAs to prohibit short-term rentals, though it limits the ability of city and county governments to do the same.

The Tennessee General Assembly passed legislation in 2018 called the Short-Term Rental Unit Act, the only statewide legal framework for regulating Airbnbs and Vrbos.

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While the law prevents city and county governments from wholesale banning short-term rentals, it allows them to regulate units based on their classification, use or occupancy, primarily in the interest of public health and safety.

The law grandfathers in short-term rental units in use before a local government put any regulation or restriction in place. It defines a short-term rental as a home or apartment that is rented wholly or partially for less than 30 continuous days, not including hotels or bed and breakfasts.

Even as it limits the restrictions local governments can place on short-term rentals, the law allows HOAs to outright prohibit Airbnbs according to their governing documents.

State law is generally favorable to the right of HOAs to enforce contracts, even when those contracts limit property rights. While HOAs cannot contradict state and local law, they can enforce rules and regulations that go further than the law.

What the courts have said about HOAs and rentals

The Tennessee Supreme Court has ruled on HOA cases several times, even if it has never directly addressed the question of short-term rentals.

In a case from 1940, the court ruled against homeowners who used a portion of their home as a tourist lodge in a Johnson City community restricted to residential use. The court found the tourist lodge, which the owners advertised with a lighted sign on the highway, to be a commercial activity.

The court held in a 2021 case that developers could not apply restrictive covenants to lots they purchased later, after the rules were enacted. Pandharipande’s legal counsel argues that the case, called Phillips v. Hatfield, affirms the right of property owners to unrestricted enjoyment of their home and demonstrates that Tennessee law looks down on retroactive restrictions.

But the precedent that weighs most heavily on the Pandharipande case came not from the Tennessee Supreme Court, but from the state Court of Appeals. In Shields Mountain Property Owners Assocation, Inc v. Teffeteller, better known simply as “Teffeteller,” the Court of Appeals ruled that an HOA’s residential use restriction prohibited short-term vacation rentals, which operate more like a motel than a home.

The 2006 ruling stated that the HOA’s residential use restrictions in that case were unambiguous in preventing Airbnbs and Vrbos.

Pandharipande wants Teffeteller reversed, and the FSD Corporation wants it upheld. In fact, the HOA wants the court to make “residential” a more specific term so it could be used to prohibit short-term vacation rentals, according to its lawyer’s statements to the court.

Homeowner or HOA: Who gets to determine property rights?

Pandharipande’s lawyer Ben Rose argues in court documents that if the Tennessee Supreme Court does not reverse lower court rulings, then HOAs will ban short-term rentals through “retroactive amendments” and residential use restrictions, which he says threaten property rights.

Rose cites dozens of cases as precedent, including Tennessee Supreme Court rulings dating back to 1839, to make the argument that FSD Corporation wrongly stripped a homeowner of his rights.

“They are trying to take away a property right that Dr. Pandharipande had when he acquired the property and prohibit him from doing something that he enjoyed at the time he took the property,” Rose said in oral arguments.

Previous Tennessee Court of Appeals rulings appear to boost the HOA’s case, though Rose argues against their application here.

A case known as DeVaughn established that condominiums are subject to restrictions enacted by an owners association even after an owner purchased a unit, though the Pandharipande case does not involve condos, which are more strictly regulated.

In Teffeteller, the court ruled that HOA residential use restrictions could be used to prohibit short-term rentals.

Rose wants the court to reverse the Teffeteller decision on the grounds that it is outdated, given the rise of Airbnbs and Vrbos, which he said function more like residences. The Teffetellers ran a cabin rental company, whereas Pandharipande is a physician who owns only one property for rent.

Instead, Rose points to dozens of more recent cases from other states that provide updated standards of judging short-term rentals as either residential or commercial, such as whether the presence of Airbnbs fundamentally alters a community. Rose said his client’s rental has not altered Four Seasons.

Rose has asked the court to reverse the Court of Appeals ruling and return the case to a trial court for further proceedings.

HOA: Airbnbs aren’t a residential use

Two lower courts already have sided with FSD Corporation, which successfully made the case that Pandharipande rented his property in violation of the 1984 covenants and 2018 amendment.

Both the trial court and the Court of Appeals saw no meaningful difference between Pandharipande’s renters and those in previous cases that favored HOAs, especially because he used a management service that provided laundry, cleaning and concierge services to guests.

The courts ruled that he intended to make money from his short-term rental for commercial purposes in violation of the 1984 residential use restriction.

Kinnard, speaking for the FSD Corporation, argued that long-term rentals are permitted under the HOA’s covenants. Still, FSD’s legal counsel seeks the court’s specific guidance on what counts as residential and commercial, guideposts that could help lower courts, developers and homeowners.

How this case could change state Airbnb law

The Tennessee Supreme Court could release its opinion in Pandharipande v. FSD Corporation in days or months. In the court’s latest pending case report, the case was listed alongside cases heard back in 2022. The retirement earlier this year of Justice Sharon Lee, who was on the bench for oral arguments, might have delayed the ruling. Lee’s seat was filled by Knoxville attorney Dwight Tarwater.

The court could agree with Pandharipande’s lawyer that there are factual discrepancies that require a trial court to resolve. In that instance, the court could reverse the Court of Appeals ruling and send the case back to DeKalb County. Rose wants the court to reverse Teffeteller at the same time, though it’s unlikely the court would go as far as to overturn lower court precedent.

On the other hand, the court might side with the HOA and affirm lower court rulings. If that happens, Teffeteller will likely stand as good precedent, even as the short-term rental market has undergone massive transformation since the 2006 ruling. That would be welcome news for HOAs and residents who want to prohibit Airbnbs using residential-only rules.

Daniel Dassow is a reporting intern focusing on trending and business news. Phone 423-637-0878. Email daniel.dassow@knoxnews.com.

This article originally appeared on Knoxville News Sentinel: Airbnb, Vrbo law could change after Tennessee Supreme Court weighs in