The AirBnB Business Model is at Risk: A Prior Authorisation Requirement for Short-term Property Lettings to Combat a Structural Housing Shortage is Consistent with the EU Services Directive.

Tuesday 8 June 2021

Lieven Peeters

ALTIUS, Brussels, Belgium

lieven.peeters@altius.com

Jessica Xiong

ALTIUS, Brussels, Belgium

Jessica.Xiong@altius.com​​​​​​​

Vera Van Thuyne

ALTIUS, Brussels, Belgium

vera.vanthuyne@altius.com

The facts and the proceedings

Cali Apartments SCI and HX each owned a one-bedroom flat in Paris that were offered for short-term rental to occasional customers on AirBnB’s website.

In 2015, the municipal services of the City of Paris investigated and discovered that Cali Apartments SCI and HX were letting their flats through AirBnB, without the Parisian authorities’ authorisation to do so. Following that investigation, the Procureur de la République lodged an application for interim measures against the two companies.

In the first instance proceedings, the tribunal de grande instance de Paris ordered both companies to pay an administrative fine to the City of Paris and to use the premises for residential purposes only from then onwards (and not for holiday rentals). The City of Paris voluntarily intervened in these legal proceedings.

This judgment was based mainly on the French Construction and Housing Code, which provided that in municipalities with more than 200,000 inhabitants, and therefore in the municipalities of Hauts-de-Seine, Seine-Saint-Denis and Val-de-Marne, any changes in use of residential properties required a permit. The short-term letting of furnished accommodation to a transient clientele who were not electing their domicile there constituted such a change of use of a residential property.

According to the Construction and Housing Code, the permit had to be granted by the mayor of the municipality in which the property was located. The mayor could even grant a permit for one property on the condition that another property without residential use would be converted into one with a residential use, so-called ‘offsetting’ as elaborated in the Advocate General’s Opinion.

In the case at hand, the Municipal Regulation of the City of Paris that set the conditions for granting authorisations and determining the offset requirements in concreto did provide for quota and requirements that must be met in the event of offsetting.

Cali Apartments SCI and HX lodged an appeal against this judgment before the cour d’appel de Paris, which confirmed the first instance ruling and ordered Cali Apartments SCI and HX to pay fines of EUR 15,000 and EUR 25,000 respectively. Both companies then further challenged the court of appeal’s ruling on points of law before the cour de cassation de France, which in turn eventually requested a preliminary ruling from the EU Court of Justice.

The EU Court of Justice’s ruling

The EU Court of Justice had to assess in particular whether the legislation in question on an authorisation requirement was compatible with the freedom to provide services, as set out in Directive 2006/123/EC of 12 December 2006 on services in the internal market (the so-called ‘Services Directive’). The Services Directive’s goal is to limit barriers to the freedom to provide services between Member States. Permits or authorisations required for exercising a service activity could be such a barrier.

On 22 September 2020, the Court’s Grand Chamber ruled as follows:

  1. The repeated, short-term, professional or non-professional letting for remuneration of furnished accommodation to a transient clientele that does not take up residence there constituted a ‘service’ within the meaning of Article 4(1) of the Services Directive;
  2. The national legislation, together with the implementing municipal regulations at issue, constituted an ‘authorisation scheme’ within the meaning of Article 4(6) of the Services Directive;
  3. An authorisation scheme must comply with the requirements imposed by Article 9, first paragraph and Article 10, second paragraph of the Services Directive to ensure freedom of services, it being understood that:
    1. the need for an authorisation scheme must be justified by ‘an overriding reason relating to the public interest’. According to the City of Paris and the French Government, the aim of the provisions at issue was primarily to combat a structural housing shortage, to protect the urban environment and social housing policy objectives. According to established EU case-law, these all constituted an overriding reason relating to the public interest and were therefore valid justifications for the establishment of authorisation schemes, especially in those municipalities where rent pressure was particularly severe;
    2. the objective pursued could not be attained by means of a less restrictive measure (proportionality criterion). Since the French Republic had incorporated several flexibility mechanisms into the design of its ex ante authorisation scheme, the latter could not be considered to be disproportionate. The national and local provisions at hand were applicable to a specific kind of rental activities within specific geographical areas. An authorisation was also not needed for the letting of a main residence. Finally, the Court concluded that if an a posteriori inspection would take place, then this would be too late to be genuinely effective;
    3. the authorisation scheme criteria must preclude the competent authorities from exercising their power of assessment in an arbitrary manner. According to the Court, offsetting in the form of the concurrent conversion of non-residential premises into housing was an appropriate instrument for public authorities to comply with such objectives, since it would leave local authorities with the choice as to whether or not to demand compensation and, as the case may be, to determine the quantum of such compensation;
    4. an authorisation scheme had to be clear, unambiguous and objective. The Court decided that the national and local provisions in question were all easily understandable for everybody, treated all operators in a fair and impartial manner and ensured that applications were assessed on their own merits; and
    5. the authorisation requirements had to be made public in advance, be transparent and accessible. The minutes of the municipal council meetings at hand were displayed in the town hall and were made available online on the municipality's website, therefore the Court concluded that this requirement also had been fulfilled.

From this case, we can conclude that a structural housing shortage and the risk of saturated rental prices constitute ‘an overriding reason relating to the public interest’ and therefore justify a national legislator requiring an authorisation or permit for short-term lettings.

Such an additional formality (once implemented) does not make it easy for AirBnB and will likely put its business model at stake.

Contrast with previous EU jurisprudence involving AirBnB

However, it must be noted that prior to this ECJ judgment, AirBnB could easily ‘escape’ from a clearly defined regulatory framework as the Court had ruled in its case C-390/18 of 19 December 2019 that AirBnB was not a real estate agent and thus did not have to comply with national licensing requirements applying to real estate agents.

By relying on such jurisprudence, AirBnB, for instance, has claimed not to fall under the scope of application of the Flemish Accommodation Decree of 10 March 2017.

The Court used peculiar reasoning in that judgment, which was also in contrast to its previous rulings in the Uber-case: AirBnB provides services in addition to its letting arrangements (such as insurance, a guarantee, a tool to establish the rental price in accordance with local market standards), however its services are not an integral part of and therefore merely accessory to its principal intermediary letting service. Given that AirBnB has no control over capping rent prices or the selection of landlords, it cannot be regarded as a real estate agent.

Towards a curtailment of the AirBnB business model

In reality, metropolitan cities such as Paris have been coping with a scarcity of affordable residential property for many years and even decades. The massive number of properties that have been let through AirBnB to tourists over the past years has only driven housing prices higher and higher.

In view of combating illegal AirBnB practices, in which landlords rent out their properties without any permit to do so, mayors from no less than 22 metropolitan cities (including Brussels, Barcelona, Athens, Berlin, Amsterdam, Florence, and Prague) had requested the EU to tackle the AirBnB business model more thoroughly by allowing for a stringent regulatory framework.

This ECJ judgment has provided authorities with leverage to achieve their social and economic goals. If many municipal authorities follow the Court’s ruling, then this movement might even lead to strenuous lobbying work against AirBnB and the long run result could be measures and penalties against illegal AirBnB practices.

Belgian regulatory framework on AirBnB

In regards to Brussels Capital Region’s property market, regional legislation provides for a list of strict requirements so that landlords can legally rent out their property through AirBnB. A building permit to convert a property’s destination from residential only into usage for tourist accommodation is, among other things, most of the time required. Unfortunately, such strict requirements are the reason why the EU Commission on 24 January 2019 started infringement proceedings against Belgium as those rules could be disproportionate and therefore incompatible with the Services Directive.

Apart from the latter, and thanks to this ECJ judgment, the alderman for Town Planning of the City of Brussels delightedly stated on 23 September 2020 that, although the City of Brussels must remain attractive for tourists, he still aspired to slow down illegal AirBnB rentals through effective administrative measures. He further hoped to structurally decrease long-term rental prices for approximately 1,000 properties so that properties on the long-term rental market would remain or become affordable for the average middle-class citizen.

In addition, on two occasions, the Flemish government has already imposed fines on AirBnB for not passing on information to the inspection services about the landlords (and their premises) based upon the registration requirement for anyone who makes (part of) its accommodation available for (tourist) renting.​​​​​​​