This post was written for Tripping by Volo.
There are a lot of vacation rental horror stories online: from guests refusing to leave, to being sued for an accident, or even nasty reviews. Although I’ve personally never experienced a circumstance needing legal intervention (knock on wood), there have been a handful of instances over the years where I was happy to have a solid plan of protection in place.
Legalities are important, and they’re something I cannot adequately speak to. Max Neuhaus, a real estate attorney, has chimed in with some advice to help you properly start your vacation rental business:
NIGHTMARE: A LOOPHOLE IN YOUR VACATION RENTAL CONTRACT COSTS YOU THOUSANDS
Consumers that are “guests” subject to vacation rentals are typically going to have more legal rights than consumers that are subject to other kinds of rentals, such as car rentals or commercial real estate rentals. The only way to be sure your rental contract is protecting you to the fullest is to consult with an attorney licensed in the jurisdiction where your vacation rental is located.
I always advise my business clients as follows: “I know the law, you know the industry. Tell me what you want, and I’ll tell you if it’s legal.” So let’s take some specific vacation rental issues below and see what the law has to say.
NIGHTMARE: YOUR GUEST WON’T LEAVE
First, make sure your lease specifically spells out in easy-to-understand terms what the consequences will be. Consider a provision in your contract that includes a promise that you will call the authorities to have the guest forcibly removed. It is likely that enforcement will consider a guest that has overstayed their welcome an illegal trespasser, and the authorities will forcibly remove them.
That said, be careful that you are not advertising your vacation rental as “residential housing.” If you do so, the trespassing guest may be able to convince the authorities that they are actually tenants. In most cases, a tenant can only be removed by legal eviction, which could mean weeks if not months before the guest would be required to leave.
From Kris: I’ve never personally met someone who this has happened to. Don’t let the thought scare you from starting a vacation rental business. Do consider a provision, as Max suggested, so you are protected from an anomaly.
If you have personally had a guest refuse to leave, I’d be interested to hear the situation and how you resolved the issue in the comment section below!
NIGHTMARE: YOUR GUEST WANTS A FULL REFUND
Make sure your contract clearly states the circumstances where a guest is and is not entitled to a refund. Be careful when you use the word “guarantee” in your advertising. The difference between “you’ll love seeing the whales” and “we guarantee you’ll see whales” is the difference between good advertising (the first) and a legally enforceable promise you are guaranteeing as the owner (the second).
When guests are not entitled to a refund due to unforeseen circumstances, this is called a “force majeure.” It’s a French phrase adopted in American law that literally means “superior force.” If, for example, the municipal water plant has an emergency shut down causing you to close your vacation rental, it will be likely that a displaced guest will not be legally entitled to a refund. Granting a refund would, of course, still be a voluntary option for the owner.
From Kris: My personal contracts are pretty buttoned up to protect me. However, I do objectively look at each situation to determine if I should give a refund.
A guest once booked one of my homes for two weeks in the off-season at a very reasonable rate. Unbeknownst to me, the neighbor had planned a full exterior remodel and landscape project at the same time.
Needless to say, there was a lot of dust, noise, and commotion that irritated the heck out of my guest. Although she didn’t ask to be released from her reservation (nor was I legally liable to release her), I offered it and refunded her payment on a prorated basis. I couldn’t take the thought of getting another phone call from her without being able to remedy the situation. I just don’t want anyone to be miserable at my property.
A different scenario: Some guests’ business plans changed, they cancelled their reservation four days prior to arrival and asked for a refund. Of course, I also had no obligation to refund them but offered to accept last-minute bookings and refund IF rebooked. It didn’t get rebooked, and I did not refund. After all, this was peak season and I was running a business. They understood and appreciated my efforts.
Both guests mentioned above have referred their friends and returned themselves.
It goes without saying that there are people who you just cannot please, even if you have gone above and beyond. Don’t let the fear of a negative review push you into refunding when it’s not necessary.
NIGHTMARE: YOU GET SUED BY THE CITY
As a general rule, the larger the population base of the area in which your vacation rental is located, the more likely there are to be additional county and or city regulations you will have to follow. Additionally, you should verify if there are any environmental regulations you should be aware of by contacting your local United States Department of Agriculture office as well as your local Department of Natural Resources office.
From Kris: The most common regulations I come across are the need for a business license and charging a transient sales tax. Many owners think that if their vacation home is personally used for a portion of the year that they do not need to do either. However, that is often far from true. In many instances, if the vacation home is rented out for more than a mere 14 nights per year, a license and applicable taxes are required. This is a great time to loop in your accountant for a personalized approach and set up a separate business checking account. (More on that in the next post!)
NIGHTMARE: YOUR GUEST TRYS TO SUE YOU FOR AN INJURY AT YOUR PROPERTY
A rental owner’s first line of defense against liability is almost always going to be to insure against the loss. How you calculate your risk is typically a conversation you have with your insurance agent outside of the counsel of your attorney.
The second most common form of liability protection is for the owner to transfer their interest in the subject real estate into a business entity that is owned by the owner, and with that, modifying all contracts accordingly. In doing so the liability of loss falls on the business and is limited to the assets of the business.
From Kris: There can be tax benefits and consequences to putting your vacation home into an LLC (business entity referenced above), depending on your situation. It doesn’t hurt to consult an accountant before doing this.
Max Neuhaus is a business, family and real estate attorney practicing in western Wisconsin, and has served as corporate council for a number of realtors, real estate companies and real estate managers over the years. You can contact Max by visiting him and his law firm at www.riverfallslaw.com.