MADISON, Wis. (CN) – The Wisconsin Supreme Court heard oral arguments Friday in a case centered around whether operating a home as a vacation rental constitutes commercial activity.
The neighbors, represented by Linda Coleman of Carlson & Coleman, argued the rentals violate a restrictive deed covenant everyone in the neighborhood adheres to, which dictates “there shall be no commercial activity on any of said lots.”
The trial court agreed and ruled the Neuschwanders’ short-term rentals violated the covenant’s prohibition against commercial activity and ordered an injunction barring further rentals, except during the weekend of North America’s largest cross country ski race, the American Birkebeiner.
Attorney Anne Berleman Kearney of Appellate Consulting Group filed an appeal on behalf of the Neuschwanders and the Wisconsin Court of Appeals reversed last year, finding that public policy favors free and unrestricted use of property. It deemed the restrictive covenant to be ambiguous as to whether the ban commercial activity on the neighborhood lots was meant to preclude short-term rentals.
The Wisconsin Court of Appeals noted that several other state appeals courts have ruled similarly, and also found that the trial court went beyond the restrictive covenant and considered extrinsic evidence to determine the covenant’s intent.
The neighbors say the Neuschwanders’ home, advertised as “Lake Point Lodge,” was acquired as part of a tax-deferred 1031 exchange in which the Neuschwanders transferred another property in exchange for it. To maintain its tax status, they are required to hold the property for productive use in a trade business or for investment.
In 2015, the property was rented to over 170 people and the couple received $55,000 in rent and paid the city $4,000 in room tax, according to court documents.
The Neuschwanders argue the property is being held for trade or business purposes, is being advertised for rental and is being rented in exchange for money, which is being taxed.
“We think because words like ‘owner-occupied’ and ‘leasing’ are not in the covenant terms, that means that they are not unambiguously prohibited…You really need to look at what’s on the property itself and the use of the property,” attorney Berleman Kearney argued before the Wisconsin Supreme Court on Friday.
She said the nature of the use of the property is not about what the owner does, but rather what the tenant does.
“The focus is what’s happening in the residence. What [is the tenant] doing when they step into the shoes of the owner? They are eating, sleeping, recreating… You could be stepping in as a short-term rental and selling bait and tackle, that’s different,” Berleman Kearney said.
The neighbors’ attorney, Coleman, disagreed and argued in her rebuttal that the relevant issue is actually the money exchange, not the activity.
“The inquiry should be not on what the activity is but whether somebody is paying to engage in it on the lot. I can watch a DVD at home, that’s not commercial. I can pay to do it somewhere else—that is,” she said.
Justice Annette Ziegler questioned the definition of “commercial activity.”
“People have home offices, people sell things on eBay, people babysit… they sell Mary Kay,” Ziegler said. “Here is what troubles me: if I own property, I think there’s a presumption that I can do a lot of things with my own property and if you’re going to restrain me from doing things on my own property, it ought to be really clear what I’m prohibited from doing. So where is the clarity in the word ‘commercial activity?’ It seems so broad to me that it almost is unenforceable.”
Coleman explained her definition of the term.
“We don’t have here a year-long lease of a one-family that might look a lot like any other residential situation. We have a new party every week, with a huge group of people who are ready to cut loose and have a good time in a neighborhood they don’t know and they have no connection to,” the attorney said.
Coleman continued, “It’s repeated strangers coming through the neighborhood driving down this tiny drive, past all of these homes with a lot of traffic, lots of cars, trailers and noise. That’s what’s happening. It looks like many other businesses with hundreds of customers a year making tens of thousands. That’s commercial activity. It looks like it, it acts like it and we ask that this court enforce this covenant and protect these property owners and their expectations on this property.”
It is unclear when the Wisconsin Supreme Court will issue a decision in the case.