June 11, 2018 – Owners of a vacation lake home in Hayward can rent it out to vacationers nightly or weekly, the Wisconsin Supreme Court has ruled, despite a restricted covenant that prohibits “commercial activity” in the subdivision.
Lee and Mary Jo Neuschwander (Neuschwander) own a lake home on a peninsula within Lake Hayward. They started renting it through Vacation Rental by Owner (VRBO), but the neighbors within the subdivision sued them, arguing that the restrictive covenant that binds the subdivision clearly prohibits commercial activity.
The Sawyer County Circuit Court ruled against Neuschwander. The Wisconsin Court of Appeals reversed, and the neighbors sought Supreme Court review to determine whether a short-term rental is considered prohibited “commercial activity.”
Recently, in Forshee v. Neuschwander, 2018 WI 62 (June 5, 2018), a majority (6-1) affirmed, concluding that restriction did not cover the short-term rentals.
“We conclude that the term, ‘commercial activity,’ which is undefined in the covenant, is ambiguous,” wrote Chief Justice Patience Roggensack.
“Therefore, we narrowly interpret it and conclude that it does not preclude either short-term or long-term rentals of Neuschwanders’ property.”
Justice Shirley Abrahamson wrote a concurring opinion, concluding the lead opinion “reaches the right conclusion for the wrong reasons.”
Justice Daniel Kelly also wrote a concurring opinion, joined by Justice Rebecca Bradley, applying “grammatical elbow-grease” to conclude that the plain meaning of the covenant “simply does not say what [the neighbors] want it to say.”
The lone dissenter, Justice Ann Walsh Bradley, concluded that renting out the property clearly violates the restrictive covenant: “It relates to commerce and has profit as its chief aim,” she wrote, noting Neuschwander earned more than $55,000 in rent in 2015.
The chief justice noted that free and unrestricted use of property is the public policy in Wisconsin, and restrictions must be “strictly construed to favor unencumbered and free use of property.” Chief Justice Roggensack said restrictive covenants must be clear.
“[I]f the meaning of a restrictive covenant clearly can be ascertained from the words of the covenant itself, its restrictions will be enforced,” the chief justice wrote.
But the term “commercial activity” is not clear in this case, she said. “It could be that the drafters were attempting to prevent a lot from being used as a lakefront restaurant or a filling station for boats,” Chief Justice Roggensack wrote.
“On the other hand, perhaps a homeowner could maintain a daycare for preschool children in his or her home without running afoul of the commercial activity proscription.”
Without guidance, the term is ambiguous, Roggensack’s opinion explains. Examining the dictionary definitions of “commercial” and “activity” did not help, and case law notes that restrictive covenants must be clear and unambiguous, she said.
The lead opinion also notes that the home, built in the 1980s, was first used for short- and long-term rentals by people other than the actual owner.
Louisiana Pacific first owned the home and corporate executives used it to entertain guests, including clients, vendors and politicians, Chief Justice Roggensack noted.
“[I]f the encumbrance actually were placed on the property to proscribe short-term stays, as the original owner would have been well-aware of the restrictive covenant, Louisiana Pacific would not have built and maintained the house as it did.”
She said the restrictive covenant, with its ambiguities, had to be interpreted narrowly to allow short-term rentals that were not clearly prohibited.
Justice Abrahamson’s concurrence agreed that short-term rentals were not prohibited under the restrictive covenant. She said the language was unambiguous, but Neuschwander did not violate the deed restriction by renting the place out.
Abrahamson said that engaging in short-term rentals to make a profit is a commercial activity, but that commercial activity does not take place on the property. The only activity that takes place on the property is residential living by non-owners.
“In the instant case, the Neuschwanders’ activity involves the property, but it is not conducted on the property,” she wrote. “To conclude otherwise would be to impermissibly rewrite the language of the restrictive covenant.”
Justice Kelly’s concurrence took the grammatical route. “[T]he prepositional phrase tells us the sentence does not apply to all ‘commercial activity,’ but only to ‘commercial activity’ as further described by the prepositional phrase,” Justice Kelly wrote.
“Because the restrictive covenant is a location-specific prohibition of commercial activity, our application of its language must begin with surveying what is happening in the Property,” wrote Kelly, noting that what is happening on the property is residential.
But Justice A.W. Bradley didn’t agree that short-term leases were not covered by the commercial activity language, noting the more than $50,000 profit in 2015. “To run such a lucrative enterprise is, in my view, plainly commercial activity,” she wrote.
She was concerned with the neighbors’ rights too. “This is particularly problematic because the rapid development of the short-term rental industry appears to have outpaced the development of the law,” Justice A.W. Bradley wrote.