Short-Term Rental Restrictions in Mountain Town

Robinson & Henry’s knowledgeable attorneys give their professional insight in “From Our Perspective” where we take a closer look at successful outcomes achieved by our attorneys. We’ll also share our legal expertise on other cases and legal issues in Colorado.

In this episode, Civil Litigation Partner Boyd Rolfson discusses a recent case involving short-term rental restrictions in a Colorado mountain town. Our client purchased a vacation home and hoped to rent it out on platforms like Airbnb and Vrbo. Instead, the client lost hundreds of thousands of dollars in potential rental income and had trouble trying to sell the property. After negotiations, our client reached a deal that removed the restrictive covenant, allowing them to maximize their property’s potential.

Past results afford no guarantee of future results; each matter is different and must be judged on its own merits. Facts are those of an actual Robinson & Henry litigation case. 

Client’s Costly Discovery

After purchasing a vacation home in the mountains, our client was looking forward to making some money renting it out during the busy ski season. But instead of the profitable investment they expected, they found themselves in a tough situation.

After the purchase, our client discovered a restrictive covenant on the property that banned short-term rentals. The covenant wasn’t a standard rule from the town or homeowner’s association. It was tied specifically to our client’s property because of an agreement with a previous owner. 

Dispute Over Covenant 

The covenant required the property owner to submit reports about renters, like employment records, to the town which complicated matters. The town took a very strict stance about the covenant making it nearly impossible for the client to rent the property for short stays. These short-term rental restrictions had a huge financial impact on the property’s profitability. The town also added a $100 daily fine for violating the covenant.

The Settlement

After lengthy negotiations with the town, Attorney Boyd Rolfson and his team worked out a favorable settlement for the client. In exchange for our client making a one-time payment to the town, the restrictive covenant would be removed. This had a positive impact on the property’s market value. Without the covenant, the property instantly became more appealing to potential investors.

Lessons for Future Property Investors

This case illustrates the importance of doing your research before buying a property in areas with possible short-term rental restrictions. If you’re thinking about buying a property in one of Colorado’s mountain towns or are already in a dispute over short-term rental restrictions, our team can help you protect your investment. 

Read this video’s full transcript:

Question: Boyd, thank you for joining me. Tell me more about our client and why they reached out to you.

Boyd: This was a client that came to us who purchased a property some years ago in a mountain ski town, purchased it as an investment property, the client lives out of state for the purpose of being able to make money during the ski season and rent it at that premium rental rate. 

Well, come and find out, they purchased a property that had a covenant restriction that specifically restricted short term rentals on this property, which translated as they're not able to rent it on Airbnb or Vrbo, which is very popular among vacationers and skiers. They couldn't use their property for the purpose which they had purchased it for. 

Question: And why was this property covenant so unique in this situation?

Boyd: This one was unique because it wasn't a community wide covenant. It only applied to this specific property and one that the town had placed on this property, under a previous owner, under a deal to grant them a permit, allowed them to remodel the property and place this covenant on the property. 

That's very unique. Usually covenants apply to the whole neighborhood or a whole area or a whole town. It was unique to have one property with this specific restrictive covenant. 

Question: How was the covenant being interpreted then by each party in this situation? 

Boyd: One of the problems is, was the interpretation of the covenant, because the town really used it as an opportunity to be very restrictive and to require the owner to submit stats, to submit regular reports about the people that were renting this property.

The covenant went on to say that those people that rented the property they would allow short term if they worked full time in, in the town where they lived. 

They had to have a full-time job. Therefore, they were requiring them to submit reports on employment records and very invasive information for the people who are renting it. And that's how the town interpreted it. 

Of course, the covenant was a little ambiguous. And of course, our client and we did not interpret in the same way and saw it as they had the opportunity to monitor once in a while. But no required regular reporting of who rented the property. 

Question: How much were the fines and the estimated financial loss for our client for not being able to rent the property? 

Boyd: Not being able to rent the property, the client really would lose out on the prime ski season, which the property is in a ski town in Colorado. Would lose out all that revenue during the ski season because they couldn't rent it out in short term amounts, so they would lose hundreds of thousands each year in potential rentals.

In addition to that, for violation of the covenant, the town attempted to fine a $100 a day for every day that they were in violation of that covenant, so the losses and the fines really could stack up for our client. 

Question: Sounds like it definitely added up. After negotiations, what was the settlement that was reached?

Boyd: Ultimately, negotiating and, and working with the town, with our client, we ultimately reached a settlement where our client would pay the town a one-time payment.

Not a large payment, but a fair payment. And the town agreed to remove the restrictive covenant. It's very beneficial for our client to be able to rent that or, as he planned, to resell the property because the value had really jumped. 

One of the key values of the property is whether or not an investor would be able to rent out the property. Removing this restrictive covenant allowed him to reach out to investors willing to pay much more for the property with this restrictive covenant removed. 

Question: What advice would you give to anyone who's considering purchasing a property and they want to use it as a rental?

Boyd: Any potential investor purchasing a property really should do the due diligence to find out what potential covenants, especially those covenants that restrict their usage on the property. And those covenants can come from a homeowner's association or condo association. 

It can come from the city covenants or town, or it can come from the county. Really doing your background and research, knowing what you can use the property for, will save you a lot of potential losses in the future.

And that's something that we can help to interpret what those covenants allow purchasers to do and what they can use their home for.