Third Circuit Dismisses Constitutional Challenges to Jersey City Short-Term Rental Restrictions | Practical Law

Third Circuit Dismisses Constitutional Challenges to Jersey City Short-Term Rental Restrictions | Practical Law

The United States Court of Appeals for the Third Circuit recently upheld a Jersey City, New Jersey, ordinance regulating the use of short-term rentals, holding that the regulations did not violate property owners' constitutional rights.

Third Circuit Dismisses Constitutional Challenges to Jersey City Short-Term Rental Restrictions

by Practical Law Real Estate
Published on 23 Aug 2022 • New Jersey, USA (National/Federal)
The United States Court of Appeals for the Third Circuit recently upheld a Jersey City, New Jersey, ordinance regulating the use of short-term rentals, holding that the regulations did not violate property owners' constitutional rights.
On August 16, 2022, in Nekrilov v. City of Jersey City, the United States Court of Appeals for the Third Circuit, upheld a Jersey City, New Jersey, ordinance imposing restrictions on the operation of short-term rentals (STRs), finding that the ordinance does not violate the U.S. Constitution ( (3d Cir. Aug. 16, 2022)).
The ordinance was challenged by a group of property owners that operate STRs, claiming the ordinance denies them all beneficial use of their properties and, therefore, violates the Takings Clause of the Fifth Amendment, the Contract Clause of Article I, and the Due Process Clauses of the Fifth and Fourteenth Amendments.

Background

On October 30, 2015, the mayor of Jersey City, New Jersey, signed Ordinance 15.137, which affirmatively legalized the operation of STRs in an attempt incentivize investment and development in Jersey City. Four years later, on June 28, 2019, the mayor signed Ordinance 19-077, which placed significant restrictions on STRs, including limiting STRs in non-owner-occupied units to 60 nights per year and prohibiting the subleasing of properties by tenants on a short-term basis.
Between the passing of Ordinance 15.137 and Ordinance 19-077, plaintiffs, a group of property owners, invested in residential properties in Jersey City to conduct STR businesses. Plaintiffs allege that, after the passing of Ordinance 19-077, they lost all beneficial use of their properties.
Plaintiffs brought an action against Jersey City in the United States District Court for the District of New Jersey, seeking a declaratory judgment providing that Ordinance 19-077 is unconstitutional as well as a preliminary injunction and temporary restraining order. The plaintiffs alleged that the ordinance violated the Takings Clause of the Fifth Amendment, the Contract Clause of Article I, and the Due Process Clauses of the Fifth and Fourteenth Amendments.
The District Court dismissed plaintiffs' complaint and plaintiffs appealed to the United States Court of Appeals for the Third Circuit.

Outcome

The Third Circuit upheld the District Court's decision, holding that:
  • Ordinance 19-077 does not violate the Takings Clause because:
    • the ordinance does not effect a total taking because the properties retain numerous beneficial uses beyond the operation of STRs, so the plaintiffs were not denied all beneficial use of their properties; and
    • the ordinance does not effect a partial taking under the factors set out in Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104 (1978).
  • The plaintiffs' claims under the Contract Clause fail because plaintiffs did not allege sufficient facts to show that Jersey City does not have substantial public purpose in passing the ordinance.
  • The ordinance furthers several legitimate state interests, so it does not violate the Due Process Clause.
As a result, the plaintiffs' complaint was dismissed and their requests for temporary and permanent restraining orders were denied.

Practical Implications

The Third Circuit's decision to uphold Jersey City's Ordinance shows that the court is willing to give deference to municipalities trying to balance the competing interests between investors seeking to maximize STR profit and residents seeking to protect their quality of life in communities potentially overwhelmed by the transient nature of STR occupancy. Property owners and attorneys for STR operators should also note the precedent the Third Circuit's decision sets for future constitutional challenges to STR regulations.
For more information on short-term rentals in New Jersey, see Practice Note, Owning and Operating Short-Term Rentals (NJ).