05 August 2011

Is Airbnb suffering the legal challenges of a Zombie Mutant in both Travel and Apartment Rentals?

***Caveat*** I am not a lawyer and cannot provide formal legal interpretation of the law for the purpose of this article.***

Like many of us, I have been following the Airbnb story for some time. The recent high profile cases of renters abusing the apartments of those offering them via Airbnb have caused me to think long and hard about Airbnb’s model. The idea of a referral service is really quite attractive and a way to reduce the cost of hotel stays especially in expensive cities like New York and London.

From personal experience, I can comment directly. I have used Craigslist to find apartments in New York as well as many non-traditional hotel type accommodation services in London, and I used HomeAway to book my summer holiday in Greece last year. When I first heard about Airbnb, it sounded like an attractive proposition and even though I am a long time travel industry participant, I applauded its take on the market as an alternative accommodation provider.

However, I have been concerned that these companies should compete legally and fairly with others in the market. In the case of HomeAway, I was able to arrange a good contract and standard terms and know that the service was reliable, ALL as a direct result of the checking and care I was able to exert myself. In the case of the Craigslist in New York City – all I can say is that September during Fashion Week is not a good time to be renting a cheap hotel room, so I took what I could get and it turned out OK… just. And yes I did feel I was doing something that was breaking the odd regulation or two but economics trumped those qualms. In London I have dealt with brokers and direct property owners who are legally authorized to allow short-term rentals. This usually saves me a lot of money and I get a larger room.

I have tried to use Airbnb several times and found a wide mixture of agents as well as direct owners and individuals subletting among the offers; so far I have not been able to find a suitable rental that worked for me. The reasons are the usual level of not quite a good fit. However I was only prepared to bend the rules if the offer was economically compelling. I was surprised how many of the offers were not in my view that attractive in terms of cost saving. So I could get a better offer from a reputable brand rather than someone in whom I have no way to validate other than their “online reputation.” At best that is risky.

From a professional viewpoint, I would like to openly evaluate the legality of these types of services by reviewing the service premise and the possible issues arising from that premise. For the sake of brevity, I am going to distill this down to five factors:

1. What type of entities are Airbnb and their competitors? Is Airbnb a legally authorized body to perform the services it is offering, and does it need to register in every jurisdiction it serves?

2. Is Airbnb governed by any housing/accommodation service laws?

3. Is Airbnb providing or required to provide consumer protection, and if so what is appropriate?

4. Is Airbnb required to collect taxes?

5. Is Airbnb encouraging classes of people to break laws and/or their housing contracts?

1. What is Airbnb?

As far as I can tell Airbnb describes itself as a directory or listing service. As such it felt that it could provide a significant value with little downside to a business model that aggregates demand and supply in one place. Here is how Airbnb thinks of themselves. http://www.airbnb.com/home/about (scroll down through the section)

Travel in general remains one of the more regulated business sectors, particularly in air transportation as very strict rules apply to domestic and international travel. Accommodation services tend to be federally unregulated because there is so much local law that applies to hotels, apartments and other types of accommodations. However the commercial law around renting accommodation – short or long is very extensive.

In any travel transaction there can be a number of potential entities involved, including agent/broker, seller, product owner, etc. Travel is interesting as it is a market place – one might say several different marketplaces – dealing in electronic units of inventory. One of the characteristics of travel is that it is rare that people take inventory risk – travelers are confident the airline seat or hotel room will be available when they show up at the gate or at check-in due to regulations applying to the sale of such inventory. If it not there is time honoured solutions to the issue such as compensation.

I would question if a company such as Airbnb (and I name them only because they are the one we see most clearly) is actually a marketplace. Or is Airbnb a seller, or something else such as an agent or a broker? I am not legally qualified to add to the definition with absolute surety. However it seems that by collecting money, such an entity is not in the same league as Craigslist, nor would it resemble eBay. Companies can call themselves anything they want but just because one says something does not make it so.

Whatever one cares to call the party to a transaction, once you have a commercial relationship then corresponding commercial (and in some cases criminal) law applies. I believe this is at the heart of several of these so-called P2P business concepts. I may be a bit repetitive here but because you try to classify yourself one way – that is not relevant ; the laws have different ways of interpreting it. (No prizes for guessing which one is the one likely to win). If you make money then you are a commercial enterprise; as such you are the seller, the buyer, or a broker/agent. It would be hard to expect an entity such as Airbnb to avoid being classified as one of these.

In travel there are a number of laws that could apply. One is that you are a seller of travel according to this definition:

(a) "Seller of travel" means a person who sells, provides, furnishes, contracts for, arranges, or advertises that he or she can or may arrange, or has arranged, wholesale or retail, either of the following what?:

California law uses this definition (http://ag.ca.gov/travel/pdf/statutes_2007.pdf) but stops short because it defines travel as something that does not actually include the accommodation services. However there is a grey area because when they come to define “Travel Services” – then almost any service is covered by the law:

§ 17550.9. Travel services

"Travel services" includes, but is not limited to, lodging, surface transportation, transfers, tours, meals, guides, baggage transfer, sightseeing, recreational activities, vehicle rental, or other travel-related services, however denominated, including, but not limited to, travel certificates, registration fees, and processing fees. "Travel services" does not include travel services rendered by providers of lodging such as a hotel, motel, or similar lodging establishment where the provider of lodging supplies only that service.

However the State of California is so far not inclined to regard what Airbnb, HomeAway et al do as being part of the class of “Travel Services.”

There are several other states that have Seller in Travel laws, including Florida (http://www.800helpfla.com/pdfs/StatuteTravel.pdf) where one key section reads:

"Offer for sale" means direct or indirect representation, claim, or statement or making an offer or undertaking, by any means or method, to arrange for, provide, or acquire travel reservations or accommodations, tickets for domestic or foreign travel by air, rail, ship, or other medium of transportation, or hotel and motel accommodations or sightseeing tours by a seller of travel who maintains a business location in Florida or who offers to sell to persons in Florida.

Thus far the State of Florida has thus far elected not to challenge HomeAway and Airbnb. I believe that other states – such as Iowa will pursue the issue. Indeed the latter has now come out and said they will demand such adherence. This may make California and Florida re-evaluate their position. Other states such as Massachusetts will also be looking at this carefully.

2. Is Airbnb governed by Travel Legislation and/or Housing Laws?

If you provide an accommodation service then you are typically covered by many layers of laws. Basically the laws cover the areas of:

• Protection of Renters – mostly to prevent abuse by Landlords

• Protection of Landlords property

• Ensuring that properties are used for the correct purpose – i.e., for residency, not for money making enterprises

I would refer you to www.housing.org as a great resource for information. In my view Airbnb has specific issues as a provider of accommodation services even as a referral service. Probably the most complex market for this is New York City who has tuned its laws to ensure best fit in finding and collecting tax revenues. The reason is that NYC passed a law that governs the short-term rental market. In essence the law was specifically written to target HomeAway, Airbnb and Craigslist - http://open.nysenate.gov/legislation/bill/A10008-2009.

The battle raged long and hard. Supporters of the bill argued that there were issues of safety, citing fire codes and housing maintenance regulations and of course the collection of taxes. In essence the supporters wanted to bring these rentals into the same realm as hotels.

Opponents of the law argued it was an infringement of homeowners' rights and accused supporters of caving to pressure from the hotel industry who saw the lower rates on Craigslist and Airbnb as a threat. Even if that had been won – there would still be the issue of subletting. Read more: http://news.cnet.com/8301-13577_3-20009095-36.html#ixzz1TuobA7EF.

In many states and cities, there are standard rental/lease agreements to simplify the process of consumer protection in housing. These agreements have some pretty standard terminology that has been honed over many years. For example New York City enacts a standard form and most other commercial renters follow suit often more stringently - http://www.housingnyc.com/html/resources/faq/leases.html#purpose. This enables who class of landlords and the population of that city as a whole to have a common framework of legislation.

More traditional suppliers- would prefer to deal in service level agreements.
Expedia and others who have been long time sellers in Travel all have recognized processes and registrations. American Express as a financial seller has many extra issues it has to cover. So here are their disclaimers

In particular for the online agencies Expedia who does a good job in this area check out their terms and conditions:
http://www.expedia.com/daily/service/legal.asp in particular look at the New York City requirements: http://media.expedia.com/media/content/expus/graphics/other/travelscape_nys_certificate_of_authority.pdf this shows their right and ability to collect sales taxes under Local Law 43. A service such as Airbnb should likely register and have the same documentation available for consumers.

For renting apartments etc – there are a large amount of compliance issues that need to be covered. Check out City Rentals Terms and Conditions. http://www.cityrealty.com/how_cityrealty_works/terms_of_use.cr Compare this with how Airbnb covers the same territory. In my view therefore Airbnb falls under both travel (hotel type) and housing laws.

3. Does Airbnb have to provide consumer protection?

Comparing Airbnb to either Craigslist or to eBay is interesting because both go out of their way to address this issue.

When you have a full marketplace such as eBay care is needed to ensure that people transacting in your market are not hurting each other. EBay has a degree of caveat emptor as it has a clear set of rules of behavior and a guarantee - http://pages.ebay.in/aboutebay/eBay_Guarantee.html. Note eBay makes money from listings and from a cut of the financial transaction.

In a “free” space such as Craigslist, you can do certain things as the marketplace (as with eBay) or as a referral – it clearly understands it can be interpreted as either. Craigslist went through a degree of trauma because it found itself the unwitting participant in a battle between those who had to comply with a set of laws on accommodation services (ranging from hotels to apartment complexes) and those who did not for example private individuals. As a result, Craigslist has a great resource it developed with Project Sentinel Fair Housing - http://www.craigslist.org/about/state_fair_housing_laws. Remember that Craigslist does not collect money from private individuals only from brokers and agents, plus of course advertisers.

The issues of consumer protection are very long. They range from protecting against open scams to insurance for loss. Providing a guarantee creates a cost for the provider, and the provider must also prove compliance of that guarantee, creating another cost. EBay’s guarantee took a long time to settle in and even now the dispute resolution service is not easy.

The recent and very public cases of Airbnb arrangements going awry forced the company into a very public apology and climb down. Only after intense media and blogger attention did the company finally act. This is all voluntary because the company maintains it broke no laws despite a very public display of sackcloth and ashes by its CEO. However if the case can be made that the company has been offering accommodation services when they are in a regulated jurisdiction, then the company will have to address the consequences of that. So far no local jurisdiction has taken them through any legal process as far as we can tell. The attention I am sure will cause both conventional competitors and the regulators to sit up and take notice.

4. Is Airbnb required to collect taxes?

Airbnb collects money. As such it is running a commercial service. There has been a long running dispute between the Online Travel Agents - OTAs and the local hotel tax authorities over taxes paid and collected. After more than five years some jurisdictions have become smarter and closed previous loopholes governing what determines that tax. In New York City, the latest and most comprehensive change became known as Local Law 43. This applies to Airbnb in my opinion (and others) because of a decision the City recently made in how it classifies accommodation.

In July 2009, the city decided to change the definition of room “rent” to include “any service and/or booking fees that are a condition of occupancy.” The new law requires a “room remarketer” to collect and remit to the hotel the portion of tax based on the net or negotiated wholesale rent; the hotel operator will remit the tax to the city. In addition, the remarketer must collect taxes on the difference between the wholesale rent and the amount it charges for the room—the portion it calls its “fee”—and to remit that tax to the city taxing authorities directly.

That sounds like Airbnb would fall into the category of remarketer. Note that taxes collected are to be stated separately on the bill for the room. For hotel and motel owners the law is explained here: http://www.tax.ny.gov/pdf/publications/sales/pub848_308.pdf. However the interpretation of the law will continue to evolve because of ongoing disputes between users of the service and any entity that is classified as “arrangers” and “remarketers”.

Note that the State Supreme Court in New York upheld the law in 2010 - http://www.tnooz.com/tag/new-york-city-tax-law/.

5. Is Airbnb encouraging classes of people to break laws and or their housing contracts?

This is again a tricky area. Americans lawyers love class action suits, and there could be a basis for one here. The argument could be made that there are specific clauses in most renters’ contracts that prevent two activities:

A. Subletting, even for a short period of time

B. Conducting commercial operations from a place designated as a residency

Referring back to the City of New York standard renter’s agreement, the definition is clear - http://www.nyc.gov/html/nycha/downloads/pdf1/rc_lease.pdf:

The Leased Premises shall be the Tenant’s only residence and shall be used solely as a residence for the Tenant and the members of the Tenant’s household (i.e., those named in the signed application, born or adopted into the household, or authorized by the Landlord) who remain in continuous occupancy since the inception of the tenancy, since birth, or since authorization of the Landlord. The Tenant and the members of the Tenant’s household shall have the right to exclusive use and occupancy of the Leased Premises

One could make the case that Airbnb does not vet for nor does it seem to care that anyone with this clause in their rental agreement is breaking a contract. As such a class of property owners (as a class) who have rental accommodation could clearly argue that Airbnb is promoting renters (another class) to break their contracts on these two points. Such a situation is often grist for the mill of a happy set of lawyers.


I believe that Airbnb and services like theirs have a responsibility to address these issues. Fundamentally they ensure the following four principles are in place:

1. Consumer and vendor protections are available
2. Marketplace protections make it fair
3. Taxes are collected
4. Laws and guidelines – where and when applicable – are clearly followed

Today I believe that Airbnb and its ilk are failing these standards on one or more of this number of points. I welcome any comment from anyone competitor, regulator or consumer. I would also encourage local authorities to examine the situation to ensure that compliance is indeed in place to protect the consumer.

There are many organizations who have fallen foul of these types of laws. P2P businesses are still just that. Businesses. Would it be fair (even if legal) to allow such a player advantage in a market place where others are complying with both letter and spirit of the legal jurisdictions?

As we all know – ignorance is no excuse under the law. Especially when you just had $112 million handed to you.


Image from the movie Pandorium.

1 comment:

Alexi Olivia said...

Currently, there are over 800,000 Airbnb listings in more than 34,000 cities and 190 countries. With upwards of 20 million guests, it's safe to say that Airbnb has nestled its way into the hearts of many a traveler.