Neighbors are often not happy with short term rentals in their neighborhoods. Even if the guests are quiet and respectful of the neighborhood setting, just the volume of unknown individuals in the neighboorhood can be unsettling.
But investors have rights. They have the right to rent their property to whomever they want.
This neighbor vs. investor tension often ends up in disputes in and with the home owners association (“HOA”). In some cases, HOAs go so far as to try to ban short term rentals. But can they do that?
The answer gets into deed restrictions and the HOA’s powers. The Texas Supreme Court case JBrice Holdings, L.L.C. v. Wilcrest Walk Townhomes Association, Inc., 657 S.W.3d __ (Tex. 2022), provides an opportunity to consider this issue.
Facts & Procedural History
Jerry purchased two townhomes in the Wilcrest Walk subdivision through his company, JBrice Holdings, LLC. Operating through the business entity, Jerry offered the townhomes for lease on vacation rental websites with two- and three-night minimum stays.
As with most real estate with HOAs in Texas, the townhomes were subject to neighborhood deed covenants that authorized the HOA to enforce restrictions and govern the community. One covenant governed leasing activity by requiring written leases and tenant compliance with neighborhood covenants. However, this same covenant contained limiting language: “Other than the foregoing, there shall be no restriction on the right of any townhouse owner to lease his unit.”
Another covenant limited townhome occupancy to “private single family residence[s] for the Owner, his family, guests and tenants” and prohibited commercial uses. The covenant stated that no owner could “occupy or use his Building Plot or building thereon, or permit the same or any part thereof to be occupied or used for any purpose other than as a private single family residence for the Owner, his family, guests and tenants.”
The HOA demanded that Jerry stop offering short-term rentals. Jerry filed suit to enforce the covenant granting owners the right to lease without restriction. The HOA counterclaimed, alleging breach of the residential-use provision. During litigation, the HOA adopted rules banning rentals of fewer than thirty days.
The trial court granted partial summary judgment to the HOA, ruling that Jerry violated the residential-use restriction. The court permanently enjoined Jerry from leasing its townhomes for periods of fewer than seven days. The court of appeals affirmed on different grounds, holding that Property Code § 204.010(a)(6) authorized the Association to adopt rules restricting short-term rentals. This appeal to the Texas Supreme Court ensued.
Texas Property Code § 204.010(a)(6)
Texas Property Code § 204.010(a)(6) grants homeowners HOAs broad authority to regulate property uses within their subdivisions. The statute allows HOAs to “regulate the use, maintenance, repair, replacement, modification, and appearance of the subdivision” when acting through their board of directors or trustees.
However, this authority comes with an important limitation. The statute begins with the phrase “Unless otherwise provided by the restrictions or the association’s articles of incorporation or bylaws.” This caveat means that HOA authority exists only when governing documents do not limit or prohibit the HOA’s power to adopt particular rules.
The “unless otherwise provided” language prevents HOAs from adopting rules that conflict with restrictions that property owners agreed to when purchasing their homes. When deed restrictions explicitly address a particular topic, those restrictions take precedence over conflicting association rules, even when the statute might otherwise grant such authority.
The statute applies specifically to Harris County HOAs, which includes the Wilcrest Walk subdivision. For HOAs outside Harris County, different Property Code provisions may apply, though similar limitations often exist regarding conflicts with governing documents.
What Does “Residential Use” Mean in Deed Restrictions?
Residential-use provisions in deed restrictions typically aim to prevent commercial businesses from operating in neighborhoods zoned for homes. These covenants protect property values by ensuring that neighbors do not establish retail stores, offices, or manufacturing operations in residential areas.
The question becomes whether residential-use language automatically prohibits all rental activity or only certain types of commercial operations. Courts examine the specific language used in deed restrictions to determine what activities the original property owners intended to prohibit.
Standard residential-use provisions often include language about “single family” occupancy and prohibitions on “business, commercial, trade or professional purposes.” The interpretation of these terms determines whether short-term rentals fall within prohibited activities or remain permissible residential uses.
Property owners who purchase homes subject to deed restrictions receive notice of existing limitations through the recorded covenants. However, they do not automatically consent to additional restrictions that HOAs might adopt later unless the governing documents grant such authority.
The Tarr Precedent and Residential Use Interpretation
The Texas Supreme Court previously addressed residential-use restrictions and short-term rentals in Tarr v. Timberwood Park Owners Association. In that case, the court held that covenants requiring “residential use” do not exclude short-term rentals absent specific language requiring minimum duration for tenant occupancy.
The Tarr court rejected arguments that “residential” implies physical occupancy with intent to remain for a substantial period. The homeowners association in that case argued that residential use required tenants to establish the property as their primary residence or maintain long-term occupancy.
The court found that covenant language “includes no such specification and remains otherwise silent as to durational requirements.” Without explicit durational requirements, residential-use provisions cannot prohibit short-term rentals simply because they involve brief tenant stays.
The Tarr decision established that courts will not read durational limitations into residential-use covenants unless the covenant language specifically creates such requirements. This principle protects property owners from unexpected restrictions that exceed the plain language of their governing documents.
Does “Private Single Family Residence” Create Duration Requirements?
The Wilcrest Walk covenants required that properties be used only as “private single family residence[s] for the Owner, his family, guests and tenants.” The HOA argued that this language prohibited short-term rentals because such rentals were not “private” in nature.
The court examined what “private” means in the context of property use restrictions. The term “private” means “for the use of one particular person or group of people only.” In the Wilcrest Walk covenants, the permitted group expressly included “tenants,” which prevented the HOA from excluding tenant occupancy based on duration.
The HOA attempted to equate “private” with “non-commercial” use. However, this interpretation would render the separate commercial-use prohibition meaningless. The covenants already contained specific language prohibiting commercial uses while excepting tenant occupancy from this prohibition.
The court emphasized that contract interpretation requires giving effect to all covenant provisions rather than rendering any superfluous. When covenants contain both residential-use requirements and separate commercial-use prohibitions, each provision must have independent meaning and effect.
Commercial Use Prohibitions and Rental Income
Deed restrictions commonly prohibit “business, commercial, trade or professional purposes” in residential neighborhoods. Property HOAs often argue that generating rental income from residential properties constitutes prohibited commercial activity.
The court distinguished between commercial activity conducted on the property and residential occupancy that generates rental income. When rental income derives from tenants’ residential use of the property rather than business operations conducted on the premises, the residential-use provision does not prohibit such income.
The Wilcrest Walk covenants specifically excepted tenant use from commercial activity by including tenants among those permitted to occupy the properties. This exception required no minimum duration, which meant that short-term tenants received the same protection as long-term tenants under the covenant language.
Property owners who lease their homes for residential occupancy do not violate commercial-use prohibitions merely because they receive rental income. The nature of the tenant’s use determines whether the activity falls within residential or commercial categories.
When Covenant Language Explicitly Limits HOA Authority
The Wilcrest Walk covenants contained specific language limiting the HOA’s authority to impose additional leasing restrictions. The covenant stated that “there shall be no restriction on the right of any townhouse owner to lease his unit” beyond requirements contained within the covenants themselves.
This explicit limitation directly addressed HOA rule-making authority regarding leasing restrictions. The covenants were not silent about additional leasing rules. They specifically prohibited such rules unless found within the governing documents themselves.
Courts cannot ignore explicit covenant language that limits HOA authority. When property owners agree to restrictions that include specific limitations on HOA powers, those limitations become binding contractual terms that HOAs cannot override through subsequent rule-making.
The phrase “no restriction” means exactly that. HOAs cannot adopt rules that impose additional restrictions when covenant language explicitly prohibits such restrictions. This principle protects property owners’ reasonable expectations based on the governing documents they agreed to at purchase.
Property Code Authority Cannot Override Explicit Covenant Limitations
The court of appeals had ruled that Property Code Section 204.010(a)(6) independently authorized the HOA to restrict short-term rentals. However, the Texas Supreme Court found this analysis incorrect because it ignored the statute’s “unless otherwise provided” limitation.
When deed restrictions explicitly address HOA authority on particular topics, those restrictions fall within the statute’s exception. The Property Code cannot grant authority that governing documents specifically withhold from HOAs.
The court applied its precedent from Brooks v. Northglen Association, where deed restrictions limited HOA assessment authority. Because the deed restrictions “otherwise provided” specific limitations on assessment increases, the HOA could not rely on statutory authority to exceed those limitations.
Statutory authority serves as a default rule when governing documents remain silent on HOA powers. However, when governing documents explicitly address particular topics, those contractual agreements take precedence over conflicting statutory provisions.
Short-Term Rentals as Legitimate Leases
The HOA argued that short-term rentals should be classified as licenses rather than leases, similar to hotel accommodations. They contended that brief occupancy periods created different legal relationships that fell outside traditional leasing protections.
The court rejected this distinction, defining a lease as “a contract by which a rightful possessor of real property conveys the right to use and occupy the property in exchange for consideration.” Short-term rentals maintain the essential characteristics of leases when they provide tenants with exclusive occupancy rights for specified periods.
Jerry’s rental agreements granted tenants exclusive possession of the townhomes for the contracted durations. The evidence showed no basis for concluding that these arrangements constituted licenses rather than legitimate lease agreements.
Courts will not differentiate between short-term and long-term tenancy in ways that the governing covenants themselves do not create. When covenant language treats all tenant occupancy equally without durational distinctions, HOAs cannot impose such distinctions through rule interpretations.
The Takeaway
The Texas Supreme Court’s decision in JBrice Holdings establishes that standard residential-use language in deed restrictions does not automatically prohibit short-term rentals without specific durational requirements. Covenant provisions requiring “residential use” or “private single family residence” occupancy do not create minimum lease term requirements unless the language explicitly states such limitations. Property owners who invest in rental properties benefit from understanding that deed restrictions must contain clear, specific language to prohibit particular uses, and general residential-use provisions may not restrict rental duration without explicit durational requirements. This decision protects property owners’ reasonable expectations while preserving HOAs’ ability to address legitimate community concerns through appropriate covenant enforcement and amendment procedures.
