With the rise of Airbnb, investors in the residential market have had a greater choice in realising income from their properties. However, unregulated short stay accommodation can prove challenging for owner occupiers in a building, result in health and safety concerns and may negatively affect a development. If a developer wishes to regulate, limit and/or prohibit short stay accommodation, what strategies can a developer implement?

Traditionally, owners corporation rules have been the main mechanism to regulate short stay accommodation. However, a number of cases in recent years have frustrated the attempts of owners corporations to regulate, limit or prohibit the use of apartments for short stay accommodation. The principal case is Owners Corporation PS 501391P v Balcombe [2016] VSC 384 which, in essence, held that owners corporations do not have the power to make a rule prohibiting short-term letting of apartments.

Against this backdrop, the Victorian State Government passed The Owners Corporation Amendment (Short-stay Accommodation) Act 2018 (Vic) (the Act) in August this year. The Act will amend the Owners Corporations Act 2006 (Vic), and the intent is to regulate the provision of short-stay accommodation arrangements in certain categories of building. The Act will come into operation on 1 February 2019 unless Parliament announces that it will commence sooner.

So, what are the key provisions of the Act and will it enable greater regulation of short stay accommodation in practice?

Key provisions of the Act

The Act will regulate accommodation arrangements in certain buildings for ‘short stay accommodation arrangements’ which are defined as stays under lease or licence that are for a maximum period of seven days and six nights. It will mean that:

• apartment owners and, importantly, short stay providers (i.e. serviced apartment operators), can now be liable for any damage, noise or loss of amenity caused by their short stay guests;
• an owner or occupier of a lot or a property manager may make a complaint to the owners corporation in relation to:
• unreasonable noise or behaviour;
• interfering with the enjoyment of common property;
• causing a hazard to the health, safety and security of another person; and
• damage to the property or common property,
• owners corporations, other members or occupants can apply to VCAT where behaviour that is the subject of the complaint is not rectified after a complaint is made; and
• short stay apartment owners may be ordered to pay compensation of up to $2,000 to each affected neighbour and costs for any damage to common property caused by unruly behaviour of their short stay guests.

Prohibition order – three strikes and you’re out

The Act does provide a framework for VCAT to make an order prohibiting short stay accommodation use, if an owners corporation has issued at least three notices of breach of the new provisions of the Act on three separate occasions in the last 24 months. Relevantly, any prohibition order ceases to have effect on the sale of the apartment, unless the sale is to a short stay provider, or an associate of that provider, that was involved in the short stay letting arrangement at the apartment.

Other strategies to manage the Airbnb effect

Will relying on the Act be sufficient comfort for a developer looking to regulate, limit or prohibit short stay accommodation? Most likely not, certainly in the short to medium term whilst the industry waits to see how effective the Act may be. There are other ways in which a developer may regulate, limit or prohibit short stay accommodation.

Whilst the case law referred to in this article may render void any owners corporation rule prohibiting a short stay accommodation, owners corporation rules can still be an effective mechanism if they are well drafted and, in particular, focus on impacts on the health and safety of those in the building.

Another mechanism that may be used is a restrictive covenant on title or a restriction on a plan of subdivision. Such a mechanism may not be for everyone, as it is hard to remove that restriction when registered against a title, but it is a strategy that may be implemented nonetheless.

The devil is in the detail in terms of how any restriction is drafted. The terms of that restriction can be crafted to have regard to the vision for the operation of the building, and may range from an absolute prohibition against a defined short stay use to allowing short stay use in certain circumstances.

It is also important to note the role the terms and conditions of a contract of sale may play in regulating short stay accommodation. Well drafted conditions can add an extra layer of recourse in regulating short stay accommodation in the short term.

The jury is out on whether the Act will be effective in regulating behaviour in short stay accommodation. It will take time for cases to flow through and set precedents on disputes over the key provisions of the Act. There will at least be a framework in place. Much will depend on how proactive owners corporations, and its managers, are.

In the meantime, if a developer wants to regulate short stay accommodation it is important to properly consider and seek advice on all the strategies discussed above to achieve the desired outcome.