Wednesday, July 6, 2022
HomeVacation RentalHow 1999's NC Vacation Rental Act is a Model for Today's Regulations

How 1999’s NC Vacation Rental Act is a Model for Today’s Regulations


How 1999’s NC Vacation Rental Act is a Model for Today’s Regulations

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Photo: Waterfront homes in Surf City, NC, courtesy Gene Gallin

In 1994, the Conley family stepped onto their Emerald Isle vacation rental deck for a family photo. The deteriorated deck nails gave way under the weight of 20 people, and the deck collapsed, injuring several of them.

Jim Batten, then owner of Emerald Isle Realty (EIR), the property’s management company, lived just a quarter of a mile away. As soon as he heard what happened, he was immediately on the scene to see what he could do to help, said Julia Wax, his daughter and current owner of Emerald Isle Realty. “Of course, as a property manager, we have certain duties and responsibilities, but we also take it very seriously that we’re also their neighbor for that week.”

The Conleys sued Emerald Isle Realty, and the case made its way to the Supreme Court of North Carolina.

In early 1999, the court ruled in the property manager and homeowners’ favor, stating that the North Carolina Residential Rental Agreements Act that governs primary residence rental landlords does not apply to vacation rentals nor their brokers, thus applying the “buyer beware” principles of common law.

The decision created several new problems, questions – and opportunities – in its wake. Among them was the new risk that without the Residential Rental Agreements Act standards and the protection such regulations provide, vacation rental brokers were left vulnerable to other lawsuits and an absence of insurance providers willing to underwrite policies for short-term rental properties in the state. Furthermore, if vacation rentals were not considered residential, they could fall under more restrictive innkeeper laws governing hotels.

In the NC Supreme Court’s opinion, Chief Justice I. Beverly Lake Jr. closed with an encouragement of the state legislature to address what he called “a unique situation which does not appear to have been contemplated by our legislature.”

“Because our General Assembly has legislated so pervasively in the area of landlord-tenant relations, I join the majority in declining to make what I consider to be a badly needed change in this area of landlord-tenant liability,” he wrote. “This area of the law is ripe for legislative action.”

The Opportunities in Smart Regulation

And so it was. The vacation rental industry collectively recognized that in addition to safety and property care standards, there were three key challenges and headaches state legislation could help them solve.

Advance Payments and Property Sales

In the 1990s, properties were advertised primarily via catalogs. Property managers would send a printed book of their listings and weekly rates to prospective guests at the beginning of the year, who would then book their vacation months ahead and pay deposits to hold the dates.

Some property managers would disburse some or all of that income to the homeowners right away, leaving them in a bind should the guest cancel. They would pay the refund out of pocket and have to recoup the loss back from the homeowner. Some property managers would hold on to all or a portion of the advance payments to prevent this and would only disburse booking revenue to the owner once the guest checked in, but this created a competitive disadvantage in recruiting owners who wanted or needed their rental revenue right away.

Additionally, property managers had little to lean on when a property was sold. Property buyers could elect not to honor reservations on the books at the time of purchase, forcing the cancellation of guests’ reservations, sometimes on short notice with no availability to move them to comparable properties.

Evictions

Property managers also needed an enforcement solution for those who overstayed their lease. Long-term tenant evictions could take months, an option that would not work when a home’s next guests would be checking in within hours.

Evacuations

Finally, property managers needed a better way to handle mandatory evacuations. Particularly for managers on North Carolina’s hurricane-prone coast, they needed standards for handling refunds for guests who were forced to evacuate or who could not arrive at their vacation rental because of emergency orders or storm damage.

“We were just kind of lost,” said Tim Cafferty, owner of Outer Banks Blue and Sandbridge Blue. “There was nothing out there for us as vacation rental managers. We didn’t work under hotel-motel standards, and we didn’t fit under long-term rental standards.”

“The main thing was there was so much confusion, no rules and regulations in place that gave us in the industry anything to hang our hat on whenever a homeowner was upset or a guest was upset, and each company was doing the best they could to manage their company and their properties in such a way they could make a profit,” said Alan Holden, then owner of Alan Holden Realty and founding president of the North Carolina Vacation Rental Managers Association (NCVRMA). “It was just kind of like a bunch of wild horses running in different directions, or like a ship without an anchor; We needed something to hang our hat on and give us guidance.”

Coming Together

The state’s governing body over real estate sales and management, the North Carolina Real Estate Commission, took the lead in drafting legislation to fill the “unique situation.” Then Executive Director Phillip Fisher organized a task force of stakeholders from within the vacation rental industry and other important and influential voices to collaborate on a beneficial outcome.

Amongst the vacation rental industry representatives were Holden; Tim Midgett, owner of Midgett Realty and then chairman of the Outer Banks Tourism Board; the late Stewart Couch, then owner of Hatteras Realty; Doug Twiddy, owner of Twiddy & Company; the late S.R. “Buddy” Rudd, vice president with Margaret Rudd & Associates, Inc. and board member of the NCVRMA; and others. Several other property managers worked closely with task force participants in informal advisory roles, including Wax and Cafferty.

“It was the people in the industry who were the best practitioners who were very worried that they were in a situation where the law did not help them,” said Tom Miller, then special deputy attorney general, head of the real estate division. (At the time, the Real Estate Commission was a state agency within the attorney general’s office.)

Fisher brought in Miller, then Assistant Executive Director Miriam Baer, and Real Estate Commission General Counsel Blackwell Brogden to draft the legislation. He also invited David Kirkman and Harriet Worley from the state attorney general’s office, consumer protection division, to represent the interests of guests.

The group itself was not large, but each person represented an important perspective, Kirkman said, and there was a “desire on the part of several people to come up with a solution that didn’t harm the property owners or the consumers.”

The task force met – a lot, most interviewees emphasized. The stakeholders would come from all over the state to a big conference room at the Real Estate Commission and sit there all day, month after month, until they ironed it out, Miller said. He largely credits Fisher for creating “an environment for discussing policy where everybody was safe and people would eventually drop their defensiveness about their own constituencies and work together.”

“The great thing about a process like that is there’s no clock running, and by meeting over and over and over again, the representatives of these stakeholder groups got to know each other and trust each other,” Miller added. “And that’s how you make good legislation.”

Good Legislation

What they came up with was a robust but elegantly simple piece of legislation that solved everyone’s needs.

They first officially defined what a vacation rental is: “The rental of residential property for vacation, leisure, or recreation purposes for fewer than 90 days by a person who has a place of permanent residence to which he or she intends to return.”

Then, to address safety and the divisions of responsibilities between managers, owners, and guests, they used the established landlord-tenant laws of the Residential Rental Agreements Act as a model and copied its language nearly verbatim. This includes homeowners’ responsibilities to keep their properties in safe condition with features like carbon monoxide detectors, property managers’ duties to ensure owners maintain these standards, and guests’ responsibilities to maintain the dwelling units properly during their stays.

On advance payments and trust accounting, the bill included the requirement that brokers hold rental revenues due to the homeowner in a trust account in which at least 50 percent of the revenue had to be held until the guest checked in. Property managers could opt to disburse up to 50 percent to the homeowner prior to the guest’s check-in, but they were not required to.

To protect reservations on the books at the time of a property sale, they instituted a 180-day rule in which the new owner would be required to honor reservations for six months after taking ownership.

To solve the evictions challenge, they implemented a summary evictions option, a shortened process in which managers could bypass the court system and go straight to a local magistrate to enlist the support of law enforcement to evict guests on the expiration or violation of their lease.

For mandatory evacuations, the group leveraged a private solution: travel insurance. Property managers would be required to offer travel insurance to their guests to protect their vacations. Should the guest opt not to purchase it and a hurricane or other disaster shorten or prevent their stay, property managers nor the homeowner would be on the hook.

And finally, guests would have to agree to all of these provisions at the time of booking by signing a standardized rental agreement.

By the time the bill was proposed to the legislature later that year, it faced little opposition, Miller and Kirkman said.

“The real reason it went through pretty smoothly is that none of the major stakeholders – none of them – were surprised by the legislation because they had all been invited to that negotiating environment that Philip Fisher had created with the task force he had set up within the commission,” Miller said.

“It really did do a good job of marrying these different parties’ concerns and resolving them in a fairly reasonable and comprehensive manner,” Kirkman said.

Senator Dennis Wicker, Representative James Black and Governor James Hunt signed the bill, named the North Carolina Vacation Rental Act (NCVRA), into law on August 5, 1999.

To Pre-empt or Not to Pre-empt

As more North Carolina municipalities seek to limit short-term rentals today, many have debated whether the NCVRA pre-empts them from doing so, specifically whether it prohibits cities from requiring operators to get a permit or registration prior to operating.

In 2019, the state passed SB483 to clarify the NCVRA by adding “The provisions of G.S. 160A-424 and G.S. 153A-364 shall apply to properties covered under this Chapter” to the act. These general statutes cover inspections and registration, reading in part:

(c) In no event may a county do any of the following:  (i) adopt or enforce any ordinance that would require any owner or manager of rental property to obtain any permit or permission from the county to lease or rent residential real property or to register rental property with the county, except for those individual rental units that have either more than four verified violations of housing ordinances or codes in a rolling 12-month period or two or more verified violations in a rolling 30-day period, or upon the property being identified within the top ten percent (10%) of properties with crime or disorder problems as set forth in a local ordinance; […]

Some believe this is a pre-emption.

“In North Carolina, since 2019, there is no point in getting your city to do anything since the general assembly pre-empted local regulations,” Miller said.

While most other subjects in this article said they do not remember pre-emption being a part of the discussion in crafting the original law, a recent ruling in a lawsuit against the City of Wilmington may support Miller’s interpretation.

Wilmington passed an ordinance in February 2019 that, amongst other things, limited how many and where short-term rentals could operate based on a permit lottery system. Upon not receiving a permit, vacation rental owners David and Peg Schroder sued the city. Among their claims is that the Wilmington ordinance violates G.S. 160A-424 and G.S. 153A-364.

On April 5, 2022, a North Carolina appeals court ruled in their favor, striking down the pieces of the ordinance that require registration. “We agree with the trial court’s interpretation of Section 160D-1207(c) as prohibiting local governments from requiring a short-term rental owner to obtain a permit to rent under Articles 11 or 12, a permission to rent under the same Articles, or to register the property as a rental with the government,” the opinion states. However, a footnote attached to this line expands, “We do not interpret Sections 160A-424(c) or 160D-1207(c) as exempting rental properties from all zoning or permitting requirements; as Plaintiffs conceded at oral argument, even their reading would not preclude Wilmington from zoning or requiring Plaintiffs to obtain a building permit to construct an addition to their property.”

The decision throws into question other ordinances around the state, including Charlotte, which is currently revising its Unified Development Ordinance to which it plans to add new rules for short-term rentals.

As Adam Lovelady, an associate professor of public law and government at the School of Government at UNC-Chapel Hill, writes in his blog post Short-Term Rental Regulations After Schroeder, cities may not use rental registrations but may still apply their zoning authority by defining short-term rentals as a land use and implementing parking requirements, occupancy limits, operational restrictions, and more.

“Based on the Schroeder case, a local government may not require a short-term rental operator to register with the local government and the local government may not require a permit or permission under the building code or housing code to rent or lease property,” he adds. “But, may the local ordinance require the operator to obtain some other development approval such as a zoning compliance permit for the land use? Short answer: Based on the case and the statutory authority, an ordinance could require a zoning permit or similar development approval, but an ordinance could not use a zoning permit in a way that amounts to a registration program.”

The City of Wilmington may still appeal to the state Supreme Court, its final judgment deciding once and for all whether the NCVRA is a pre-emption law.

Standing the Test of Time

Despite the lingering question around pre-emption, the NCVRA has remained relatively untested and unchanged in 23 years, especially compared with other state laws like those in Florida and Arizona.

When asked why this is, Kirkman said, “I think it was precisely because of the process the Real Estate Commission followed in getting this thing put together and bringing various stakeholders to the table.”

He added, “I think the simplicity of having certain models that were out there, such as the Residential Rental Agreements Act, and the fear of what would happen if there wasn’t something on the books, is what made it so successful.”

Many of the subjects interviewed in this story said the NCVRA is one of the things they are most proud of in their careers and all credited the act’s success to this spirit of collaboration.

“The Vacation Rental Act was proof that business, individuals, owners, renters, the Real Estate Commission, our elected officials, the legislators, the governor – this is an example of everybody with a stake in this industry coming together to make this happen, and it’s the single most important creation that we all came together and made happen,” Holden said. “That’s the thing I think I’m most proud of.”

Alan Holden's commemorative plaque with a signed copy of the NC Vacation Rental Act given to him by Governor Hunt

Alan Holden’s commemorative plaque with a signed copy of the NC Vacation Rental Act given to him by Governor Hunt

Holden keeps on his office wall a plaque with an original copy of the act and a pen used to sign it gifted to him by Governor Hunt in appreciation for his work on the task force.

Holden sold his realty company last year and now focuses on his roles as the mayor and emergency director of Holden Beach. When asked about his view on the act as an elected official, he noted that long-time destinations like Holden Beach are different from urban areas grappling with short-term rentals today, but the act is still an essential resource for them.

“The Vacation Rental Act has given guidance to those elected officials, and if they follow it and pay attention, it will help eliminate a lot of the questions and concerns renters and owners raise,” he said. “It’s just a guiding light, is the way I look at it.”

Multiple subjects in this story said it was designed to be a living document and evolve over time, and the changes that have been made to it have been “tweaks” rather than major overhauls or attacks.

Cafferty called them “adjustments to real life,” each of them as carefully considered as the original language with multiple people at the table. Cafferty sat on a 2005 industry advisory group that helped adjust language around travel insurance – and still uses the paperweight gifted to him in recognition of his service.

Wax of Emerald Isle Realty (EIR) sat on a task force charged with rewriting vacation rental agreements to match the new rules after the act passed.

“I really would encourage other states to take a look at this process because it’s a way to say, ‘We’re proud of what we do as vacation rental managers,’” Wax said. This year, EIR is celebrating its 60th year as a family-owned business, now with the third generation at the helm.

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