The Evolving World of Short-Term Rentals In Arizona

May 5, 2023 Stephen Aron Benson Paul F. Dowdell Real Estate Law

The rise of short-term rental (STR) activity in the state of Arizona over the last decade has been meteoric and difficult to ignore. The popularity of rental platforms such as Airbnb has spurred the growth of the market for STRs (generally understood to be rentals of 30 days or less), creating both a bonanza for participating property owners and their renters, and a challenge for neighboring property owners and their neighborhood associations who sometimes have to deal with trash, noise, crime, and other undesirable circumstances.   

The current state of affairs was created by the 2016 enactment of legislation now codified as A.R.S. §9-500.39, which stripped from Arizona municipalities the power to prohibit STRs, including vacation rentals. The statute has since been amended on several occasions and now allows cities and town to regulate (but not totally ban) STRs for certain specified purposes, including the protection of public health and safety, the adoption and enforcement of zoning ordinances, the limitation or prohibition of STR housing for sex offenders, sober living homes or adult-oriented businesses, the imposition of permit and license requirements, and the imposition of compulsory liability insurance coverage. The statute also now contains a “party house” provision that disallows the use of STRs for non-residential uses that would otherwise require a permit or license pursuant to state law or city/town ordinance. Importantly, the statute only applies to cities and towns. It does not prevent homeowner and condominium associations from barring or restricting STRs in their communities in accordance with their governing documents. 

As STRs continue to proliferate in Arizona, efforts to control their growth and operation have proceeded down two different tracks. Under the first track, cities and towns have aggressively sought to enact ordinances to restrict STRs to the maximum extent allowable under A.R.S. §9-500.39 (as amended). Under the second track, homeowner and condominium associations have sought to amend their governing documents to bar, or at least significantly restrict, STR activity in their communities. 

Examples of the first track are evident in the Phoenix metropolitan area, where a number of cities and towns have enacted ordinances to regulate and control STR activity within the confines of state law. Among many others, ordinances have been enacted for this purpose in Phoenix (Ordinance No. G-6653), Scottsdale (Ordinance No. 45-66), Mesa (Ordinance No. 5734), Tempe (Ordinance No. 02023.01), Chandler (Ordinance No. 4939), Glendale (Ordinance No. 022-34), and Peoria (Ordinance No. 2022-20). While a detailed discussion of these ordinances is beyond the scope of this note, all of them involve some mix of mandatory STR operator licensing or permitting, mandatory notifications to adjacent property owners, mandatory emergency contact requirements, mandatory minimum liability insurance requirements, and civil penalties for ordinance noncompliance. Most of these ordinances have been in effect for less than a year and will undoubtedly continue to undergo refinements as time goes on.

The approach taken in the second track by homeowner and condominium associations has generally centered around association attempts to amend the governing documents of the association (typically a recorded “Declaration of Covenants, Conditions and Restrictions” known as “CC&Rs”) to strictly prohibit STRs in their communities. That objective is seemingly accomplished with little difficulty since it typically requires only an amendment to the CC&Rs following a vote of the association membership taken in accordance with the particular voting scheme set forth in the CC&Rs. Since most homeowners in any given association are not STR operators, achieving the requisite number of votes to bar STRs does not seem to pose a significant hurdle for most associations. 

But, the ability of associations to freely amend their CC&Rs to prohibit STRs may now be significantly curtailed as a result of a March 2022 decision of the Arizona Supreme Court. In a case entitled Kalway v. Calabria Ranch HOA, LLC., the Court determined that amendments to CC&Rs, even if passed by the requisite number of votes mandated by an association’s governing documents, must be reasonable and foreseeable in order to be enforceable. As the Court explained, this means that the language in the original CC&Rs must give sufficient notice to homeowners of the possibility of a future amendment and that an association cannot create a new restriction or obligation in an amendment where the original CC&Rs did not provide notice to homeowners that they might later be subject to such a new restriction or obligation. The language of the Kalway decision at least suggests that where an association seeks to amend its CC&Rs to bar STRs, and the original CC&Rs give no notice that a member’s use of his/her property can be restricted by the association at some later date, the amendment may be unenforceable under Arizona law. While the Kalway decision did not involve or specifically address STRs, the language of the decision is expansive enough to be concerning for all associations who are contemplating or have already adopted a CC&R amendment that restricts or bars STRs. Whether such amendments would survive a court challenge in light of the Kalway decision is simply unknown at this time. 

There are generally at least two sides to every issue, and the debate surrounding STRs in Arizona is no exception. Arguments in favor of STRs often center around the premise that the right to rent out one’s home is a core right of private property ownership (as is the right to sell one’s home), and that attempts to ban or regulate STRs violate that core property right. Arguments in opposition to STRs often focus on the burden to neighborhoods caused by some STRs, such as noise disturbance and parties, parking issues, trash disbursement and instances of disorderly conduct. Both positions raise legitimate issues which do not lend themselves to easy answers. As a consequence, the future of STRs in Arizona will almost certainly be shaped by more legislative action and judicial decisions in the coming years.