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Ambiguous Restrictive Covenant on Real Property is Unenforceable

Jennifer M. Luther

June 27, 2017

The Wisconsin Court of Appeals recently held in Forshee v. Neuschwander, No. 2016AP1608 (Wis. Ct. App. June 13, 2017) (recommended for publication), that a restrictive covenant prohibiting “commercial activity” was ambiguous as to whether it prohibited short-term rentals of a property. Restrictive covenants must be clear and unambiguous in order to be enforced. The Court of Appeals concluded that reasonable minds could differ as to whether short-term rentals were “commercial activity,” and therefore, the Court deemed the restrictive covenant to be unenforceable.

Background

The Neuschwanders own a single-family waterfront residence on a private, dead-end road in Hayward. The Plaintiffs-Respondents are neighbors of the Neuschwanders (collectively referred to in the case as the “Neighbors”). All of the properties owned by the Neuschwanders and Neighbors are subject to multiple restrictive covenants. The specific covenant at issue in the case provides that “there shall be no commercial activity allowed on any of said lots.”

The Neuschwanders began renting out their property on a short-term basis in 2014. They advertised the property as “Lake Point Lodge,” using both print media and an online vacation rental website. The advertisement described the property as available for two to seven night stays, for up to 15 guests. In 2015, they rented their property to 170 people. They received $55,784.93 in rent, including taxes, and paid the City of Hayward $4,973.81 in room tax.

The Neighbors sued the Neuschwanders in 2016, alleging that the short-term rentals violated the restrictive covenant prohibiting “commercial activity” on the Neuschwanders’ lot. The Neuschwanders admitted to renting their property on a short-term basis but denied that such activity was in violation of the restrictive covenant prohibiting “commercial activity” on their lot.

Court of Appeals Decision

The Court of Appeals started its analysis by reiterating the well-settled Wisconsin public policy favoring the free and unrestricted use of property.   In order to be enforceable, therefore, deed restrictions must be clear and unambiguous. When the meaning of a restrictive covenant is doubtful, all doubt is resolved in favor of the owner’s free use of his or her property.

The Court’s decision focuses on the phrase “commercial activity.” That phrase was not defined within the restrictive covenant. Applying the dictionary definitions of the terms “commercial” and “commerce,” the court determined that the restrictive covenant at issue prohibited the Neuschwanders from “engaging in activity on their lot that is concerned with the activity of buying and selling, or activity by which they make or intend to make a profit.”

The Court concluded that reasonable minds could differ as to whether the short-term rental of the Neuschwanders’ property met this standard. On the one hand, the Court noted that it was undisputed that the Neuschwanders made money and intended to make money from renting the property on a short-term basis.

On the other hand, the Court noted that the short-term rentals were residential in character, as the tenants used the property as a dwelling. While the restrictive covenant prohibits commercial activity “on” the Neuschwanders’ lot, the Court pointed out that there is no evidence that an actual exchange of money occurs “on” the lot. The Court found that reasonable minds could differ as to whether the restrictive covenant prohibits short-term rentals. Therefore, the covenant was deemed ambiguous.

The Court next considered whether “the intent” of the restrictive covenant could be ascertained by the language of the covenant in order to render it enforceable. The Court rejected the contention that the covenant was intended to maintain a quiet neighborhood where people would know their neighbors. The restrictive covenant also included provisions prohibiting dwellings of less than 1,000 square feet and prohibiting subdivision of existing lots. The Court held that when read together, the three provisions of the restrictive covenant did not clearly show that the intent of the covenant was to maintain a quiet neighborhood. Further, the covenant did not clearly show that prohibiting “commercial activity” on the lots was intended to preclude short-term rentals.

The Court of Appeals also found support in cases out of Oregon and North Carolina for its conclusion that the restrictive covenant was ambiguous with respect to whether short-term rentals were prohibited. Because the covenant was ambiguous, the Court held that it could not be enforced against the Neuschwanders to prevent them from renting out their property on a short-term basis.

Key Takeaways

With the rise in popularity of vacation rental websites, more property owners will certainly be looking to generate extra income from second homes. Despite its outcome, the Forshee case is still a lesson to individuals looking to rent their properties in such a fashion. Prospective buyers should always be wary of restrictive covenants that could impact their intended use of a property.

Forshee further reminds us that the analysis used in interpreting restrictive covenants is different from the standard analysis used to interpret other contracts. Courts may not consider extrinsic evidence to determine the intent of a restrictive covenant. Forsehee therefore underscores the importance of using clear and unambiguous terms when drafting enforceable restrictive covenants.


If you have any questions about how the information in this article may affect you or your business, please contact Jennifer Luther at jluther@stroudlaw.com or (608) 257‑2281 or your Stroud attorney.

DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice.  This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship.  You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.