Risky Business

Condominiums & Short Term Rentals

By Alex Zhvanetskiy, Vice President of Samsonshield Inc.

The short-term condominium rental market is not a new fad or phenomena. It has been around for decades in North America. With the growth of condominiums particularly in the Greater Toronto Area (GTA), the demand and competition for such product is getting very aggressive and everyone has an opinion; good; bad; and sometimes ugly. 

Background

Historically, short term rentals were arranged and managed through few sources such as realtors and specialized placement firms. Developers saw the growing trend especially in the GTA and capitalized by building, ‘specific use’ short term rental condominiums and mixed use condominium hotels. These developments are specifically designed, zoned and created for this purpose. The designated use is disclosed in advance to all buyers and outlined in condominium declarations. These sites are considered legitimate short term rental use properties.

Current State

The trend of short term use rentals has grown substantially worldwide as a natural alternative to hotels and licensed bed and breakfast establishments. Websites marketing condominium units, underground parking spaces and even lockers to the general public are now readily accessible.

Given the sustained growth in the population of the GTA of over 80,000 per year, the trend of short term rentals will only become even more prevalent. Affecting this trend even further are large scale events such as: the Toronto PanAm Games; and the popularity of Toronto events such as the Toronto International Film Festival, the Canadian National Exhibition, the Caribbean Carnival Parade, and the Pride Parade.

The question begs, “Is this legal?” Gerry Miller is the managing partner of Gardiner, Miller, Arnold LLP and a subject matter authority on condominium law in Ontario.  His firm manages a large portfolio of condominium corporations in the GTA.  Mr. Miller states,

“We get this question a lot from our clients.  It is not a question of whether short term rental companies are legal.  Companies that engage in marketing short term rentals are legitimate businesses legally operating to capitalize on these growing markets.

However, a condominium board of directors have a duty and obligation to enforce the declaration, by-laws and rules of their condominium community. Part of the board’s duties and that of the corporation’s property manager is to analyze all risks and protect their communities from the negative impacts of those risks.  That is why virtually all condominium corporations have rules as it relates to the leasing of units.

The problems arise when owners, and sometimes tenants without the knowledge of owners, rent out condominium units on a short term basis in buildings where there are specific prohibitions against short term rentals and/or do not register the tenants with property management. 

Condominiums with time limitations on rentals have communities that expect stable, longer-term tenancies.  It’s up to the boards and property managers to ensure compliance, meet the expectations of their communities and to manage risk. 

In buildings with prohibitions on short term rentals, I recommend to our condominium owner clients that they avoid engaging in this type of activity and further I advise the boards and property managers to have zero tolerance if owner’s or tenants are breaching the corporation’s rules or declaration and to be aware of the consequences of allowing such activity to occur.”

What’s Next?

There is no doubt that this trend will not only continue, but will grow. In 2011, New York City implemented a ban on all short-term rentals (aka: the “Illegal Hotel Law”) in any residence less than thirty days. Quebec has also implemented similar measures. Heavy fines and other measures have not only been levied against the owners/tenants involved, but also condominium corporations as well for allowing it to occur.

It is highly likely and anticipated that GTA authorities from all levels of government will follow their counterparts in larger cities around the world and start clamping down on people who engage in such business enterprises in areas where it is prohibited.

The Impact of Short Term Rentals

The Good

Where allowed, and after full disclosure to all owners through the Declaration, by-laws and rules, short term rentals provide an environment that assists municipalities in accommodating travellers and visitors.  It also engages individual unit owners as participants in the growing urban landscape. It also can provide snowbirds with income while they are away.  Managed properly and professionally, the consensus is that this type of business adds a lot of value to municipalities and communities.

The Bad

In communities where prohibited, even uttering the words, ‘Short Term Rental’ to a property manager, a Board member or security provider can send shivers up their spines. Why?  Frankly, it’s all about risk. 

Negative consequences of illegal short term rentals can stigmatize communities, negatively affect the brand of a condominium, create ill feelings, even provoke lawsuits between residents with competing agendas, and leave frustrated neighours with a sense of helplessness in dealing with the high frequency of transient neighbours.

Regardless of the trend towards anonymity in major urban communities worldwide, people feel more comfortable when there is a greater sense of safety and security. Short term rentals can create a, ‘hotel-like’/‘bed and breakfast’ atmosphere that is not consistent with the intended use, zoning or the expectation of the population of a condominium community. The anonymity and transient feel that can be associated with shorter term rentals is often unwelcome in these communities. High resident turnover and increased community anxiety is the unfortunate negative result of illegal short term rentals.

The Ugly

Unauthorized short term renters are often not prequalified by the property owner/ tenant, known to anyone in the community and almost always remain unregistered with property management and security. Unbeknownst to some property owners and property managers, some tenants have even re-rented units, parking spaces and even lockers to non-residents.

There are an alarming number of stories revealing a disturbing and ugly underbelly of this type of business especially in communities where such activity is strictly prohibited. Countless cases have been reported worldwide to police, municipalities, tax agencies, insurance companies, mortgagees, landlords, etc. where, albeit with the best intentions, things have gone very wrong.  Potential renters are in some cases, not what they appear to be. There are cases, albeit rarely publicized, where condominiums are being rented by the hour and used as bawdy houses for prostitution. These are not in seedy areas but in some of the A+ buildings in the GTA.

Damage to property; amenities; and neighbouring properties, wild parties, shootings, voiding of insurance, neighbor complaints, police attendances, fights, domestic related violence, prostitution, short term rental refusals to leave units after lease end, noise complaints, disorderly activity, and criminal behavior are just some of the occurrences.

The question often asked is, “Does a deviation in the intended use of a condominium void my insurance?”  According to Basel Kaskas, Insurance Specialist at The Paisley-Manor Insurance Group,

“I have seen a wide range of policies and claims related to short term rentals. Most insurance policies exclude the participation in short term rentals given the risks involved. If you ignore the exclusions in your policy and still proceed to be involved in the short term rentals you are choosing to operate without any insurance coverage as your insurance will become voided.

There are insurance providers for short term rentals; however, there are many risks associated with such activities. Be sure to do the research and know what is allowed and what is not allowed according to your policy in your property. The safest method is to always ask your insurance advisor if you are protected before proceeding with business venture such as short term rentals.”

Residential Tenancies Act

This is a provincial law that governs residential tenancies in Ontario. This law specifically prohibits current tenants from re-renting (subletting) a property without advising the property owner:

97 (1)  A tenant may sublet a rental unit to another person with the consent of the landlord.
2006, c. 17, s. 97 (1).

A growing trend is forming where tenants re-rent (a form of subletting) condominium units on a short term basis without the knowledge or consent of the owner or notifying property management.

And what about the short term renters?  What about their rights?  In cases that occur more often than not, the people that rent out short term rental units report becoming unknowing victims themselves when arriving at condominiums communities that prohibit such activity and who have a plan in place to restrict access to the building. Trying to find accommodation after being barred entry to a pre-booked suite, particularly in a saturated market because of a major event, can ruin a vacation.

The hangover is often a very time consuming, costly and embarrassing affairs for everyone involved.

Other Considerations The following are important factors to consider before engaging in short term rentals:

Mortgages

Lenders to condominium owners require the designated use of the property to be disclosed prior to funds being cleared and advanced.  Any change of a designated use (e.g. single family residential to commercial) must be disclosed to the mortgagee.  If engaging in short term rental in a single family unit zoned building, your mortgage may be voided.

Tax Compliance

There is an urban myth that engaging in short term rentals is tax exempt, reporting such an activity is unnecessary as the activity is more hobby than business, and no one is tracking these smaller businesses. Before anyone engages in such an activity, the best advice comes from legal and tax experts.

Such considerations include:

  • HST on rentals
  • HST on the purchase / sale of a unit
  • Income tax
  • Municipal tax increases
  • Capital gains

Insurance

Condominiums in Ontario have multi-layered insurance policies to protect the corporation, the owner and the tenant. In all cases, disclosures to the insurer must be made on the designated use of the property. The primary use of a condominium unless, otherwise zoned and municipally approved, is strictly for single family use designation. If a change from residential to business is contemplated, insurance providers must be notified in advance.

Regulatory Compliance & Licensing (Hotels / B&Bs)

Short term rentals often are considered a, ‘Bed-and-Breakfast’ or ‘Hotel-Like’ style accommodation. The hotel/ B&B industry in Ontario is heavily regulated.

Health and safety compliance as well as licensing and the registering of guests feature prominently in the mandate of hotels and B&B’s.  Municipal licensing is also required to operate hotels and B&B businesses. Noncompliance with any of these municipal and provincial requirements can result in substantial consequences to the owner of a condominium unit and possibly the corporation.

Zoning

Municipalities designate or, ‘zone’ areas and specific properties before they are developed and built. Any change to the designated use of a property must be approved by the municipality. The consequences of short term rentals may impact the zoning of a individual unit and a community. Levies and fines may apply.

Conclusion

It is inevitable that the discussions and opinions regarding short term rentals will continue and that this type of business will grow. The question that has to be asked is, “What type of condominium community do you want?” 

Board members and property managers should be ready for the likely circumstance of short term rentals occurring at their sites and reach out to lawyers and subject matter experts on this topic for advice. Plans should be finalized well in advance to address this issue.  The time to start preparing for and addressing short term and unregistered rentals in your community is not when it actually occurs.