Daily Development for
Tuesday, September 16, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

SERVITUDES; COVENANTS; USE RESTRICTIONS; "RESIDENTIAL ONLY:" Restrictive covenants requiring property to be used exclusively for "residential purposes" and prohibiting "commercial enterprise" does not prohibit renting property on short-term basis.

Yogman v. Parrott, 937 P.2d 1019 (Or. 1997).

Property owners in a subdivision brought suit against other property owners for renting out their beach house for short periods of time. Plaintiffs argued that the short-term rentals violated a set of restrictive covenants applying to the property which stated that "all lots . . . shall be used exclusively for residential purposes and no commercial enterprise shall be constructed or committed on any of said property."

The Oregon Supreme Court held that the language by itself was ambiguous. It was not clear whether short-term rentals would fall within the definition of "commercial enterprise," or whether such rentals would violate the "residential purposes" requirement.

When the context of the disputed provision was no help, the court then turned to an examination of extrinsic evidence of the contracting party's intent, which the court again found to be ambiguous. Some of the property within the subdivision may have been subject to short-term rental, but evidence regarding such rentals was so minimal as to not fairly resolve the ambiguity. Finally, the court turned to maxims of construction when interpreting a contract, namely to the maxim that "restrictive covenants are to be construed most strictly against the covenant; and, unless the use complained of is plainly within the provisions of the covenant, it will not be restrained." Thus, while the court noted that there has been debate about this maxim, it found that the maxim continued to serve useful purposes, and held that the challenged use was permissible because not explicitly prohibited by the covenants.

Comment 1: The presumption indulged by the Oregon court against the restrictions established in the servitude is not universally followed any more. Particularly in common interest developments, such as this one, courts often are looking to simple contract interpretation approaches, without a presumption one way or the other, on the notion that the burden on the landowner's parcel is a bargained for benefit to the parcels of the other landowners in the subdivision, and there should be no bias in construction for or against either side. There is Oregon authority standing for this new constructional approach, Swaggerty v. Peterson, 572 P.2d 1309 (Or. 1977), but the court here treats the statements in Swaggerty as dictum and, in effect, overrules them.

Comment 2: In the DD for February 21, 1997, the editor discussed the court of appeals decision which this decision affirms. The Court of Appeals had held that the language of the covenant could not possibly prohibit short term rentals, as they manifestly were not "commercial enterprises" as opposed to "residential uses." The editor concurred in that view, arguing that the impact on the neighborhood of use by a transient families renting these beach cottages was no different from the transient use to which the owners routinely put the properties for their own families.

But the Oregon Supreme Court here took what at first may seem to be a more cautious approach - ruling the covenant ambiguous rather than concluding that short term rentals qualified either as a residential use or as a "non commercial" use. But this approach is less "conservative" than it appears. The court's approach in fact may have a broader precedential impact than the approach used by the Court of Appeals. The big issue for the Court of Appeals was whether the short term residential rentals were "commercial enterprises." The Oregon Supreme Court wasn't even ready to admit that such rentals were "residential" activity. This finding that the term "residential" is so ambiguous, may have implications in the construction of other covenants in Oregon or elsewhere, and in some states (those without a presumption against enforcement) could be cited in support of arguments for barring short term rentals in "residential only" restricted areas - a result that is the opposite of the result here.

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