Legal Issues with Respect to Virtual Hotels
By Banks Brown
*Co-authored by Audrey Lu, Associate, McDermott, Will and Emery, LLC* Over the past few years a new business model has taken center stage in the market for transient lodging. The fundamental nature of this new model is an internet booking platform that facilitates and participates in the short-term transient rental of private homes and apartments. Participants in the market are, for example, Airbnb, HomeAway, and onefinestay. The model is often described as part of the sharing economy, in the sense that it facilitates the “sharing” of residential space between transient guests and the primary occupant of that space. This new model raises a number of legal concerns that have long been addressed by the hotel industry. The legal requirements imposed upon the transient lodging industry trace their origin to the ancient days of England where road houses, taverns, and inns provided rooms to travelers. A series of common-law requirements were imposed by the English courts upon these transient lodging facilities because travel was so dangerous. It was during this period of time that inns became known as “quasi-public” institutions, with duties of requiring housing for those who were traveling as long as there was room and providing safety precautions for such persons and their property. These duties still exist to this day and have been supplemented by further stringent regulations and rules concerning safety of guests and their property and the additional duty to take in guests without discrimination(i). These duties can be – and are – fulfilled by hotels and inns because the innkeeper is in charge of the building that contains the rooms in which guests stay. However, the use of private residences (such as apartments, co-ops and condominiums) that are spread throughout a building and throughout a city for transient lodging purposes, creates a near impossibility that the rules developed to protect transient guests in a foreign place can be followed. Additionally, in an urban setting, this new model creates questions concerning land-use and affordable housing. This article addresses the legal issues that are now being raised as a result of such a model that is operating in the well-developed and highly regulated market of transient lodging. Although the article concentrates on New York law, which is the most developed in the country on these issues, it also applies, in part, to other jurisdictions. **Findings of the New York State Attorney General.** An October 2014 report by the New York State Attorney General Eric Schneiderman (“NYAG Report”), based on data obtained directly from Airbnb for bookings on its platform between January 1, 2010 and June 2, 2014, provides clear insight into these types of enterprises(ii). The NYAG Report concluded that a large percentage of Airbnb’s revenues came from “hosts” who were not residential owners of apartments seeking to “share” their residences, but rather were commercial users operating multimillion-dollar businesses. The NYAG Report concluded that over 100 “hosts” controlled more than 10 different apartments that were rented out regularly through Airbnb. Together, these “hosts” booked 47,103 reservations and earned $59.4 million in revenue. The most prolific “host” administered 272 unique listings, booked 3,024 reservations and made $6.8 million in revenue. Additionally, while only 6% of hosts ran large-scale operations on Airbnb, that same group dominated the platform and generated 36% of all rental revenues(iii). The NYAG Report also found that short-term rentals were displacing long-term housing options in New York City. In 2013, more than 4,600 units were booked for at least three months of the year. Of these, nearly 2,000 were booked for a cumulative total of six months or more, rendering them largely unavailable for use by long-term residents. Notably, the share of host revenue from units booked as short-term rentals for more than half the year increased steadily, accounting for 38% of the site’s revenue by 2013(iv). The NYAG Report also noted that the data suggested that 25,532 out of the 35,354 private, short-term units violated either New York State’s Multiple Dwelling Law and/or New York City’s Administrative Code (zoning laws). It found that hosts generated approximately $304 million in revenue from these listings alone and, Airbnb itself earned almost $40 million from these transactions(v). Additionally, the NYAG Report found that the data supported the conclusion that a large number of bookings violated the New York laws that prohibit commercial enterprises from operating as hostels. The report noted that in 2013, approximately 200 units were booked through Airbnb for more than 365 nights during the year, indicating that multiple, unrelated guests shared the same unit on the same night, as they would in a hostel. The 10 most-rented units were booked for an average of 1,900 nights in 2013, with one top listing average 13 reservations per unit per night(vi). In sum, the NYAG Report found that the model itself is big business, with a significant number of “hosts” running their own big businesses through the operations of, in this case, Airbnb. Based on the NYAG Report, there is also reason to believe that the lion’s share of listings violate New York State and/or City Codes. **The New York State and City Codes.** The codes that the NYAG Report found are being violated are not merely technical. Rather, for decades, large areas of New York City, as a matter of zoning law, have not permitted transient occupancy, such as tourist occupancy, and, thus, do not allow hotels in such zones. The purpose of these zoning laws is to maintain those areas of New York City as long-term residential communities, necessary to maintain the neighborhood nature of the City(vii). These zoning regulations effectively prevent the transient use of apartments within such zones. At the time that the zoning law preventing transient use in certain portions of New York City went into effect over fifty years ago in 1961, two types of hotels were operating throughout the City – transient hotels and apartment hotels (viii). Transient hotels were hotels that typically had a high number of guests, who stayed for less than 30 days. By contrast, apartment hotels were buildings that were constructed for long-term use (and included amenities such as, for example, some method of cooking) and, generally, had guests who stayed longer than 30 days. The zoning law grandfathered in then-existing transient hotels. As a result, if a transient hotel was operating in a district that disallowed transient use after the zoning law, that hotel could continue to do so. But no new transient hotels could be built in such a district. Similarly, the zoning law also prevented apartment hotels from being converted into transient hotels and required them to remain long-term use hotels. The law was amended slightly in 2010(ix). While the 2010 legislation is widely referred to as the “illegal hotel” law, in fact, all it did was define certain terms in a law that had already been on the books for decades. The prohibition against renting residential apartments as any type of transient hotel room, with minor exceptions, arises from the New York City building and fire codes and from a decades-old zoning prohibition designed to protect the character of the City. It appears from the NYAG Report that Airbnb’s New York City listings are nearly exclusively in apartment buildings. These rentals of apartments by tourists for short-term stays are illegal, regardless of where they occur in the City, because, as explained above, apartment buildings cannot be used for transient purposes, except in very limited circumstances. If the rentals are also in a “non-transient zone”, then the illegality is compounded. Not only are they forbidden by the building and fire codes, they are also operating to defeat the zoning purpose to maintain the character of the City. There is also reason to believe that most of the rentals in an urban setting, New York and elsewhere, are prohibited by contract. It is well known that in virtually every major real estate market that residential leases include a standard “no sublet” clause that flatly prevent tenants from subleasing to any other party without the express written permission of the landlord. These clauses also regularly appear in the co-op leases. Additionally, many condominium buildings restrict renting of the units, at least on a transient basis. A breach of such provisions, including a sublet through these new enterprises can lead to eviction.(x) **Safety and Security.** It is a fair generalization that hotels, in New York and elsewhere, are required to be “safer” than apartment buildings because tourists are much less likely to understand the building they are staying in than long-term residents of an apartment building. Hotels are particularly heavily regulated to be much more fire safe, by building codes and fire codes, than apartment buildings. For example, in many locales, hotels are required to have sprinkler systems, detailed systems to let guests know of a fire emergency, and detailed evacuation plans, and the staff must ensure that those systems and plans work. Hotels are also generally required to adhere to detailed construction standards to prevent the spread of fire throughout the hotel. These same standards often do not apply to apartment buildings. Indeed, in February 2015, it was reported that: In the most recent enforcement action against illegal hotels taken by the Mayor’s Office of Special Enforcement, the two building owners cited in the legal action had accumulated over $38,000 in fines related to multiple fire safety code violations. As part of the enforcement action, a sworn affidavit by then-FDNY Chief of Fire Prevention Thomas Jensen highlighted the fact that residential buildings do not meet fire and safety code regulations mandated for commercial hotels, and as such, transient hotel guests face a significant public safety risk. In the affidavit, Chief Jensen stated in part: “Visitors who stay in transient residential occupancies are not familiar with the layout of the building, including the exit stairwells, as are permanent residents. Occupants of transient accommodations therefore are likely to find it more difficult to evacuate the building quickly in the event of a fire or other emergency. This would be especially the case if there is a heavy smoke condition, smoke being a prime cause of death…The visitor is thus placed at significantly increased risk of injury or death in the event of a fire.”(xi) Additionally, many states have specific provisions governing the operation of a hotel to further protect guests and the public. For example, as a general matter, hotels are required to: 1) maintain a register of hotel guests, to ensure that undesirables or those with whom US citizens cannot do business can be easily found by law enforcement if necessary; 2) post room rates to ensure that a person staying in a hotel room is being charged a reasonable rate for it; and (3) maintain latching chains on hotel room doors to further ensure the safety and security of guests.(xii) These regulations harken back to the “quasi-public” nature of hotels, inns and other transient lodging discussed at the beginning of this article. Indeed, one of the primary duties of a hotel is to use due care to protect its guests.9xiii) In order to fulfill this very basic duty, hotels employ security directors, security officers, and train their employees on guest security and potential guest issues. Hotels have specific lockdown procedures in the event of emergencies and protocols to respond to suspected infectious or contagious diseases on the premises, terrorist attacks, unauthorized persons on the premises, including human traffickers, and for reports of theft or other illegal activity on the premises. Hotels also provide safes for valuables, doormen to assist in transportation, and 24-hour staff to respond to guest concerns, including providing for disabled individuals so that they can use the facilities and so that they can be safely evacuated in the case of emergency. Hotels also regularly assist law enforcement on a wide-range of issues, varying from petty theft to trafficking to terrorism. Every member of the staff of a hotel operates as a safety officer in this sense: inactivity in a room and refusal of maid service for more than one or two days is usually reported to hotel management in case there is something wrong with the guest; the manager of the hotel, as well as the room staff are charged with surveying the premises to use reasonable care that the premises are in order and create no danger; operators or desk clerks are available 24 hours a day in case any guest has a problem, or an illness, or an accident; special fire safety directors are on duty 24 hours a day; and, in many cases, room furnishings are standardized because they have been tested to be reasonably safe for guest use(xiv). Innkeepers and hoteliers are able to fulfill this broad range of duties because they control the inn or the hotel involved. The new enterprises create a situation where there is no one in charge of fulfilling these duties to the transient guest. The enterprises disclaim such duties as a practical matter, and there is no reason to believe that those offering apartments on such platforms even know about those duties, much less have any desire to try to fulfill them. In almost every case, the buildings themselves are simply not constructed for transient guests and, therefore, it is impossible to fulfill the duties. Thus, these new enterprises could be viewed as large virtual hotels with rooms spread throughout an entire city, made up of any apartment in any apartment building that a “host” wishes to list – safe or not. The residents of apartment buildings, co-ops, and condos bargained for a stable environment in which to live, a place that does not require the type of security necessary when dealing with transient traffic that hotels must and do provide as a matter of law. The “virtual hotels” disrupt that stable environment and provide no security in case a guest’s true desire is to roam the hallways to the detriment of those who rent or buy apartments in urban areas. Imagine this scenario: A married couple with two young children lives in a rental building in New York City. The building is home to many other similarly situated couples, also with young children. On any given day, children play in the hallways or designated areas in the building and freely visit their friends in other apartments. The building has a doorman (in some cases) but no other security personnel. A neighbor, looking to make a quick buck while away, decides to list his apartment and lists on the platform of one of these new enterprises. One only has to imagine the parade of horribles – all of which are could easily become realities in an urban context – that could happen next. The “guest” that “checks in” could be a child molester, a rapist, a prostitute, a thief, a terrorist, or a human trafficker. There are no adequate safety mechanisms in residential buildings to make certain that that those who are renting on the platforms provided by these new enterprises, and their guests or clientele, are not roaming the hallways. There are no safety mechanisms in such buildings to detect active prostitution or drug dealing or other crimes. There is no evacuation protocol or other fire safety standards that protect a guest staying in such a rental if there is a major fire in the residential building. Contrast this to a hotel, which has an active safety staff, not only in the lobby, but in the person of every employee, each of whom is trained to spot suspicious or dangerous characters and activity, and to report such signs to safety officers and fire safety directors who are on-duty 24-7 and who have close contacts with local police and fire departments. The market in transient lodging is heavily regulated to provide for the safety of guests and the safety of the communities in which companies providing services to transient guests operate. The new enterprises in the transient market appear to be taking the position that they created a void where each party to the transaction can disavow any duty to address the safety and security concerns, much less obey such regulations. The new enterprises claim that they are mere websites. The “hosts”, even ones that control multiple apartments and listings, claim that they are merely owners of apartments. Thus do they claim that they may create a whole new sector, functionally exempt from all regulation, developed over hundreds of years, imposed upon those providing transient travel accommodations, not only the regulations described above, but also, for example, many of the taxes on transient lodging facilities and the laws governing unlawful discrimination under the Americans with Disabilities Act. Because such new enterprises contend that they need not spend the money necessary to comply with the rules that operate in the market they have chosen to compete in, their profitability is at least partially (and, perhaps, wholly) due to that factor, rather than to any innovation. *References:* *(i) Jefferies & Brown, Understanding Hospitality Law, Chapter 10 (5th Ed. AHLEI) (“Understanding Hospitality Law”) at Chapter 1, pp 3-5.
(ii)) The NYAG Report can be found at http://www.ag.ny.gov/pdfs/AIRBNB%20REPORT.pdf.
(iii) NYAG Report at pp. 3, 10.
iv) NYAG Report at pp. 3, 12-13.
(v) NYAG Report at pp. 8.
(vi) NYAG Report at pp. 3, 14.
(vii) Generally, http://www.nyc.gov/html/dcp/html/zone/zonehis.shtm.
(viii) http://www.andersonkill.com/webpdfext/RealEstate Weekly-Dec2008.pdf.
(ix) http://www.nysenate.gov/press-release/illegal-hotels-bill-passes-legislature-bill-protect-residents-increase-apartment-avail.
(x http://nypost.com/2015/02/21/landlords-planning-more-evictions-after-airbnb-ruling/.
(xi) http://www.sharebetter.org/story/after-major-fires-at-illegal-hotel-buildings-nyc-official-calls-for-increased-fire-safety-inspections/
(xii) e.g., http://codes.lp.findlaw.com/nycode/GBS/12
(xiii) Understanding Hospitality Law, Chapter 3; see also http://hotelexecutive.com/ business_review/347/common-legal-issues-that-confront-hotel-operators.
(xiv) Understanding Hospitality Law, Chapters 10-13, 27, 29, 34.* ![alt text][1]
*This article was co-authored by Audrey Lu. Ms.Lu is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s New York office. Ms. Lu focuses her practice on complex commercial litigation. She has also worked closely with Banks in his capacity as General Counsel for the American Hotel & Lodging Association and the Hotel Association of New York City, Inc. In 2014, Ms. Lu was named to Lawyers of Color’s Second Annual Hot List, which recognizes early- to mid-career minority attorneys working as in-house counsel, government attorneys, and law firm associates and partners.* [1]: http://www.hotelexecutive.com/images/business_review/d5634_Audrey_LU,__co-author.jpg
