Short-Term Rental Law Survives Regulatory Taking Claim

June 15, 2020

For the last several years, municipal governments across Long Island, and beyond, have been taking action to control or outright ban short-term rentals in their communities. Inevitably, these efforts have met opposition from both entrepreneurial property owners and the home-sharing services that support them. Lawsuits challenging local regulation of short-term rentals have popped up across the country, and they often raise questions about whether such regulations–which have direct implications on a property owner’s “bundle of rights”–are constitutional. In the Fourth Department’s recent decision in Matter of Wallace v Town of Grand Island (CA 19-00925, decided June 12, 2020), the question before the Court was whether the specific regulations under review effected a regulatory taking of real property for which just compensation was owed. The Appellate Court answered “no.”

In Wallace, the petitioner-plaintiff (plaintiff) purchased a single-family home in the Town of Grand Island for the specific purpose of operating a short-term rental. A few years later, the Town amended its zoning regulations to prohibit short-term rentals in certain zoning districts, except where the property was also owner-occupied. The law contained a one-year amortization period, which an affected property owner could petition to extend up to three times.

After the new law took effect, the plaintiff sought an extension of the amortization period as well as a use variance allowing him to continue operating his short-term rental indefinitely. The defendant Town boards denied his applications. In response, the plaintiff sued seeking (among other things) a declaration that the regulations were void on the grounds that they resulted in an unconstitutional regulatory taking of his real property.

On appeal, the Fourth Department affirmed dismissal of the plaintiff’s claims, concluding that the short-term rental law did not effect a regulatory taking of the plaintiff’s property. Applying the test set forth in the seminal case of Penn Central Transportation Co. v New York City, 438 US 104 (1978), the Court found that the plaintiff failed to provide “dollars and cents proof” (i.e. financial evidence) that “the subject premises was not capable of producing a reasonable return on his investment or that it was not adaptable to other suitable private use.” (Memorandum and Order at p. 3). At best, the plaintiff established a “mere diminution” in property value, which is not sufficient to establish a regulatory taking (Id.). The Court observed that the plaintiff was not precluded from selling the property at a profit, or from renting it on a long-term basis. (Id.). Finally, the Court noted that, even if plaintiff successfully established a regulatory taking, the proper relief for his claim would have been a hearing on just compensation, not invalidation of the law. (Id.).

The Court’s decision in Wallace is another weight on the scale for local control over short-term rentals. However, the dispute over these uses still seems far from over. A copy of the Court’s Memorandum and Order is available by clicking the following link: Mtr of Wallace v Grand Island.