The Airbnb phenomena

The Airbnb phenomena, subleasing and Bill n°67: An Act mainly to improve the regulation of tourist accommodation and to define a new system of governance as regards international promotion

A. Introduction

Airbnb is an online platform to rent dwellings which has been in operation since 2008. Given its immense popularity, nowadays Airbnb is an enterprise aspiring to reach revenue projections nearing twenty billion dollars. As a novel service that offers an intriguing alternative to conventional services provided by the hotel industry, it goes without saying that this platform’s popularity among tourists has raised a slew of questions and concerns thus justifying the establishment of a regulatory framework.

In order to address this problem, National Assembly of Québec drafted Bill n°67: An Act mainly to improve the regulation of tourist accommodation and to define a new system of governance as regards international promotion (hereinafter the “Airbnb Act”) which came into effect on April 15^th, 2016. As evidenced by its name, this act aimed to modify two (2) existing acts:

1) The Act respecting tourist accommodation establishments (chapter E-14.2) (hereinafter designated as the “Act”); and

2) The Act respecting the Ministère du tourisme (chapter M-31.2).

From here on, all transactions on platforms similar to Airbnb will be subject to the regulatory framework established by this act. As such, the Airbnb Act has been well-received by lessors and/or owners who are now better positioned to defend themselves in litigious matters.

An example of a situation highlighting the importance of the Airbnb Act is one where the lessor of a condominium receives noise complaints from its neighbors who are bothered by the presence of troublesome tourists, be it the sublessees having transacted on the Airbnb website. Unbeknownst to the lessor, the Airbnb host subleased his dwelling to these tourists. While the lessor is not involved in the contractual link between the lessee and the subleasing tourists, his liability is nonetheless engaged as the lessor and/or owner of the unit.

The present article aims to summarize the state of the law in Quebec with regards to leasing contracts concluded on platforms similar to Airbnb. Given the increasing prevalence of Airbnb-type leasing, this global phenomenon has led to recent developments in the legal field which warrant our attention.

B. History

1. The major issues for the hotel industry before the coming into effect of the Airbnb Act

i) Fiscal aspect

In Quebec, websites offering services similar to Airbnb benefited from a fiscal advantage. Consequently, they invited controversy because the hotel and tourism industry perceived their presence as unfair competition. This fiscal inequality was explained by the fact that, “[…] contrary to authorized lodges and bed and breakfasts, […] [Airbnb leased dwellings] do not generally contribute to service taxes”.

Pursuant to article 541.24 of the Act respecting the Québec sales tax, a sleeping-accommodation establishment must collect a specific tax per overnight stay for each unit. Moreover, this tax varies depending on the class of the prescribed tourist region.

Briefly, depending on the tourist region and the supplier, the customer supplied with an accommodation unit in a prescribed sleeping-accommodation establishment must pay a specific tax in the amount of $2.00, $3.00, or $3.50 per night per unit or a rate of either 3% or 3.5% of the service value received per night.

Please note that we shall shortly qualify what constitutes a “sleeping-accommodation establishment”.

Until recently, dwellings rented on the Airbnb platform escaped such a qualification. Consequently, compared to the competition, a lessor on Airbnb benefited from a fiscal advantage. Thus, to appease Quebec’s tourism sector, the Quebec government adopted the Airbnb Act.

ii) Its illegal characterization

Having reached this step in our analysis, let us analyze the “law of 31 days”. In practice, the former is not officially recognized as a legislative measure, but rather the first (1^st) article of the Regulation respecting tourist accommodation establishments (chapter E-14.2) (hereinafter the “Regulation”) whose first (1^st) paragraph reads as follows:

“Any establishment operated by a person who offers for rent to tourists, in return for payment, at least one accommodation unit for periods not exceeding 31 days is a tourist accommodation establishment. Accommodation units rented on an occasional basis are not included in the above definition.”

However, as indicated at the last sentence of the paragraph, there is an exception for accommodation units rented on an occasional basis. Large scale events such as “the 2011 U2 concert which attracted thousands of visitors to Montreal” would be considered as an “occasional basis”.

Thus, a dwelling is likely to be considered as a sleeping-accommodation establishment should its rental period be less than 31 days. It should be noted that the lessor is required to hold a certificate enabling him to operate such an establishment. In the absence of said certificate, the lessor’s rental activity shall be deemed illegal.

On the other hand, should the leasing period surpass 31 days, the lease ceases to be qualified as “touristic”. Correspondingly, the jurisdiction is reverted back to the Régie du logement, subject to certain exceptions.

C. The major issues for the lessor/owner

The selection of a lessee is an important process requiring a diligent background check on the lessor’s behalf. The lessor must discern whether the eventual lessee is able to fulfill its financial obligations all the while possessing the necessary qualities to minimally maintain a harmonious relationship with the other lessees of the establishment.

Let us revisit the example initially described in the introduction in which the lessor and/or owner of the unit realizes that his lessee subleased the dwelling to tourists via the Airbnb platform for less than 31 days. This sublease is likely to entail certain annoyances, namely:

a) Complaints regarding noisy visitors;

b) A violation of the lessee’s obligation to inform his lessor of a sublease and to obtain his consent (art. 1870 C.c.Q.);

c) The repeated frequency of the sublease rental activity risks rendering the unit an immovable intended for commercial use;

d) The change in use would have serious consequences on the owner’s civil liability who would be obliged to inform his insurance company of these new circumstances. According to article 11.1 of the Regulation:

“The holder of a classification certificate must, during all the term of the certificate, be covered by civil liability insurance for at least $2,000,000 per claim to cover the risks associated with the operation of a tourist accommodation establishment, except if the operator is the Government or a public body.”

That being said, the lessor and/or owner does not lack recourses. While case law is scarce at this point in time, jurisprudence seems to clearly define the Régie’s current position relating to the use of leasing platforms such as Airbnb. According to the situation, a leasing contract concluded between two (2) parties on the Airbnb platform is not always considered as a lease agreement by the Régie.

Pursuant to case law, the following judgments are examples of cases in which the Régie did not consider that the lease was residential:

1. When the lessor is aware of the lessee’s intention to sublease the dwelling via the Airbnb platform

In a decision rendered by the Commissioner Francine Jodoin dating May 12^th, 2015, the Régie du logement declined jurisdiction regarding a situation where the lessor was approached by a lessee willing to operate a commercial leasing activity by subleasing the dwellings to third parties. From the onset of their agreement, the lessee mentioned that “his main occupation consists of carrying out a commercial activity by leasing furnished dwellings to foreign students or for short stays by the intermediary of specialized sites (e.g. airbnb)”.

The administrative judge was of the opinion that the concluded agreement wasn’t a residential lease since the parties “became associated in an enterprise aimed at generating a profit from the rental activity of residential units” and that the lessor had abandoned “his right to lease his units in favour of a lessee who would subsequently sublease the unit and turn a profit”.

Given the Régie’s lack of jurisdiction, when the lessor is aware of such rental activities, it cannot intervene if the lessee is in default to pay rent to the lessor. In such cases, the lessor must address a court of competent jurisdiction such as the Court of Quebec or the Superior Court of Quebec depending on the claimed amount.

Based on the Régie’s reasoning in the matter cited above, we are of the opinion that should a lessor remain unaware of his lessee’s leasing activities, the Régie maintains jurisdiction and can intervene since the contract binding the lessor and lessee would be regarding a residential lease.

2. When the lessor ignores the lessee’s intention to sublease the unit on Airbnb

In Commissioner Éric Luc Moffatt’s decision dated July 7^th, 2015, the Régie was presented with a question regarding inconveniences stemming from “the profitmaking dwelling rented out to tourists”. However, since the inconveniences alleged in the lessor’s application subsided, the administrative judge was unable to “conclude the existence of a serious prejudice which would justify the resiliation of the lease”.

Nonetheless, the administrative judge admits that “should the troublesome activity resurface, i.e. the profitmaking subleasing to tourists, the Court would then be able to reach another conclusion based on the facts and proof presented”.

Thus, we are of the opinion that should the neighbours repeatedly complain to the lessor about the sublessees’ troublesome behaviour, the lessor may address the Régie to obtain the resiliation of his lease and evict the sublessees from the unit.

3. The lessee’s defense: article 1900 C.c.Q.

When the lessor wants to limit the number of occupants having access to the dwelling via a clause in the lease, the lessee who is subleasing the unit on Airbnb can use article 1900 C.c.Q. to annul this type of clause.

Article 1900 C.c.Q. reads as follows:

“A clause which limits the liability of the lessor or exempts him from liability or renders the lessee liable for injury caused without his fault is without effect.

 A clause to modify the rights of a lessee by reason of an increase in the number of occupants, unless the size of the dwelling warrants it, or to limit the right of a lessee to purchase property or obtain services from such persons as he chooses, and on such terms and conditions as he sees fit, is also without effect.”

Lest forgotten, according to article 1870 C.c.Q., the lessee subleasing his dwelling must notify the lessor of his intention, indicate the name and current address of the individual he intends to sublease the dwelling and obtain the lessor’s consent.

 D. Overhauling the legal landscape: Bill n°67

1. Overview of the significant changes

On December 2^nd, 2015, the National Assembly of Québec sanctioned Bill n°67: An Act mainly to improve the regulation of tourist accommodation and to define a new system of governance as regards international promotion which came into effect on April 15^th, 2016.

According to Quebec’s tourism minister, by modifying the Act (hereinafter the “Minister”), the Airbnb Act aims to fulfill the following objectives:

• Define the notion of “tourism”;

• Specify the Minister’s powers pertaining to the delivery of a classification certificate;

• Allow the Minister to delegate his responsibilities pertaining to the cancellation and suspension of classification certificates;

• Provide provisions for the purpose of an inquiry; and

• Review the offence scheme of the Act.

In addition, the Airbnb Act also modifies the Act respecting the Ministère du tourisme.

a) Broadening the definition of “tourist”

The first (1^st) article of the Airbnb Act broadens the definition of the term “tourist” to include:

“a person who takes a leisure or business trip, or a trip to carry out remunerated work, of not less than one night nor more than one year outside the municipality where the person’s place of residence is located and who uses private or commercial accommodation services”

While the term “tourist” is clarified, the Airbnb Act as a whole remains insufficient regarding definitions since the legislator did not seize this opportunity to clearly define the parameters of an “occasional basis” lease, as seen at the first (1^st) article of the Regulation. These parameters will most likely be determined through the enactment of the Airbnb Act and the observations of the Minister’s inspectors.

Moreover, according to the Minister, the Airbnb Act defines what a tourist accommodation is by introducing the terms “regular” and “public”.

b) Subjugation to the Act respecting the Québec sales tax

Pursuant to the second (2^nd) article of the Airbnb Act, which modifies article 6 of the Act, every tourist accommodation will require a classification certificate such that the accommodation will be required to “charge a particular accommodation tax along the same lines as hotels”. Let us be reminded that this fiscal obligation is derived from article 541.24 of the Act respecting the Québec sales tax.

c) Obtaining a classification certificate

The Airbnb Act has facilitated the process of obtaining a classification certificate for tourist accommodation establishments.

i) Application process

The important steps in the process are the following:

Additionally, pursuant to article 9 of the Act, while a certificate is typically valid for a period of 24 months, the length of its validity varies depending on circumstance.

Note that the Minister may refuse to deliver a certificate if the criteria set forth in the Act and its bylaws are not met, pursuant to article 5 of the Airbnb Act which modifies article 11 of the Act.

ii) The applicable fees associated with an application

The organization recognized by the Minister responsible for classifying the establishment must also establish the applicable fees (pursuant to the second (2^nd) paragraph of article 7 of the Act and article 10.3 of the Regulation).

iii) Delays in obtaining a classification certificate

While the Act does not mention the precise delay in obtaining said certificate, it does provide certain time markers.

Pursuant to the second (2^nd) paragraph of article 6.1 of the Act, newly added by article 3 of the Airbnb Act, the municipality must inform the Minister if the intended use of the establishment is in conformity with urban municipal bylaws within a period of 45 days of having received the notice.

Moreover, pursuant to article 8 par. 2 of the Act, the Minister may deliver a temporary certificate while awaiting the completion of his request.

Lastly, pursuant to article 11 par. 1 of the Regulation, “Any new application must be made 2 months before the expiry date of the classification certificate”.

d) The penalties/fines

Regarding penalties and fines, article 17 of the Airbnb Act states that article 38 of the Act shall be replaced with the following:

“38. Anyone who operates or purports to operate a tourist accommodation establishment for which the issue of a classification certificate has been refused or whose classification certificate has been suspended or cancelled is guilty of an offence and is liable to a fine of $5,000 to $50,000 in the case of a natural person and $10,000 to $100,000 in other cases.”

Additionally, article 17 also replaces article 39 of the Act with the following:

“39.The minimum and maximum fines prescribed by this Act are doubled for a second offence and tripled for a subsequent offence.”

Hence, the amount in penalties/fines has substantially increased, particularly for repeat offenders. Beforehand, pursuant to the second (2^nd) paragraph of article 38 of the Act, a first (1^st) offense was punishable by way of a fine varying anywhere between $750 and $2,250.00 while subsequent offenses garnered fines ranging from $2,250.00 to $6,750.00.

In summary, the Airbnb Act aims to efficiently implement these new changes by severely punishing those who neglect to abide by the regulations set forth therein.

E. Conclusion

The Airbnb phenomenon has become more problematic in recent years and, by extension, has raised several questions in the legal, political, fiscal, and hotel tourism fields.

The hotel industry’s concerns can be contextualized by comparing the current situation to the taxi industry where drivers are vehemently opposed to Uber’s growing market footprint. Pursuant to article 4 of the Act Respecting Transportation Services by Taxi, taxi drivers must obtain a taxi owner’s permit prior to providing passenger transportation by automobile. Similar to Airbnb lessors, Uber drivers are at a financial advantage compared to taxidrivers by avoiding the acquisition of a certificate/permit.

With the emergence of websites offering a leasing platform similar to Airbnb, we envision an increasing number of litigious cases related to this type of leasing. Consequently, lessors/owners and their lessees will find themselves in legal disputes whose outcome will help define the regulatory framework of the Airbnb Act moving forward.

Certain lawyers are of the opinion that the process of obtaining a classification certificate must garner the lessor/owner’s approval. This position is notable defended by the Quebec Landlords Association. However, we consider that the requirement of a certificate must be assessed in each situation. To that effect, we envision the following scenarios:

1) The lessor and/or lessee

i) The lessor and/or lessee gives his consent to sublease the unit on Airbnb

This is the ideal situation regarding the contractual link between both parties. As long as the accommodation service taxes are paid and a certificate has been delivered, the Airbnb Act is fully respected.

ii) The lessor and/or lesse has not been informed of the lease on Airbnb

This is a problematic situation. Let us imagine a scenario where the lessor receives his monthly rental payments. Even though a complaint has not been filed on behalf of the neighbors for noise disturbances, the lessee has been using Airbnb to sublease the dwelling to tourists. Up until this discovery, all parties were satisfied. However, now that the lessee has established a considerable source of income with the lessor’s property, the lessor is financially disadvantaged.

Faced with such a situation, the lessor wishes to resiliate the lease. That being said, on what legal basis can he conceivably pursue his lessee? Was he prejudiced by this situation? If so, would that justify his request to resiliate the lease?

To avoid this situation altogether, we are of the opinion that it is preferable that all leases contain a clause determining the parameters of the lessee’s intention to use a leasing platform similar to that of Airbnb.

2) The Airbnb lessee/sublessor

Must the lessee obtain his lessor’s authorization?

According to us, it all depends if the transaction on Airbnb is considered as a sublease. If so, pursuant to article 1870 C.c.Q., a lessee wishing to sublease must advise his lessor to that effect.

Moreover, does the “serious reason” criterion codified in article 1871 C.c.Q. allow the lessor to refuse to consent to the sublease of the dwelling? The courts have yet to address the issue.

For the time being, the Airbnb Act addresses several issues which have appeared since the emergence of such platforms and has somewhat quelled the concerns of merchants working in the hotel industry. A wait-and-see approach is necessary as we await the courts’ interpretation of questions which have yet to be addressed by case law.

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The above noted text should not be construed as providing legal advice or a statement of your claim. The process highlighted above are merely parameters and barometers and do not constitute any warranties and guaranties with regards to your file at hand. We strongly recommend that you seek legal advice with a licensed attorney from the Barreau du Quebec or a notary at the Chambre des Notaires. Each case must be seen and analysed on its merits as the legal process may be complex and cumbersome.