By Elizabeth Garvin, Esq., AICP

Short-Term Rentals, Long-Term Legal Challenges

Short-term rentals have probably existed since early human habitation. The regulation of short-term rentals has probably fallen into the black hole of topics that go unregulated for about the same amount of time. Prior to the development of the current crop of short-term rental platforms, many communities either had no reference to rentals in their zoning code or the code specified that the minimum rental time was 30 days. Why 30 days? That time period usually triggers laws that establish a landlord/tenant relationship. Not all communities had codes that were silent about short-term rentals, but I feel safe venturing a guess that the majority of zoning ordinances fell into the 30 days-or-nothing choice. Permitting a less than 30-day rental, though, is the goal of the growing short-term rental business. Efforts by both citizens and corporations to grow that business are requiring communities to shine a light into this regulatory dark spot and decide what type of short-term rentals should be permitted. Because of the economic interests at stake, we are seeing litigation as a result.

Short-term rentals are a new focus area of regulation for cities — and not just for tourist-rich areas.

Without a significant body of legal precedent, the attorneys who represent the property owners challenging the ordinance (typically the plaintiffs, but parties can get switched as cases move up the court hierarchy) are filing multi-claim challenges in search of the one or two claims that will overturn the ordinance, either entirely or as it is applied to a specific property. Recent cases include claims ranging from a garden-variety appeal of an enforcement citation to constitutional violations, including substantive due process, equal protection, and takings. A 2019 New York case included claims that the short-term rental regulation violated both the Fair Housing Act and the New York State Human Rights Law. If you’re curious, the district court denied both claims. Weisenberg v. Town Board of Shelter Island, 404 F. Supp. 3d 720 (E.D. NY 2019)

Short-term rentals can pop up in any neighborhood and cities have specific challenges in regulating them.

This is all interesting for attorneys, but can be a little more challenging for local governments when trying to adopt or amend short-term rental regulations. Why? Different types of legal claims have different “tests,” standards, or criteria against which the ordinance will be measured. Some claims have a very lenient test, where a court will defer to the governing body’s decision about what works in the community. And some claims have a very challenging or effectively insurmountable test, such as the strict scrutiny standard for regulation of noncommercial speech that we have all become more familiar with following Reed v. Town of Gilbert, 576 U.S. ___, 135 S. Ct. 2218 (2015). With communities facing this situation with short-term rentals, an extra degree of difficulty is provided by the need to have a crystal ball to help predict what purpose, intent, and findings made early, during the adoption process, will help protect a community from legal challenge much later in the game.

Different Tests, Different Outcomes

In Zaatari v. City of Austin, ____ S.W.3d ____(2019 WL 6336186) (Tex. App. 2019), a Texas court of appeals held that the City of Austin could not amend its existing short-term rental regulations to eliminate non-owner-occupied single family residences as short-term rentals. The amendment was challenged by local short-term rental property owners (claiming constitutional rights to privacy, freedom of assembly and association, due course of law, equal protection, and freedom from unwarranted searches) and the state intervened (joined the lawsuit) to add claims that the termination of existing short-term rental licenses was an unconstitutional retroactive law and created an uncompensated taking of private property. In Texas, the state constitution prohibits retroactive laws, creating a “heavy presumption against retroactive laws.” Local government is required to show “a compelling public interest” to successfully enforce a retroactive law. Determining whether an ordinance meets this test requires the court to look at: (1) “the nature and strength of the public interest served by the statute as evidenced by the Legislature’s factual findings;” (2) “the nature of the prior right impaired by the statute;” and (3) “the extent of the impairment.” Id. at 8.

How did Austin get into this situation? Austin adopted a short-term rental ordinance in 2012, which defined short-term rentals as “the rental of a residential unit or building associated with a group residential use, on a temporary or transient basis.” In 2016, following several studies and hearings, the city revised the ordinance to identify three types of short-term rentals: Type 1: rental in an owner-occupied unit; Type 2: rental in a non-owner-occupied residential unit; and Type 3: rental in a residence that is part of a multi-family residential use. The revised ordinance suspended the licensing of new Type 2 rentals and terminated existing Type 2 rentals in 2022. The revised ordinance also restricted some uses within short-term rentals, including banning “a wedding, bachelor or bachelorette party, concert, sponsored event, or any similar group activity other than sleeping. . . after 10:00 p.m.”

Plaintiffs challenged the 2016 ordinance and, for the most part, Austin lost this round. According to the court, Austin failed to provide findings to justify the ban on Type 2 rentals. The city cited four public-interest purposes for enacting the revised ordinance:

Public-health concerns about over-occupancy affecting the sewage system and creating fire hazards and about “bad actor” tenants who dump trash in the neighborhood and urinate in public;
Public-safety concerns regarding strangers to neighborhoods, public intoxication, and open drug use;
General-welfare concerns about noise, loud music, vulgarity, and illegal parking; and
The negative impact on historic Austin neighborhoods, specifically concerns of residents that short-term rentals alter a neighborhood’s quality of life and affect housing affordability.

The court, though, wanted to see more in terms of reasons and evidence because the court was looking at the legal test for weighing retroactive legislation summarized above. The court wanted the city to explain more specifically which of these public interest issues supports a ban on Type 2 rentals AND the court wanted to know that the reasons provided would resolve or prevent the problems associated with Type 2 rentals. The court also wanted to understand why the city couldn’t use existing local or state laws to resolve some of the Type 2 rental issues, including Texas disorderly conduct and public intoxication laws or Austin noise or litter ordinances? And finally, the court had a few questions about evidence of these issues that could be provided from enforcement efforts, of which the city had very little.

In practice, anybody who works in code enforcement can explain at length that lack of an enforcement record on a particular issue provides more evidence of the community’s enforcement priorities and available funding than about the scope of an actual problem. If we put that issue aside, this opinion may still give us some insight about how a court will explore the justifications behind changes to short-term rental regulations. For this court applying this test, the adoption findings needed to be far more explicit, drawing the line between “compelling” cause and specific effect. On the facts provided, Austin did not meet that standard. However, there are a couple of reasons that we may see this case again. First, this is an appellate court decision and the case was remanded (sent back to the trial) court for further proceedings. Second, Justice Kelly, in a dissenting opinion, notes that the decision in Zaatari “creates tension with opinions in our sister courts.”

Supplying the Reasons for Regulating

If we compare the Texas Zaatari case to a case in Walworth County, Wisconsin — we can see where a different legal test results in a different outcome. In Murphy v. Walworth County, 383 F. Supp. 843 (2019), the property owner brought an equal protection challenge, which requires the court to consider whether “the classification drawn by the statute is rationally related to a legitimate state interest. “ An ordinance fails the rationally related test only “if no sound reason for the action can be hypothesized,” or if it were “wholly impossible to relate to legitimate governmental objectives.” Id. at 850-51. “Rationally related” is generally a far easier standard for local government to meet than “compelling interest.” And in Walworth County, the United States District Court found that the county had both provided evidence that the short-term rental ordinance would address the problems created by short-term rentals in the community and that the court could also “reasonably conceive” of sufficient justification for the regulation.

Murphy is a property owner in Walworth County, Wisconsin, a summer tourist destination with access to Lake Geneva, Kettle Moraine State Forest, and the Alpine Valley Music Theater. Wisconsin passed Act 59 in 2017 which prohibits local government from banning short-term rentals, but still allows regulation through zoning and licensing. The county held a series of short-term rental workshops and explored solutions for complaints about excess noise, over-occupancy, and waste. They used this public feedback to create their short-term rental ordinance. The resulting ordinance specifically linked occupancy limits to the capacity of available sanitary facilities. Before, during, and after this timeframe, Murphy, a local resident, had been purchasing and renovating properties in residentially zoned areas to use as short-term rentals. Murphy’s equal protection challenge to the county ordinance claimed that it was improper for the county to treat short-term rental properties differently from single-family homes. The court wasn’t buying it, stating that “[a]s a threshold matter, the single family homes used for short-term rentals are not similarly situated as single-family homes used for long-term use.” Differences could include rate of electricity, plumbing, and gas usage; number of automobiles in the driveway; amount of trash created by people on vacation; and “the interests that tourists have in preserving the quality of life in a neighborhood tends to be lower because they will soon leave.”

Unlike the Zaatari court, the Walworth County court found the county had provided sufficient evidence that the short-term rental ordinance was designed to address the specific issues identified. The link to septic capacity placed residency limits on each of Murphy’s structures that were lower than any of the advertised occupancies. For example, one unit had a sanitation permit for four people but was advertised with capacity for 12 people. Using the “rationally related” test, the court also easily created a hypothetical of a busy summer rental season with consecutive over-capacity rentals that overload the private treatment system, resulting in the eruption of “bacchanal waste product” to the detriment of the nearby community. Truly something that none of us wish to experience!

Takeaways for Local Government

While we wait for the law of short-term rentals to become a little more predictable, local governments can take a few steps to support the adoption of or changes to short-term rental regulations. First, explore the research. We are starting to see more long-term studies of the impacts of short-term rentals on neighborhoods and communities – such as a series of articles on Short-Term Rentals and the Effects on Housing Affordability available from the Urban Land Institute – and the information contained in these studies may be useful to the local decision-making process. Second see what your peer communities are doing. Relatively recent reports prepared by a number of communities, including Albuquerque and New Orleans, provide a roadmap to understanding what options are available for the regulation of short-term rentals. And third, consider creating legislative findings that describe the “why” and “how” of your community’s short-term rental regulations. Findings can be included in the adopting ordinance and should at least establish a framework for any future discussion about the reasons behind the ordinance.

Don’t Forget the Definitions

Utah’s Community Development Office created a introductory guide on Short-term rentals which may be helpful for other regions.

One final short-term rental case for your consideration. Working Stiff Partners, LLC v. City of Portsmouth, ___ A.3d ___ (2019 WL 4725178) (NH 2019), courtesy of the Supreme Court of New Hampshire. Working Stiff Partners owned a home that was listed and used for short-term rentals and located in a residential district. Portsmouth determined that the short-term rental use was not permitted in the district and issued a cease and desist order, which was appealed multiple times resulting in this decision. Reviewing the case, the court held that using a property for short-term rentals is a transient occupancy use, similar to a hotel or motel where lodging is provided for a daily rate. Portsmouth’s zoning ordinance expressly excluded transient occupancies from the definition of a dwelling unit, the use permitted in residential districts. The court found that Working Stiff’s use of the property for short-term rentals violated the zoning ordinance. The court reaches this conclusion by giving the reader a short workshop on regulatory interpretation, explaining how it worked through a series of definitions, first from the zoning ordinance and then, where there are gaps, from the dictionary to reach its conclusion. This case might have had a different outcome if Portsmouth’s definitions had not been sufficient for the court to use them to establish the city’s intent for each use. A little something to keep in mind when updating your local short-term rental regulations.

Elizabeth Garvin is a land use lawyer and planner and the founding principal of Community ReCode in Denver, Colorado. She is a member of the RMLUI Regional Advisory Board who writes the RMLUI Legal Corner for The Wester Planner. This article is informational only and is not a legal opinion.

WP / RMLUI Legal Corner: Legal Challenges to Short-Term Rental Rules - There’s a Test for That