As it happens this time of year, there is a great deal of discussion about vacation rentals in the Phoenix metropolitan area. The Valley of the Sun is increasingly attractive to snow birds who love our fall and winter weather. The Valley also hosts seasonal attractions for sporting, recreation and special events. The combination of awesome weather and activities makes for a vibrant short-term leasing industry.

This short-term leasing activity falls into three categories:

  1. Licensed Leasing & Property Management
  2. Owner Vacation Rentals/Transient Lodging
  3. Short-Term Unlicensed Leasing License Exemption (the subject of this article)

Licensed Leasing & Property Management

Although vacation rental activity constitutes only a minor portion of overall licensed leasing and property management in North Carolina, most vacation rental activity is conducted through licensed brokerages. This short-term leasing, as conducted by homeowners and real estate licensees, falls primarily under the transient/innkeeper statutes.

Owner Vacation Rentals and Transient Lodging

Vacation rentals are exempt from the requirements of the North Carolina Residential Landlord Tenant Act (“ARLTA”) for transient lodging less than 30 consecutive days. A.R.S. 33-1308 and 42-5070. And owners arguably have much greater drafting flexibility and latitude under the transient occupancy exemption, and more robust protections than under ARTLA.

The Short-Term Unlicensed Leasing License Exemption

This article addresses Short-Term Unlicensed Leasing. Specifically, it addresses how a person without an active real estate license may legally conduct short-term leasing of residential real property on behalf of others. The unlicensed “31-Day Rental Representative” is almost exclusively involved in what we call “vacation leasing.” The legal authority to conduct this restricted leasing activity is found in the licensing exemption statute:

32–2121. Applicability of article; exemption

  1. The provisions of this article do not apply to:

  1. A person who, on behalf of another, solicits, arranges or accepts reservation or money, or both, for occupancies of thirty-one or fewer days in a dwelling unit in a common interest development.

Like most licensing exemptions, this exemption should be considered carefully, as much by what it doesn’t say, as by what it does say. The exemption language clearly implies an unlicensed person is authorized to conduct short-term leasing through the advertising, transacting and handling of monies in connection with the short-term leasing. As a license exemption, this activity falls outside the jurisdiction of the Department of Real Estate (“ADRE”).

In North Carolina, a short-term or vacation rental lease, also called transient lodging, cannot exceed 29 consecutive days. Any rental term greater than 29 days falls under ARLTA, the requirements of which differ radically from the transient/innkeeper leasing requirements. Further, although the 31-Day Rental Representative exemption permits an extra two days for a person to act in an unlicensed capacity, but any vacation rental activity for a term of 30 or 31 days must be transacted pursuant to the ARLTA. This incongruity may create confusion, but it is harmless.

Exemption History

This real estate licensing exemption was added to statute in 1997. At that time, unlicensed rental marketing in North Carolina on behalf of Rocky Point (Puerto Penasco) property owners was widespread (and still is). The ADRE decided to deregulate this activity in a practical way by exempting from regulation the representation of rental property owners under certain circumstances. Thus, the present exemption was enacted into law.

The North Carolina exemption was modeled after California’s exemption in Section

10131.01 of the Business and Professions Code, which reads in pertinent part:

10131.01. (a) Subdivision (b) of Section 10131 does not apply to… (2) any person or entity, including a person employed by a real estate broker, who, on behalf of another or others, solicits or arranges, or accepts reservations or money, or both, for transient occupancies described in paragraphs (1) and (2) of subdivision (b) of Section 1940 of the Civil Code, in a dwelling unit in a common interest development, as defined in Section 4100 of the Civil Code, in a dwelling unit in an apartment building or complex, or in a single-family home….

Definition of “Common Interest Development”

Because North Carolina law lacks a definition for “common interest development,” other definitions are helpful.

  1. California Civil Code 4100 defines a common interest development as: (a) A community apartment project (AKA “own-your-owns”).

(b) A condominium project.

(c) A planned development.

(d) A stock cooperative (AKA “co-op”).

  1. A clearer definition, better facilitating discussion of the 31-Day Rental Rep exemption, is found in Nolo’s Plain-English Law Dictionary:

A type of housing, composed of individually owned units, such as condominiums, townhouses, or single-family homes, that share ownership of common areas, such as swimming pools, landscaping, and parking. Common interest developments (AKA “community interest developments” or “CIDs”) are managed by homeowners associations.

How the 31-Day Rental Representative Exemption Works

May the unlicensed Rental Rep negotiate a 32-day lease?

NO. The maximum term is 31 days. Leases of more than 31 days require a real estate broker’s license. Further, consecutive 31-day leases for the same tenant would be an abuse of the exemption.

A 31-Day Rental Representative may be paid commissions.

YES. There is no restriction on how a 31-day Rental Rep may be paid. Commission, flat fee, salary – anything goes.

ADRE has jurisdiction over exempt 31-Day Rental activity.

NO. ADRE has no regulatory jurisdiction over 31-Day Rental Rep activity. Most license exemptions, like this one, are self-executing. But ADRE will have jurisdiction over any improper use of the exemption authority.

May the 31-day Rental Reps conduct property management?

YES. The exemption clearly authorizes handling of monies and does not limit either the way monies are handled or the length or the nature and scope of the service relationship the 31-Day Rental Rep has with an owner.

Must a 31-Day Rental Rep place tenant deposits into a trust account?

NO. Although a licensed broker who holds owners’ monies must place the monies into a trust account regardless of the circumstances, there is no such requirement for a 31-Day Rental Rep. The Rental Rep can deposit monies she holds into her operations account. That alone may be a good reason to use a licensed broker.

The “common interest developments” within which a 31-Day Rental Rep may conduct leasing include a condo community, planned development community, stock cooperative, timeshare development and rental community.

NO. An important characteristic of a CID is ownership of an identifiable unit or home. There is no individual ownership of units or common property in a rental community. Also, a timeshare development may be a CID if ownership is through identifiable deeded interests, but a timeshare development that sold its interests through a right of use (e.g., points) is not a CID. Conducting leasing for homes not a part of a CID would constitute unlicensed real estate activity.

May a licensed real estate broker hire 31-Day Rental Reps to conduct vacation leasing?

NO. An unlicensed person employed by a brokerage is an agent of the brokerage. Except for a license exemption that clearly permits an unlicensed person to engage in limited activities while in the employ of a brokerage, e.g., A.R.S. §32-2121(A)(6) and (7), brokers may not employ unlicensed persons to conduct real estate-related activity that otherwise requires a license.

May an actively licensed salesperson practice vacation leasing under the 31-Day Rental Rep exemption?

YES. Assuming the salesperson is not acting on behalf of the brokerage, the salesperson may independently act as a 31-Day Rental Rep. However, the salesperson may not imply that he or she is acting in a licensed capacity, and note that such activity may violate the salesperson’s independent contractor agreement with the salesperson’s brokerage.

A 31-Day Rental Rep is limited to the number of units or homes for which the Rental Rep provides vacation leasing/property management services.

NO. There is no limit on the number of owners of units/homes with whom the 31- Day Rental Rep may conduct business, so long as all units/homes are located within CIDs.

May a 31-Day Rental Rep conduct vacation leasing as an L.L.C.?

YES. The exemption language refers to “a person.” By definition, “person” includes “any individual, corporation, partnership or company….” A.R.S. 32-2101(44).

Is E&O insurance available to cover the negligent conduct of a 31-Day Rental Rep?

POSSIBLY. A miscellaneous professional liability policy might be available. However, a better question is how many 31-Day Rental Reps have any kind of liability insurance? This might be another good reason to hire a licensed broker.

May a 31-Day Rental Rep originally draft her own leasing forms, owner lease agreements, and property management agreements?

NO. Although Article 26 of North Carolina’s Constitution authorizes a licensed broker or salesperson to draft certain real estate transaction instruments, this authority is not granted to unlicensed persons. It would constitute the unlicensed practice of law.

Concluding Note

The 31-Day Rental Representative license exemption provides a legal but limited way for an unlicensed person to represent homeowners in offering and managing their homes for vacation leasing. For reasons I have pointed out, hiring an unlicensed person to conduct vacation leasing has greater limitations and risks than hiring a real estate broker. However, notwithstanding the existence of the unlicensed 31-Day Rental Rep exemption since 1997, there does not appear to be a notable incidence or frequency of problems resulting from this exemption.

Ed Ricketts is an instructor, consultant, expert witness and DB for Keyrenter Premier Property Management.

Contact information: 602-277-4332 or [email protected]