State High Court Holds Restrictions Limiting Property Use To Residential Purposes Do Not Prohibit Short-Term Rentals

  • Tuesday, October 17, 2023

The Tennessee Supreme Court held Tuesday 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.

Four Seasons is a housing development on Center Hill Lake in Dekalb County, Tennessee.

FSD Corporation operates the Four Seasons homeowners’ association. Pratik Pandharipande purchased a property in Four Seasons in 2015. The property was subject to restrictive covenants that stated the property must be used for “residential and no other purposes.” Pandharipande began leasing his property to third-parties exclusively on a short-term basis. His leases lasted between two and 28 days. In 2018, a majority of FSD’s shareholders amended the restrictive covenants by a majority vote. The amendments provided that property owners could lease their properties but imposed a minimum lease term of 30 days. Pandharipande continued to lease his property for terms of fewer than 30 days.

Pandharipande sued FSD and sought declaratory and injunctive relief. FSD counterclaimed and also sought declaratory and injunctive relief. Pandharipande argued that no restrictive covenant prohibited him from using his property for short-term rentals. FSD, by contrast, argued that both the original restrictive covenants and the 2018 amendments prohibited such use. The trial court granted summary judgment in favor of FSD, holding that Pandharipande’s short-term rentals violated the residential-purposes provision of the original restrictive covenants as well as the 2018 amendments. The Court of Appeals affirmed.

The Supreme Court granted Pandharipande’s application for permission to appeal.

The Court first considered whether the residential-purposes provision of the original covenants prohibited Pandharipande’s short-term rentals. The Court examined the text of the provision and concluded that, at best for FSD, the provision is ambiguous as to whether short-term rentals are allowed. Because restrictions on property use must be clear and unambiguous, the Court held that the residential-purposes provision does not prohibit Pandharipande from leasing his property for short terms.

The Court next considered the 2018 amendments. Pandharipande did not dispute that his short-term rentals would violate the provision imposing a minimum lease term of 30 days. He instead argued that his short-term rentals were permitted under the amendments’ grandfather clause, that amendments to restrictive covenants may not impose additional restrictions on property use, and that the amendments were arbitrary and capricious. The Court rejected those arguments and held that the 2018 amendments prohibited Pandharipande’s short-term rentals. The Court therefore affirmed the Court of Appeals in part, reversed in part, and remanded for further proceedings.

To read the Court’s unanimous opinion, authored by Justice Sarah K. Campbell, visit the opinions section of TNCourts.gov.

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