The lure of turning properties into short-term rentals in Tennessee has grown exponentially in recent years, driven by the promise of lucrative returns and the thriving tourism industry in the state. According to Knox News, Knoxville had 1,072 short-term rentals in Aug. 2023, while Chattanooga had 1,247 and Nashville had a whopping 8,517.

It’s clear that the trend of people buying properties and renting them out via platforms like Airbnb and VRBO isn’t slowing down anytime soon in the Volunteer State. However, beneath the surface of this investment strategy lies many challenges for owners, from neighborhood restrictions and zoning issues to navigating the regulations imposed by Homeowners’ Associations (HOAs) and potential legal liabilities for property damages.

Understanding Neighborhood Restrictions and Zoning Issues

Before plunging headfirst into property investment for short-term rentals, it’s crucial to comprehend the local neighborhood restrictions and zoning regulations. Tennessee, like many other states, has zoning laws that dictate where short-term rentals are permissible. Some areas may have restrictions or outright bans on short-term rentals to preserve the character of residential neighborhoods or to minimize disruptions caused by transient guests.

For instance, Nashville, a hotbed for tourism, has specific regulations concerning short-term rentals, with zoning laws categorizing properties based on their eligibility for short-term rental use. Understanding these zoning laws and restrictions is pivotal to avoiding investing in a property that cannot legally operate as a short-term rental.

Ensuring HOA Compliance for Short-Term Rentals

HOAs wield significant authority over property use within their jurisdictions. Investors eyeing properties within HOA-regulated communities should carefully review the association’s bylaws and regulations regarding short-term rentals.

Investors must communicate with the HOA to clarify their stance regarding short-term rentals. Obtaining written permission or ensuring the covenants allow for such activities is important to prevent future conflicts or legal repercussions.

TN Supreme Court Ruling Creates Potential for More Short-Term Rentals

On Oct. 17, 2023, the Tennessee Supreme Court held that “a property owner using his home as a short-term rental did not violate homeowner association restrictions requiring that homes be used for ‘residential and no other purposes.’” However, “the Court also held that the property owner’s short-term rentals violate later amendments to the restrictions that impose a minimum lease term of 30 days”

Many HOAs currently have rules or bylaws stating that properties within their jurisdictions can only be used for residential non-commercial purposes. In the past, courts interpreted that language to mean that HOAs could, in fact, prohibit short-term rentals. However, this recent Tennessee Supreme Court ruling changes the law by stating that short-term rentals are residential in nature and don’t constitute “commercial activity,” as the people renting them would be using them in the same manner as actual homeowners or long-term renters.

For many HOAs that wish to ban short-term rentals, this Tennessee Supreme Court ruling requires amending their current restrictions, especially if they were previously relying on language concerning commercial vs non-commercial usage of residential properties. Unless those specifically worded bylaws are changed by HOAs throughout Tennessee, the October ruling has opened up the possibility of significantly more properties being turned into short-term rentals.

Legal Liabilities and Possibility of Lawsuits for Damages

Owning and operating short-term rentals inherently risks property damage or legal issues from guest behavior. Some of the most common types of guest-related damages in short-term rentals include:

  • Accidental damage: This encompasses accidental spills, broken items, or damage caused by guests’ negligence. It might include stained carpets, broken furniture, or damaged appliances.
  • Excessive wear and tear: Continuous occupancy leads to regular wear and tear on the property. Frequent usage of amenities, such as HVAC systems, plumbing fixtures, and electrical appliances, can accelerate their deterioration.
  • Property alterations: Guests might make unauthorized modifications to the property, such as painting walls, installing fixtures, or attempting DIY repairs that end up causing further damage.
  • Noise and disturbances: Excessive noise or disruptive behavior by guests can cause disturbances, potentially leading to complaints from neighbors or even fines from local authorities.
  • Accidents and injuries: Guest-related accidents can occur, resulting in property damage. For instance, a cooking mishap leading to a kitchen fire or water damage due to a plumbing issue caused by a guest.
  • Theft or vandalism: Though less common, theft of items from the property or intentional vandalism can occur, resulting in significant losses for the property owner.
  • Infestations or pest problems: Guests can unknowingly introduce pests or insects into the property, leading to infestations that require professional intervention to resolve.

To mitigate these risks, property owners can implement several strategies:

  • Purchasing comprehensive insurance: Securing insurance policies tailored for short-term rentals that cover damages caused by guests can offer financial protection.
  • Establishing clear house rules: Establishing and communicating clear guidelines and rules for guests can help prevent accidents and misuse of property amenities.
  • Performing regular inspections: Conducting regular inspections before and after guest stays can identify potential damages early and address issues promptly.
  • Requiring security deposits or damage waivers: Collecting security deposits or implementing damage waivers can provide a financial buffer to cover repair costs in case of damages.

We Can Help with Legal Issues Related to Your Short-Term Rental

Investing in properties for short-term rentals in Tennessee can be lucrative, but it’s not without its complexities and risks. Navigating neighborhood restrictions, zoning laws, HOA regulations, and mitigating legal liabilities demand intense research and due diligence.

At Ralls & Wooten, we understand the pitfalls that can come with owning and operating a short-term rental. Our Tennessee civil lawyers have years of experience in many types of law associated with short-term rentals, including real estate and construction law, contract law, neighbor disputes, and more.

If you’re thinking about purchasing a property to turn into a short-term rental and want legal guidance, or if you already own one and need to solve a legal problem, we’re here to help. Contact us today for a free consultation.