Ladd V. Commonwealth Of Pennsylvania Should Managing Short-Term Rentals Require A Real Estate License?

Contributed by Brett M. Woodburn

Short term rentals, Airbnb, VRBO… this evolving concept in the real estate market is making waves in all aspects of the legal community. In many areas, municipalities are enacting rental registration ordinances. In some communities, battles are being waged between property owners and municipalities as local governments and neighbors seek to impose restrictions, taxes, even prohibitions against other property owners who are looking to ‘cash-in’ on the curb appeal of their homes by renting them for a day or two (or three) to folks looking to rent a “home” for a few days. In most circumstances, the transactions are being handled by the homeowners. A web site may serve to be the medium by which homeowner and vacationer are pulled together, but the transaction is handled by the owner or by a licensed real estate agent.

Until now…

On July 17, 2017, Sara Ladd (“Ladd”) and Samantha Harris (“Harris”) filed suit against the State Real Estate Commission and the Bureau of Professional and Occupational Affairs. Ladd owns two seasonal vacation properties in the Arrowhead Lake community in the Poconos. She decided that she could do a better job marketing and renting out her properties on Arrowhead Lake than could any of the rental agents who market to that community. Finding initial success, Ladd started marketing her services to others in the Arrowhead Lake community by taking the “hassle out of short-term vacation rentals by handling all of the marking and logistics that property owners would otherwise have to coordinate themselves to keep their properties rented out.” Ladd, a 61 year old retiree, lives in New Jersey and ran her new online business from her laptop in her home. She never intended to move to or live in Pennsylvania.

In January 2017, Ladd was contacted by the Bureau of Enforcement and Investigations (“BEI”), indicating that she was being investigated for the unlicensed practice of real estate. Ladd did some investigation and concluded that her business model did, in fact, fall within the definition of licensed activity; in other words, the laws of Pennsylvania require her to be a real estate licensee in order to market property for sale or lease on behalf of other owners. Harris was one of the property owners who hired Ladd to rent her Arrowhead Lake property. Once Ladd verified that she was breaking the law, she contacted her clients and discontinued offering her services to other property owners. Harris hired a real estate licensee to market her property for rent, and while here property was regularly rented, Harris believes that the real estate agent was less successful for her than Ladd was.

Ladd filed a petition for declaratory relief in the Commonwealth Court, as the court of original jurisdiction, claiming that the Real Estate Licensing and Registration Act (“RELRA”) violates her substantive due process right to pursue her chosen occupation, because the licensing obligations under RELRA were onerous, antiquated, and largely inapplicable for preparing her (or anyone else) for acting in the niche-market of short term rentals. Ladd’s goal is declaratory relief stating that the licensing requirements under RELRA do not apply to her.

The Commonwealth filed preliminary objections arguing the petition for declaratory relief should be dismissed at the preliminary stage for four reasons: (a) RELRA is constitutional as applied to Ladd; (b) there is no actual controversy, thus the Court lacks jurisdiction; (c) Ladd failed to exhaust her administrative remedies; and (d) Harris’ claims should be dismissed because she lacks standing. In response, Ladd and Harris argue as follows. First, RELRA is unconstitutional as applied to her, because her business model is different from that of a traditional broker. Second, an actual controversy exists because her short-term rental business was shut down because it falls within the scope of RELRA. Third, declaratory judgement is available because (i) RELRA does not provide a statutory remedy for Ladd to pursue, and (ii) any remedy (such as becoming licensed) is inadequate given the circumstances. Finally, Harris has standing to pursue relief because the application of RELRA prohibits her from using Ladd’s services.

The Commonwealth Court has not ruled on the Preliminary Objections. The Court has, however, refused to stay discovery. Ladd has issued subpoenas to BEI and other Commonwealth services, and the Commonwealth has objected to the subpoenas. Initially, the objections were sustained and Ladd is appealing that decision.

All of the parties involved in this litigation agree that RELRA prohibits Ladd from managing rental properties owned by others without first being licensed to practice real estate. Ladd wants to be excluded from the scope of the Act because she finds it to be too Draconian, and interferes with her ability to earn a living. This is a hot topic in real estate law, and if Ladd is successful, the ruling will fundamentally affect the way that real estate is transacted in Pennsylvania.

For additional information contact Brett Woodburn.