100 Yr-Old Covenant/Deed Restricting Short-Term Rental?

Question

Hello Bigger Pockets community,

My name is Dan, and I have been an avid listener since late last year, and made my first jump into real estate/STR this year after holding off for some time. I am in a bit of a sticky and rare situation which has been holding me back from proceeding with starting my short term rental. I would love the insight from other professionals and community members on the situation. I believe I have a strong case, but I'd like some opinions as it will be difficult for me to continue paying the mortgage on the property month after month if the other parties try to stretch this out and postpone.

A quick background:

I bought a 100-year old house in upstate NY overlooking Lake Ontario with its own private beachfront. The property is absolutely beautiful, and the house has so much character. It is the perfect setting for a great short-term rental, and the numbers have been run dozens of times to support the investment. Prior to buying the home, I made my plans to short term rent the property aware to the real estate agent, the bank, called the town in advance to make sure there were no restrictions, and had verified there was no HOA which could impose any restrictions.

Short Term Rental:

The town requires a permit to be granted since the zoning of the property is Resort. I had put in the application, and it was granted without issue as I had made sure all criteria was addressed for the town.

Background on Community:

The community is tight knit, and many members have been there for multiple generations. Proper to it being residential, in the late 1800's, there was a hotel on the grounds. After the hotel dissolved, a corporation was put in its place, and there was a deed which was set onto the land to restrict any activity/business such as there was prior with the hotel in the early 1900's.

The Dilemma:

As soon as I put in an application for the Short-term rental permit, members (corporation shareholders) of the area had presented a part of my deed dating back to 1922 which states, "may not be used as a boarding house, or any mercantile or mechanical use". This document was not in my abstract, and the lawyers mentioned that part of the deed was not in their findings. The town confirmed that all they can do is issue a permit, but if there is a covenant that specifically restricts specific actions, the covenant supersedes the towns permit. Some community members are stating that because of this covenant, my plan for short-term renting is restricted. As much as they phrase "to their best knowledge that is what is means" I believe it is mostly to keep the community as private as it is, which is understandable from a personal perspective.

My Findings:

1. Time/Wording- The deed is 100 years old, and the wording is potentially inexact

2. Specified Restrictions

- States there cannot be a boarding house. A boarding house is obviously classified differently from a single family rental.

3. Prior Similar Actions

- Other properties on the premises have been rented in the past to friends and family. To my knowledge, if restricted actions are not followed consistently, a covenant may be unenforceable.

4. Notice and Enforceable Right

- There was no notice given of any restrictions until I filed for a permit. I had even asked one of the head members of the community if there were any restrictions, or an HOA, and it was confirmed that there is not.

5. Local Zoning

- The town in which the property resides also classified a single family resident short term rental differently than they do a boarding house.

As much as this could be a case where the title company did not do their full work, and if there is title insurance, there is a chance this can get resolved on their end/ have the property sold. However, this was a very unique property, and I would prefer to keep it.

I'd be happy to provide any additional information, or go more into depth regarding the topic.

Thank you everyone for your time!

Peter Walther · Answer

Rather than speculate on whether the matter is covered under your title policy I suggest you immediately submit a claim to the title insurer whose policy was issued to you. the worst they can do is deny coverage and then you're on your own. As Tom Gimer wrote, the search time for a title policy varies by statute and local custom but in either case I doubt a search would have gone back to 1922. That doesn't mean the restriction isn't effective just it wouldn't have been found and taken exception for in your policy. If that's the case, the insurer very well may be liable for damages.

Keep in mind that even if the matter is covered you will still own the property at the end of the day. If covered one of three things would probably happen, 1. the insurer will retain an attorney who successfully defends your title and the restriction is found to be unenforceable, 2. the insurer decides to pay the loss recoverable under the policy and pays you, 3. the insurer retains an attorney who is unsuccessful in defending your title and then pays you the loss recoverable.

Please also keep in mind that your policy probably provides the loss recoverable under the policy is the difference in value between the property as insured and the value with the unexcepted encumbrance. The insurer would probably retain an appraiser to opine on those values. For example, the appraiser might find the value as a STR is $500k but the value as a SFR with the restriction is $525k. In that case you haven't suffered a loss recoverable under the policy and you get nothing. If the values were reversed your loss recoverable is $25k and you get a check for that amount.

Lastly, keep in mind litigation is the last thing you want as it can take years to resolve.

Tom Gimer · Answer

@Peter Walther Nice analysis on the loss/damages issue. Most people aren't aware of how those are calculated.

Most title commitments/policies contain an exception similar to the following:

X. Covenants, conditions, and restrictions (but omitting any racial restrictions indicating any preferences, limitation or discrimination based on race, color, religion, sex, handicap, familial status or national origin), if any, appearing among the public land records. This policy insures that any past, present or future violation of said covenants will not work a forfeiture or reversion of title.

Notice that there is no limit as to how far back in time those public records may exist to be covered by this language, and it also limits liability. This exception would appear in the final title policy.

Matt Devincenzo · Answer

Agreed with the above posts re: getting a good land use attorney. The other component here is who is the beneficiary of the covenant? It sounds like it is the 'corporation' which is functioning as a quasi HOA? If that is the case they are the only ones who can/may challenge the covenant, so nothing to worry about with the City/township. I would first obtain your attorney's input, second based on that challenge that the restriction includes STR and then meet and discuss this with the members to let them know enforcing their interpretation will likely result in their losing (assuming that's the case).

Another way to defend this is to look for other covenants that the hotel site and other parcels in this same 'corporation' have. You're looking for different restrictions that are more clearly STR based. The reason for that is to use as a defense in your case that the covenant would have been drafted with the alternate language if the intent was to restrict STR.

Your attorney may also have case law in similar circumstances that determines if this applies to STR rental or not...I've supported many similar exercises from an Engineering perspective and the reality is the devil is always in the details. I'm often surprised by how detailed or not detailed these restrictions can be...and that is what matter is the details.

Chris Seveney · Answer

@Daniel Zisman

As mentioned get a lawyer. I would have to guess title insurance will not cover this type of claim.

When I googled boarding house New York here is their definition. Where you may sneak by is if it’s not considered a multiple dwelling but it’s still limited to five people….

4. "Boarding house," "furnished room house," "rooming house," or "tourist house." A multiple dwelling, in which there are less than thirty sleeping rooms occupied primarily by transients who are lodged with or without meals, and in which there are provided such services as

are incidental to its use as a temporary residence. Also a dwelling two or more stories in height, occupied by one or two families and with five or more transient boarders, roomers or lodgers residing with any one family.

https://www.nysenate.gov/legislation/laws/MRE/4

John Clark · Answer

Define "Mercantile." Define "boarding house."

If a "boarding house" involved providing food, and an open-ended term of residence, then you might be able to argue you're not running a boarding house.

If "Mercantile" meant a shop or store, then you could argue you're not doing that. If it meant "business in general" then yes, you'd be covered by the prohibition.

Is the community a Summer resort community? If it is, then your "like kind" activity shouldn't be a problem, assuming you aren't letting it be used as a party house.

First step: get a good lawyer.

Anthony R. · Answer

I'm not a lawyer and never even played one on TV, but... I think the key is digging into what legally constitutes a "boarding house" in your state. This website sheds some light on the distinction of a boarding house vs an inn: https://dictionary.thelaw.com/... Of course, I readily admit that's about as helpful trying to self-diagnose via a symptom search on WebMD.

It does seem to my laymen's eye that an STR could, in fact, be thought of as a modern-day boarding house, just with different technology and a remote host. That would not be in your favor.

Definitely something to go to a real estate attorney about, or even two of them to get a couple opinions.

In the meantime, have you searched Airbnb, VRBO, and Vacasa to see if there are other STRs in the immediate area? I recommend searching all three because I've seen where an STR listed on one of those sites, but not the other two.

Sergey A. Petrov · Answer

Or lets start a political debate on deed and use restrictions as to whether or not a property can be used as a residence - Trump & Mar-a-Lago link below

https://www.washingtonpost.com...

Michael Baum · Answer

I would challenge it. The deed to our primary home has a restriction. No coloreds allowed. It is right there. Obviously that is not enforced nor can it be.

Not a fair comparison of course but I would go for it and see what happens.

Sergey A. Petrov · Answer

Yep this will be complicated. A deed restriction/covenant does run with the land and has no direct correlation with local zoning or permitting laws. You need a very good attorney to help untangle this. With a tight knit community that you describe, it is entirely possible that you’ll “win” it legally but the community will make it feel like you “lost” once you launch your STR. Weigh your options and proceed from there

100 Yr-Old Covenant/Deed Restricting Short-Term Rental?

100 Yr-Old Covenant/Deed Restricting Short-Term Rental?

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