Opinion
NO. 2013-CA-001578-MR
05-15-2015
DARRYL BARRICKMAN AND JENNIFER BARRICKMAN APPELLANTS v. JOHN WELLS AND ANGELA HURT WELLS APPELLEES
BRIEF FOR APPELLANT: Bobby H. Richardson Glasgow, Kentucky BRIEF FOR APPELLEE: B. Alan Simpson Bowling Green, Kentucky
NOT TO BE PUBLISHED APPEAL FROM BARREN CIRCUIT COURT
HONORABLE PHIL PATTON, JUDGE
ACTION NO. 12-CI-00577
OPINION
AFFIRMING
BEFORE: COMBS, D. LAMBERT, AND VANMETER, JUDGES. COMBS, JUDGE: This case involves the interpretation of a restrictive covenant disputed by neighboring landowners. Specifically, Restriction #6 in the Green Creek Estates' Declaration of Protective Covenants and Restrictions prohibits "commercial use" of property.
The Barrickmans (Appellants) challenged the right of the Wellses (Appellees) to rent their private residence as a short-term vacation rental. The Barrickmans contend that Restriction #6 should be construed to prohibit such a rental as an impermissible commercial use. The Barren Circuit Court held that Restriction #6 did not apply to the rental at issue and dismissed the complaint filed by Darryl and Jennifer Barrickman against John and Angela Wells. The Barrickmans now appeal, arguing that the circuit court erred as a matter of law. After our review, we affirm.
The Wellses and Barrickmans reside on adjoining lake-front properties in Green Creek Estates Subdivision, which is comprised of single-family residences located on Barren River Lake. The restrictive covenants were executed in 1997 by Dennis Madison, the developer of Green Creek Estates, and they govern the use and occupancy of the property within the subdivision. The particular restriction at issue, Restriction #6, provides as follows: "No tracts shall be used for a commercial use or purpose, except Lot 32."
Madison testified that Lot 32 contained a large barn, which he envisioned the subdivision residents could use for boat storage.
The Wellses purchased their residence in March 2008, and the Barrickmans bought theirs in March 2012. In September 2012, the Barrickmans filed suit against the Wellses alleging violation of Restriction #6. The Barrickmans claimed that the Wellses were using their property commercially by renting their residence as a vacation home for transients. The Barrickmans alleged that during almost every weekend of 2012, different parties have occupied the Wellses' residence as paying guests -- allegedly in violation of Restriction #6. The Barrickmans claimed that the Wellses' violation of Restriction #6 has interfered with their use and enjoyment of their property. They sought to enjoin the Wellses from using their property in this allegedly commercial manner.
In response, the Wellses asserted that they had built their home with the intention of residing in it full-time and that they did spend every weekend in it for a period of time. However, unanticipated complications arose. A medical pavilion in the vicinity, their intended workplace, did not open as soon as expected, preventing their permanent residency at the lake for a while. More significantly, John's former wife suddenly became terminally ill. They were not able to reside in the lake house continuously in order to enable the children to be able to spend time with their dying mother.
At the suggestion of a neighbor in Green Creek Estates, the Wellses began to rent the house on the weekends when they could not reside in it. The Wellses emphasized that the rental guests were making the same use of the property as any other homeowner in the subdivision. After holding a bench trial in August 2013, the court entered judgment in favor of the Wellses and dismissed the Barrickman's complaint. This appeal has followed.
Interpretation or construction of restrictive covenants is a question of law subject to review de novo on appeal. Triple Crown Subdivision Homeowners Ass'n, Inc. v. Oberst, 279 S.W.3d 138, 141 (Ky. 2008). In the case before us, the trial court found that no restriction expressly prevented a property owner from renting his or her home to a third party. The court further found that Restriction #6 was vague and ambiguous because the term "commercial use or purposes" was not defined anywhere in the covenants. Thus, the court applied the rule that when interpreting restrictive covenants, the intention of the parties should govern -- with special consideration given to a general plan or scheme of development. Id. at 140.
In order to determine intent, the court relied on the testimony of Dennis Madison, the developer, and Harvey Johnston, the attorney who worked with Madison in drafting the restriction. Both Madison and Johnston testified that Restriction #6 was never intended to prevent a homeowner from renting his or her home -- be it for a single night or for a longer duration. Rather, Restriction #6 was intended to prevent a landowner from operating a retail establishment such as a convenience store, gas station, or fast food restaurant on the property.
The trial court properly recognized the importance of a developer's intent when interpreting ambiguous restrictive covenants. While the term "commercial use or purposes" appears to be clear at least superficially, in the context of this dispute, it is not clear at all. Again, it was not defined anywhere in the restrictive covenants. Thus, the terminology has given rise to a latent ambiguity both requiring and legitimizing recourse to extraneous parol evidence (i.e., the testimony of Madison and Johnston) to clarify the intent of the drafters.
We agree with the trial court that the keystone to construing restrictive covenants is to ascertain the intention of the parties -- even if "that intention be not precisely expressed." Colliver v. Stonewall Equestrian Estates Ass'n, Inc. 139 S.W.3d 521, 522 (Ky. App. 2003). In relying upon the testimony of Madison and Johnston, the trial court did not err but instead based its decision on the best evidence available as to intent - those who drafted the very restrictions at issue.
Although the issue of restrictive covenants has been adjudicated with reasonable frequency in Kentucky appellate practice, no one rule has been established to cover the multitude of permutations involving what constitutes "commercial use." The better practice still appears to be to determine this issue on a case-by-case basis.
Homeowner's associations remain wholly at liberty to forbid rentals of private property by clearly drafting such intent into the restrictive covenants. They did not do so in this case and, as established by the testimony, they had no intention of doing so.
We affirm the sound reasoning of the Barren Circuit Court.
D. LAMBERT, JUDGE, CONCURS.
VANMETER, JUDGE, DISSENTS AND FILES SEPARATE OPINION.
VANMETER, JUDGE, DISSENTING: I respectfully dissent. Interpretation or construction of restrictive covenants is a question of law subject to de novo review on appeal. Triple Crown Subdivision Homeowners Ass'n, Inc. v. Oberst, 279 S.W.3d 138, 141 (Ky. 2008). And, as the majority opinion recognizes, when interpreting ambiguous restrictive covenants, the intention of the parties governs, with consideration given to the general scheme or plan of development. Id. at 140.
In this case, the trial court found that no restriction expressly prohibited a property owner from renting his or her home to a third party. The court further found Restriction #6 was vague and ambiguous since the term "commercial use or purposes" was not defined anywhere in the covenants. As a result, the court looked to the intention of the developer, Madison, and his counsel who prepared the restrictive covenants.
During the bench trial, Madison testified that when he drafted the restrictions, he did not contemplate that homeowners would be restricted from renting their homes and he did not believe the Wellses' rental of their home constituted commercial use. On the other hand, he stated that using a single-family home as a motel or hotel would constitute commercial use. Madison's understanding of the term "hotel" and "motel" is that several people would stay there. He distinguished a hotel or motel from a home by saying that a hotel or motel is a place one goes to stay the night, while a home is a place one goes to live. When asked if he thought an online advertisement for a resort-type facility, available for rent on nightly basis at a rate of $450/night, accommodating up to 18 people (and if more than 10 people stay, an additional fee is charged), with a $125 cleaning fee upon exiting was a commercial use, he said it sure sounded commercial to him.
In my opinion, the term "commercial use or purposes" as used in the restrictions is unambiguous, and can be interpreted according to its plain meaning and common usage, in a manner similar to how potential home buyers in this subdivision would construe it. Courts are not to remake contracts for parties and create ambiguity where none exists. O. P. Link Handle Co. v. Wright, 429 S.W.2d 842, 847 (Ky. 1968). Parties are bound by the clear meaning of the language used, the same as any other contract. See Larkins v. Miller, 239 S.W.3d 112, 115 (Ky. App. 2007) (stating that "a court should interpret the terms of the contract according to their plain and ordinary meaning[]").
In O. P. Link, the court admonished against giving a writing meaning which is not to be found in the instrument itself under the guise of interpretation based on direct evidence of intention. 429 S.W.2d at 847 (citing 4 Willison on Contracts, § 610A (3d ed. 1961)).
The majority opinion correctly states that the interpretation of restrictive covenants is to be resolved on a case-by-case basis. With respect to the interpretation of the term "commercial use" within the context of restrictive covenants, two recent opinions rendered by this court have addressed the issue, under factual circumstances similar to the one at bar. Though unpublished, these cases are helpful and persuasive, particularly since the parties have not directed this court to any published case addressing the issue of whether the vacation rental of a personal residence constitutes "commercial use" for purposes of restrictive covenants.
Kentucky Rules of Civil Procedure (CR) 76.28(4)(c) states: "Opinions that are not to be published shall not be cited or used as binding precedent in any other case in any court of this state; however, unpublished Kentucky appellate decisions, rendered after January 1, 2003, may be cited for consideration by the court if there is no published opinion that would adequately address the issue before the court[]".
In Hyatt v. Court, No. 2008-CA-001474-MR, 2009 WL 2633659 (Ky. App. 2009), this court held that the vacation rental of a personal residence located within a subdivision constituted "commercial use" in violation of the subdivision's restrictive covenants. In so ruling, this court found that the term "commercial use" as used in the subdivision's restrictive covenants was not ambiguous, and proceeded to define the term "commercial" as ordinarily used in legal documents:
Black's Law Dictionary, 7th edition, 1999, does not define commercial, but does use the term within its definition of business:Id. at *3-4.
Business. A commercial enterprise carried on for profit, a particular occupation or employment habitually engaged in for livelihood or gain.
BLACK'S LAW DICTIONARY, 7th edition, 1999.
Merriam-Webster's 2009 Online Dictionary defines commercial as of or relating to commerce, which is defined as the exchange or buying or selling of commodities on a large scale involving transportation from place to place, and is synonymous with business. . . .
In Hyatt, the homeowners advertised the rental of their fully-furnished home on the internet via their copyrighted website. The rental included use of their home and private dock for periods of two nights up to one week; they charged guests a cleaning fee, security deposit, an additional amount for pets, and 10% Kentucky sales tax; guests entered into a written rental agreement, which included a check-in and check-out time, a $300 damage deposit, and a $10 per person charge for each additional guest over the age of ten; and the Hyatts provided various amenities, including paper products and linens, for an additional fee.
This court found that the Hyatts went to great lengths to treat their vacation property as a business. Specifically,
the Hyatts' 2006 and 2007 tax returns listed the rents paid as income and deducted as expenses the cleaning, maintenance, repairs, supplies, utilities, insurance, legal and professional fees, as well as depreciation of the property. Additionally, the Hyatts paid the required Marshall County tourist and convention commission monthly transient room tax, and the Kentucky sales use and transient room tax, as is required of motels, hotels, and persons renting their property.Id. at *1.
This court concluded that "the Hyatts define their rental enterprise as a business. The Hyatts cannot label the rental of their vacation home one thing to the Internal Revenue Service and characterize it to the contrary to this Court." Id. at *4. Thus, the Hyatts' act of holding out their property for remuneration in a manner similar to a hotel or motel violated the restriction against commercial use. The fact that the guests engaged in similar recreational activities as other property owners residing within the subdivision was irrelevant. Id.
More recently, in Vonderhaar v. Lakeside Place Homeowners Ass'n, Inc., No. 2012-CA-002193-MR, 2014 WL 3887913 (Ky. App. 2014), this court ruled similarly and cited the Hyatt decision with approval. In Vonderhaar, this court found in favor of the homeowner's association, and held that by renting their residences, the Vonderhaars and Adams families ("Appellants") had violated the Lakeside Place Subdivision's restriction against commercial use of property. Specifically, this court found
the Appellants have labeled their home as a "motel," for tax purposes, have treated it as a business, have advertised it on various websites, have a rental agreement along with check-in and check-out times, and pay taxes required of hotels and motels. . . . [I]t is clear that the Appellants define their rental enterprise as a business, and have indeed stated as much to the Internal Revenue Service. They cannot now characterize it to the contrary to this Court.Id. at *4.
While the Appellants argue that the individuals who rent their property engage in the very same recreational activities as do the owners or their guests who reside in the dwellings permanently, or as is the case for long-term rentals, we do not find the activities of the occupants to be determinative. Indeed, it is not what the individuals do to occupy their time while on the property that is forbidden; it is the fact that the property is being held out for remuneration in much the same manner as a hotel or motel.
The factors considered in the Hyatt and Vonderhaar cases are helpful in determining whether the Wellses' rental of their personal residence constitutes "commercial use" within the meaning of Green Creek Estates' restrictive covenants. The record shows the Wellses rent their home on a short-term basis; the rates and availability are listed in the Wellses' online advertisement on the VRBO website, "Vacation Rental By Owner;" the Wellses advertise their home on VRBO as a "lakefront home" that comfortably sleeps 10-18 people and is available year round; guests may book the home for one night or longer periods; the nightly rate is $300 during the "off season" and $450 during "peak season," which runs from May to September; an additional $10 nightly fee is charged per guest for over ten guests; and entry to the home is via a four-digit keyless security code.
The Wellses disclose in their VRBO advertisement that the rental home is their personal residence, which they are unable to occupy full time due to family health reasons. While I sympathize with the Wellses' family and financial circumstances, their reasons for renting their home are irrelevant to determining whether the rental constitutes commercial use.
John Wells testified in his deposition that guests are charged a 6% Kentucky sales tax. During the bench trial, he clarified that he had refunded all past guests who had been charged the sales tax, after being advised by his accountant that he was not required to charge sales tax on the rentals. He testified that he no longer charges guests a sales tax. That said, the manner in which the law distinguishes between short-term rentals and long-term rentals for tax purposes is illustrative and relevant with respect to "commercial use."
KRS 139.200 addresses retail sales tax and provides, in pertinent part:
Kentucky Revised Statutes.
A tax is hereby imposed upon all retailers at the rate of six percent (6%) of the gross receipts derived from:
* * *
(2) The furnishing of the following:
(a) The rental of any room or rooms, lodgings, or accommodations furnished by any hotel, motel, inn, tourist camp, tourist cabin, or any other place in which rooms, lodgings, or accommodations are regularly furnished to transients for consideration. The tax shall not apply to rooms, lodgings, or accommodations
supplied for a continuous period of thirty (30) days or more to a person[.]KRS 139.200(2)(a) (emphasis added). This statute distinguishes between commercial transient rentals and long-term residential rentals. Rentals for less than thirty days are defined by statute as a retail sale and are subject to sales tax. The statutory obligation to pay sales tax is another factor to consider in deciding whether a use is commercial. Hyatt, 2009 WL 2633659 at *1.
The record contains insufficient evidence to determine the manner in which the Wellses represented their rental endeavors to the IRS. The Department of Revenue is not a party, and this action is inappropriate to rule that the Wellses owe sales tax on these transactions. On the other hand, the statutory language is relatively clear, and the Wellses' self-serving actions in refunding sales taxes previously collected should not be dispositive of whether sales taxes are properly due and owing.
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Given the number and frequency of short-term bookings and the rates charged, the Wellses certainly appear to have been renting their home for profit, which falls within the definition of a commercial business. Such rentals are qualitatively different from longer-term rentals, as evidenced by KRS 139.200. As emphasized in the Hyatt and Vonderhaar cases, the activities of the renters while occupying the home are not determinative of whether the use is commercial. Rather, the dispositive factor is whether the Wellses were holding out their home for remuneration in a manner similar to a hotel or motel. The record indicates that they were, and were doing so in a neighborhood subdivision of single-family residences governed by restrictive covenants that expressly prohibit commercial use of property. Based on the record and relevant legal authority, I believe that the Wellses' use of their property was commercial and in violation of the Green Creek Estates' Restriction #6.
For the foregoing reasons, I would reverse the judgment of the Barren Circuit Court and remand for proceedings consistent with such reversal. BRIEF FOR APPELLANT: Bobby H. Richardson
Glasgow, Kentucky
BRIEF FOR APPELLEE: B. Alan Simpson
Bowling Green, Kentucky