Condominium Rights in the Face of the Sharing Economy Model
An Analysis of the Legal Rights of Airbnb Lessors of Condominium Units
In recent years, many high-rise condominiums have been in major cities in the Philippines. Despite concerns about an oversupply of units, many analysts expect the Philippine real estate market to be profitable for the years to come.[i]
What cannot be denied is that many condominiums are not used by their owners as their primary dwellings. They are, for the most part, investment vehicles earning revenue primarily through long-term leases. The rise of the sharing economy[ii] and the advent of sites like Airbnb have changed that.
Airbnb was founded by two housemates who, needing money to pay their rent, offered the airbeds on their living room floor to accommodate attendees to a design conference in San Francisco.[iii], The site (and accompanying mobile application) allows potential lessors to post pictures of their rental space, display the price per night, and provide means to directly contact the owner. An Airbnb renter could lease out an entire apartment, house, houseboat, castle, villa and even entire islands for very short periods of time. In short, it’s an online market place for short-term rentals previously served by hotels and motels. For a property owner, Airbnb provides the opportunity to earn more revenue by simply pricing the rental unit at rates slightly below hotels and motels in the same area. For the budget traveller, Airbnb provides a multitude of differently-configured short-term rental properties in various areas of many cities in the world.
In the Philippines, many Airbnb listings are condominium units located in residential developments, which necessarily affect the owners of neighboring units. For one, the building’s security is impaired by the constant stream of short-term renters entering and leaving the vicinity of their units. Also, some condominium unit owners place great value in the exclusive nature of the development. By allowing some unit owners to rent out their spaces to strangers, the exclusivity is impaired, which diminishes the property values in the development.
Because of these considerations, some condominium associations have enacted regulations that seem to target Airbnb lessors within their buildings. A common rule adopted by the association prohibits any rental period to less than sixty (60) days.[iv] Since rental terms on Airbnb rarely last that long, the rule effectively prohibits Airbnb rentals from occurring at all.
Is it legal for these condominium corporations to set such restrictions?
The legal relations of developers and owner-buyers of condominium units are embodied in The Condominium Act[v], enacted in 1966. The statute enumerates the rights of the buyer of a condominium unit (constrained by the so-called Master Deed of Restrictions), as well as the powers of the condominium association or corporation, which manages the condominium project.
First, it should be noted that the statute undoubtedly grants ownership rights to the condominium units. The Act defines a “unit” as “a part of the condominium project intended for any type of independence use or ownership[vi].” It also provides that “the real right in condominium may be ownership or any other interest in real property[vii].” Undoubtedly, the buyer, as an owner, may lease his unit out to other persons as an exercise of his right of ownership.
What about the legal right of the management body to place restrictions on the unit owner such as the ones mention above? According to the law, the corporate purposes of a condominium corporation acting as a management body “shall be limited to the holding of the common areas, …to the management of the project, and to such other purposes as may be necessary, incidental, or convenient to the accomplishment of said purposes[viii].”
Hence, a condominium association can justify restricting Airbnb-type rentals on the grounds of safety and security, which are not trivial concerns. After all, some criminal activity have been reported using Airbnb rentals including prostitution, drugs and orgies[ix]. This is apart from potential increased risk of liability arising from injuries suffered by Airbnb guests. In one case, a renter suffered injuries within an Airbnb rental property, which resulted to his death.[x] These cases demonstrate an increased risk of liability for the condominium corporation since it is inevitable that Airbnb guests will be using common areas to access the rental property.
Of course, the rights of a condominium buyer may be subject to stipulations, which are commonly embodied in the master deed or declaration of restrictions, which form part of the constitutive documents for a condominium project, which are lodged with the Register of Deeds.[xi] These restrictions, like all contracts, however, must be consistent with law, morals, good customs, public order, or public policy.[xii]
Considering that the sharing economy model is a recent phenomenon, it is unlikely that that master deeds of existing condominium projects have embodied restrictions such a minimum periods for lease terms. And while the declaration of restrictions may be amended after its initial registration with the Register of Deeds, the law provides that such amendments may be made only after obtaining the vote of the majority in the interest of the unit owners – a rule enacted by the condominium corporation might not be enough[xiii]. All the same, if the declaration of restrictions stipulates that the unit will be used for residential purposes, then the multiple and frequent agreements entered into by an Airbnb renter can potentially remove the unit from that classification. This, in relation to zoning regulations, is yet another justification to support a condominium association’s restrictions.
These issues raise other concerns with respect to the sale of condominium units. As mentioned, Airbnb’s business model has made the purchase of condominiums even more attractive to potential investors. Thus, it is likely that a developer would advertise the sale of its units espousing the benefits and revenue potential if it were used as an Airbnb unit. What happens then, if the condominium corporation later imposes restrictions against Airbnb rentals? Would the developer be liable?
The Subdivision and Condominium Buyers’ Protective Decree[xiv] is instructive. It provides that the registration of a condominium shall include, among others, “a copy of any circular, prospectus, brochure, advertisement, letter, or communication to be used for the public offering of the subdivision lots or condominium units.” [xv] In addition, the law requires that these advertisements “must reflect the real facts and must be presented in such manner that will not tend to mislead or deceive the public” and that any “form of development represented or promised in brochures, advertisements and other sales propaganda” shall “form part of the sales warranties enforceable against” the condominium owner or developer.[xvi] The failure to comply with these warranties leads to the imposition of penalties on the developer including the revocation of its registration certificate and license to sell.” But a developer can defend itself by pointing out that the representations were true as of the time the condominium was being marketed and that the subsequent restrictions by the condominium association is beyond its ability to prevent or predict. After all, the purpose of the Decree is to prevent the perpetuation of fraud, and as long as there was no intention to mislead buyers, developers of real estate would not be liable under the law.
The development of real estate may indeed prove to be a “sunny” industry for years to come. However, just like any other business, it comes with unpreventable risks – especially considering that the sharing economy model is one that has yet to be fully understood by our legislature. While it certainly is profitable for condominium developers to market their units for buyers seeking to rent out their units with Airbnb, this privilege comes with a plethora of legal issues. In the absence of rules that adapt to the developing economic models, buyers of real properties – especially condominium units – must always be careful in advertising the sale of their realty, for fear of violating laws relating to fraud and misrepresentation. At the same time, liability to third party sublessees may be imposed against these sellers.
On the other hand, buyers of these units must also exercise caution in ensuring that they do not get the short end of the stick in their purchases. Considering that our laws do not explicitly prohibit developer-imposed restrictions on the units after the sale, buyers must scrutinize their Master Deeds to determine how easy their ownership rights may be changed by the condominium corporation. While our statutes remain silent on the unique set up of the sharing economy model, these transactions shall be governed by the laws on contracts, sales, and lease.
[i] Paolo Taruc, What bubble? Analysts see sunny real estate industry, CNN Philippines, August 30, 2015, available at http://cnnphilippines.com/business/2015/05/22/sunny-ph-real-estate-2015.html
[ii] For more discussions on “sharing economy”, read: All eyes on the sharing economy The Economist, March 9, 2013, available at http://www.economist.com/news/technology-quarterly/21572914-collaborative-consumption-technology-makes-it-easier-people-rent-items
[iii] For more information on Airbnb, read the ‘How it works’ section on their official website: https://www.airbnb.com/help/getting-started/how-it-works
[iv] Even San Francisco, where Airbnb originated, passed a city ordinance with more or less the same restriction. Read: Matt Weinberger, San Francisco complains it can’t enforce its own Airbnb law, Business Insider, March 23, 2015, available at http://www.businessinsider.com/san-francisco-calls-airbnb-regulations-unenforceable-2015-3
[v] Republic Act No. 4726 (1966).
[vi] Sec. 3, R.A. 4726.
[vii] Sec. 2, R.A. 4726.
[viii] Sec. 10, R.A. 4726.
[ix] http://nypost.com/2014/04/14/hookers-using-airbnb-to-use-apartments-for-sex-sessions/; http://www.ibtimes.co.uk/australia-prostitute-uses-airbnb-flat-brothel-1508721; http://www.huffingtonpost.com/2014/04/14/prostitutes-renting-airbnb-apartments_n_5147910.html; http://www.dailytelegraph.com.au/news/nsw/familys-airbnb-drug-house-nightmare-as-police-raid-holiday-home-and-find-hydroponic-setup/news-story/21bca7ae7b3c739434c98b7d1fd322d9
[xi] Sec. 10, R.A. 4726.
[xii] Civil Code of the Philippines, Article 1306
[xiii] Sec. 9(a), R.A. 4726.
[xiv] Presidential Decree No. 957 (1976)
[xv] Sec. 4, P.D. 957.
[xvi] Sec. 19, P.D. 957.
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Photo credit: Chasing Donguri via Foter.com / CC BY-NC-SA