N.J. District Court: Jersey City’s Limit on Short-Term Rentals is Constitutional Under the Takings Clause

Home sharing platforms have exploded in popularity over the past decade, becoming an acceptable way for individuals to earn supplemental income from their properties. Using these platforms, individuals may lease or sublease their properties for a short-term period of days, weeks, or months at a time. In 2015, Jersey City passed an ordinance affirmatively permitting short-term rentals in the city. In 2019, however, the city passed another ordinance which limited such rentals. The 2019 ordinance, among other things, banned the practice of subletting long-term lease properties as short-term rentals and limited non-owner-occupied properties to hosting no more than sixty nights of short-term rentals per year.

In December 2019, a group of plaintiffs sued Jersey City and challenged the restrictive ordinance pursuant to the Takings, Contract, and Due Process Clauses of the U.S. Constitution. In sum, the District Court for the District of N.J. granted Jersey City’s motion to dismiss and denied plaintiffs’ motion for a preliminary injunction. This blog focuses on the Court’s analysis as it relates to the Takings Clause challenge.

Plaintiffs operated short-term rentals which they marketed through online home-sharing platforms such as Airbnb. They did so via two methods. The first was that each plaintiff purchased a property (or properties) and offered short-term rentals of that property through Airbnb. The second was that the plaintiffs all entered long-term leases with other property owners and then, with those property owners’ permission, sublet those leases as short-term rentals through Airbnb. The plaintiffs each alleged that they chose Jersey City as a location to focus their short-term rental business due to the City’s enactment of ordinances permitting short-term rentals and its efforts to advertise those ordinances. They claimed, however, that they are unable to make a profit from their owned and leased properties unless they are permitted to continue exploiting them as short-term rentals.

After expressly authorizing short-term rentals in 2015, a series of political maneuvers led Jersey City to reconsider its view. Ultimately, in 2019, the City passed Ordinance 19-077 which imposed several important restrictions on short-term rentals. First, it barred short-term rentals in non-owner-occupied dwellings in excess of a total of 60 nights per year. Second, it no longer permitted short-term rentals as subleases; that is, only property owners were permitted to rent their property on a short-term basis. Lastly, the Ordinance imposed permitting and registration fee requirements, and created a Division of Housing Preservation, which was empowered to enforce the short-term rental limitations set out by the ordinance. Before Ordinance 19-077 was passed, each plaintiff made significant investments in Jersey City real estate for use as short-term rentals. Some of those investments consisted of purchases of properties. The rest consisted of long-term leases in which several years remained.

The Court began its Takings Clause analysis by outlining the two-step process that it was tasked with answering: first, whether the plaintiffs have asserted a “legally cognizable property interest,” and second, whether Ordinance 19-077 amounted to a taking? While the Court denied plaintiffs allegations that they had a property interest consisting of their forward-looking right to “pursue their short-term rental businesses in Jersey City,” the Court found that they did have “the right to use and enjoyment of their properties held in fee simple interest, the right to use and enjoyment of long-term leases, and the contractual interest in short-term rental bookings which would be rescinded by Ordinance 19-077.”

Demonstrating that Ordinance 19-077 amounted to a taking proved to be a much tougher task for plaintiffs. At the outset, plaintiffs asserted that the Ordinance was a regulatory taking in two ways: (1) by denying all economically beneficial use of their property under the Lucas test and (2) by causing a partial taking of their property under the Penn Central test. Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1015 (1992); Penn Central Transp. Co. v. New York City, 438 U.S. 104, 124 (1978). Examining the claims under Lucas, the Court found that plaintiffs had not been deprived of all economically beneficial uses of their properties because they could sell them, rent them as long-term leases, or use them as homes. Thus, the Ordinance was not a per se taking. Under Penn Central, the Court opined that plaintiffs failed to allege a precise amount of diminution of value of their property and take into account the power of the state to regulate in the public interest. Additionally, the Court concluded that Ordinance 19-077 is a generally applicable public program seeking to adjust the benefits and burdens of economic life in order to promote the common good. Therefore, the Penn Central factors weighed heavily against plaintiffs and Ordinance 19-077 was not found to be an unconstitutional taking by the District Court.

The District Court’s decision demonstrates the high burden that challengers face in attempting to prove a regulatory taking. Practitioners should be familiar with the broad gamut of Supreme Court caselaw on this  ever-evolving topic. If you are confronted with a governmental taking and need guidance regarding the proper procedure to follow, please contact McKirdy, Riskin, Olson & DellaPelle, P.C. to speak with an experienced eminent domain attorney. To view the entire Nekrilov, et al. v. Jersey City decision, click here.