What an attention-grabbing headline, and it is accurate! Before all real estate licensees let loose with a collective cheer of approval, we need to examine what conduct has motivated this unusual and provocative action.
This lawsuit was brought on behalf of Sara Ladd (“Ladd”) and Samantha Harris (“Harris”). Ms. Ladd owns two (2) vacation properties in the Pocono Mountains resort area. Ms. Ladd describes herself as an entrepreneur who works from her home in New Jersey as a digital marketing contractor. Beginning as early as 2009, Ms. Ladd began renting one or both properties to vacationers as an additional source of income. By 2013, she was convinced that she was more effective and more efficient at renting her cottages than a real estate licensee would be.
Concurrently, by the middle of 2013, Ms. Ladd had convinced many of her friends and acquaintances she could do better for them by marketing to the “short-term rental market” than could any real estate agent. Ms. Harris has joined in this action as one of Ms. Ladd’s former clients who believe that she should be able to hire Ms. Ladd (or presumably anyone else she wants to hire) to market, manage, and rent her vacation home when she is not using it. Eventually, Ms. Ladd formed her own company, which she called Pocono Mountain Vacation Properties (“PMVP”); she developed her own website; and she built herself a nice profitable property management business, which she continued to operate from her home in New Jersey. By her own statements, she “enjoyed property management and working through PMVP so much over the next few years that, by 2016, she was inspired to personally build and launch her own website to better promote her services.”
Ms. Ladd, however, never bothered to get her real estate license, nor did she license her company as a real estate brokerage. She considered obtaining a real estate licenses for herself and her company to be “burdensome and unnecessary requirements.” It is her belief that the licensing scheme in Pennsylvania, when applied to “short term rentals” are intended solely to protect the “guild-style system” of practicing real estate which benefits real estate licensees.
In January 2017, Ms. Ladd was notified that she was being investigated for practicing real estate without a license. After researching what would be required of her to obtain a real estate license and/or obtain a brokerage license for her company, Ms. Ladd decided to close her virtual doors. Ms. Ladd and Ms. Harris are asking the court to declare the provisions of the Real Estate Licensing and Registration Act (“RELRA”) and the rules and regulations promulgated by the State Real Estate Commission (“SREC”) to be unconstitutional when applied to vacation property managers, thereby permitting anyone to market, manage, and lease “short term rentals.”
Does Ms. Ladd’s business model fall within the scope of what RELRA covers? Ms. Ladd describes it as follows: Ms. Ladd is hired as an independent contractor who represents only the property owner; she never represents potential renters. When she is hired to manage a property, she lists the property on such third party web sites as Airbnb, HomeAway, FlipKey and VRBO. Interested renters contact Ms. Ladd, usually through online portals, and she manages the renters via a pre-approved list of available dates that were provided by each property owner. She collects the rental payments and holds security deposits, subtracts administrative costs and her own commissions, and then remits payments to owners. When the rental period concludes, she coordinates cleaning the property, and refunds (or retains) the security deposits, as appropriate.
A core aspect of Ms. Ladd’s argument is that her services do not involve conveying real estate, nor do they create landlord-tenant relationships. Moreover, since her services only involve terms of just a few days, only involve a few hundred dollars (per rental), and since she only manages properties for no more than five owners at a time, the requirements under RELRA are unnecessary burdens. She bolsters her argument by asserting that very few residential real estate brokers handle short-term rentals and that most transactions involving real estate licensees span several months or years and involve large sums of money; whereas Ms. Ladd runs her business from her home with little or no overhead, and because she is not focused on the larger transactions, she can concentrate her energies on servicing her clients.
Ms. Ladd is objecting to classifying what she does as the practice of real estate that must be practiced within the parameters set forth in RELRA and the interpretive regulations. She is appalled that she would be required to work for a broker for a minimum of three years, knowing that such broker would not “specialize” in short-term rentals. She also objects to being required to work within the confines of a brick-and-mortar office, and that her ability to continue to manage these short-term rentals could be restricted by her broker or, worse yet, be referred to a competitor. Since what she does is so different from what a “traditional” real estate licensee does, Ms. Ladd concludes that she should be exempted from RELRA, as its requirements and limitations “do not protect the health, safety, or welfare of the public.”
RELRA defines real estate as, “Any interest or estate in land, whether corporeal, incorporeal, freehold or nonfreehold, whether the land is situated in this Commonwealth or elsewhere including leasehold interests and time share and similarly designated interests.” 63 P.S. §455.201. A broker is defined as one who, “for another and for a fee, commission or other valuable consideration: (1) negotiates with or aids any person in locating or obtaining for purchase, lease or an acquisition of interest in any real estate; (2) negotiates the listing, sale, purchase, exchange, lease, time share and similarly designated interests, financing or option for any real estate; (3) manages any real estate; (4) represents himself to be a real estate consultant, counsellor, agent or finder; (5) undertakes to promote the sale, exchange, purchase or rental of real estate …; (5.1) undertakes to perform a comparative market analysis…” 63 P.S. § 455.201. In short, Ms. Ladd is arguing that managing short-term rentals for others for a fee should not be regulated in Pennsylvania.
This case is in its infancy, however, since Ms. Ladd is arguing that this portion of RELRA is unconstitutional and is prohibiting her from pursuing her chosen line of work, it is unlikely that this case will simply “fade away”. Procedurally, it is important to understand that because the SREC is an agency of the Commonwealth, the Commonwealth Court is where this case begins. As a result, the first (and only) state appeal to the losing party will be to the Pennsylvania Supreme Court.