In Wortham v. Village of Barrington Hills, 2022 IL App (1st) 210888, the plaintiffs (Homeowners) owned a single-family home in a zone that permitted only residential occupancy and incidental home occupations conducted by a full-time resident. The zone excluded hotels and lodging houses. When spending time at their farm in Kentucky, Homeowners listed their Barrington Hills home on Vrbo, a vacation rental online marketplace, for $299 per night.

Homeowners rented their home at least 27 times prior to March 1, 2020, each time for a minimum of three nights and a maximum of eight guests. Sometimes, three cars would be parked on the driveway for a week. The village notified Homeowners that “short-term rental use” was prohibited by its Zoning Code. The property was rented at least 14 more times.

Since the vacation rentals did not cease, the village scheduled an administrative adjudication on the alleged violations. The hearing officer concluded that the short-term rental use of the home violated the Zoning Code and fined Homeowners $32,250. Homeowners filed a complaint for administrative review. The circuit court affirmed the administrative decision and Homeowners appealed.

The appellate court first noted that “zoning ordinances are in derogation of common law rights to the use of property and should be strictly construed in favor of the rights of the property owner to an unrestricted use of the property.” It then discussed a case (discussed here in the September 2021 Legal Case Studies) called Wood v. Evergreen Condominium Association, which held that short-term rentals violated a condominium association’s declaration that prohibited “business use” by condo owners.

Acknowledging that a condo declaration is not the same as a village ordinance, the court nevertheless found the Wood case instructive. Like Wood, it held that the homeowners’ short-term vacation rentals constituted a business or commercial activity in which they provided their renters with a service and a product in exchange for payment.

The court further found that the short-term rentals could not be considered a permitted home occupation. First, Homeowners in this case spent considerable time in Kentucky and were, therefore, not full-time residents as required by the ordinance. Second, the ordinance also required that a home occupation “be conducted in such a manner as not to give an outward appearance of a business so that the general public will be unaware of its existence.” In this case, the public was aware of Homeowners’ vacation rental business because they advertised on Vrbo, allowed renters to park numerous cars on the driveway, and allowed renters to come and go from the house via a keypad on the door. These things gave the outward appearance of a vacation rental business in violation of the village ordinance.

Finally, Homeowners’ vacation rental business did not comport with the overall intent of the village Zoning Code regarding residential zones by effectively transforming a single-family home into a lodging house. The appellate court affirmed the decision of the village hearing officer.

In another vacation rental case, a federal court dismissed all constitutional challenges to a city ordinance regulating short-term rentals. In Nekrilov v. City of Jersey City, 528 F.Supp. 252 (D. N.J. 2021), the City passed an ordinance in 2015 encouraging vacation rentals by homeowners. The ordinance only prohibited homeowners and renters from “changing the character of the neighborhood” and limited the number of properties one user could rent on a rental platform like Airbnb.

In 2019 the City significantly amended its ordinance (the “Ordinance”). The new Ordinance prohibited short term rentals of more than 60 nights per year in non-owner-occupied properties. The plaintiffs in this case were several property owners who had purchased numerous residential homes or entered into long-term leases for them in reliance on the lenient 2015 ordinance. They did not occupy the residences. They rented or sublet those properties full-time to short term renters using Airbnb.

When the City effectively limited their short term rental businesses to operating only two months a year, the plaintiffs sued the City, alleging violations of the Takings, Contracts, and Due Process Clauses of the U.S. Constitution. The federal court’s analysis of the case is an illuminating discussion of these constitutional principles as they are applied by courts today.

Takings Clause

The Takings Clause of the Fifth Amendment provides that “private property [shall not] be taken for public use, without just compensation.” The court first had to analyze whether the plaintiffs asserted a property interest recognized as protected under the Takings Clause. In this case, the court agreed that the plaintiffs’ right to use and enjoy the properties they held in fee simple, the right to use and enjoy their long-term leases, and the right to continue bookings that had been made prior to the passage of the Ordinance were protected property rights.

However, the court soundly rejected the plaintiffs’ assertion that there was any right to or protection for the activity of doing business or making a profit. “To engage in a business is not a federally protected property right.”

For the property rights that the court did consider protected under the Takings Clause, the court applied two different tests to determine whether the ordinance amounted to a regulatory taking of the plaintiffs’ property as created by the Supreme Court under the Penn Central (1978) and Lucas (1992) cases.

Under Lucas, the plaintiffs would be entitled to compensation if the ordinance denied all economically beneficial or productive use of the property. This is a tough test to meet. Indeed, the court found that, although plaintiffs might generate less profit than they anticipated from short-term rentals, they were not deprived of all economically beneficial uses. For example, they could still rent the properties they owned on a short-term basis for up to 60 nights per year. They could also rent them under long-term leases. Similarly, they could sublet their long-term leases to other long-term renters. Or they could occupy the homes themselves or sell the properties. The court concluded that the ordinance did not render the property “economically idle” even if less profitable. “Lack of a profit does not establish a regulatory taking.”

The Penn Central test is much more complicated and involves weighing three factors: (1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with distinct investment-backed expectations; and (3) the character of the governmental action. This, too, is a tough test to pass.

Economic Impact: The court acknowledged that the ordinance could adversely impact the plaintiffs by denying them profits or even profitability, but future profitability is always unpredictable. The court found the plaintiffs’ arguments speculative as to market demand, potential property tax increases, the “trendiness” of Jersey City as a vacation hub, and even Airbnb’s continued terms of use and payment. The Covid 19 pandemic alone demonstrated how unexpected occurrences could have unpredictable impacts on business profits. The plaintiffs’ assertions of lost value were equally insufficient. Even if the plaintiffs’ properties lost between 50% and 66% of their value, that diminution was not sufficiently “drastic” under existing federal case law precedents.

Investment-Backed Expectations: Basically, the court found that the plaintiffs should not have relied on the 2015 ordinance as a guarantee that the City would not more stringently regulate short-term rentals. Yes, the City was inconsistent, but it did not explicitly promise that it would always be lenient in its regulations in the future. “Laws change and there is no general right to governmental consistency over time.” Plus, even with the passage of the 2015 ordinance, the City qualified it by prohibiting short-term rentals from changing the character of the neighborhood or operating as informal hotels. Regulated businesses must always expect more regulation.

Character of Governmental Action: Finally, land-use regulations can adversely affect recognized real property interests. In cases that such regulations have been disallowed, “a key consideration has been that they appeared to shift burdens between private parties without any obvious connection to public interests.” That was not the situation here, as the court found that the City’s action in passing the Ordinance was done in pursuit of promoting the health, safety, morals or general welfare.

The plaintiffs failed to state a valid claim that the ordinance worked an unconstitutional taking of the plaintiffs’ property.

Contract Clause

The plaintiffs argued that the amended ordinance impaired vested long-term leases and short-term rental bookings in violation of the Contract Clause of the U.S. Constitution. That clause provides that no state shall pass any law impairing the obligation of contracts. However, this clause does not prevent states from exercising police powers for the promotion of the general good of the public, even if contracts previously entered into are affected.

To determine whether legislation violates the Contract Clause, a court looks at three factors:  (1) whether the law has operated as a substantial impairment of a contractual relationship; (2) whether the government entity, in justification, had a significant and legitimate public purpose behind the regulation; and (3) whether the impairment is reasonable and necessary to serve this important public purpose.

The City asserted that the ordinance was amended to increase the availability of long-term housing for City residents and to reduce nuisance violations due to excessive noise, on-street parking, and accumulation of trash. The court in this case accepted these assertions and concluded that the plaintiffs failed to show that the City lacked a legitimate public purpose in amending the ordinance. Consequently, the court did not need to determine whether the other two factors were satisfied, but it noted that courts generally defer to the legislative judgment of what is reasonable and necessary to achieve an important public purpose. It dismissed the plaintiffs’ Contract Clause claim.

Due Process

The plaintiffs also asserted that the Ordinance violated their right to due process. Because their “substantive” due process challenge to the Ordinance was against a legislative act, the court applied a rational basis test to establish its validity. It concluded that the City had a legitimate interest that was rationally furthered by the ordinance. Only the “most egregious” or “shocking” official conduct will be considered unconstitutional under substantive due process.

The plaintiffs also challenged the ordinance under a “procedural” due process theory, claiming the ordinance did not create any remedies for erroneous deprivation of property interests. The court found that New Jersey statutes created a remedial procedure by providing that courts may review municipal ordinances and any fines imposed by the City could be appealed to New Jersey courts. Those remedies were adequate for procedural due process.

In conclusion, all of the constitutional challenges made by the plaintiffs failed. The court dismissed the complaint.

In Bray v. City of Chicago, 2022 IL App (1st) 201214, “SL Civic” owned the building in Chicago leased to the Lyric Opera Company (“Lyric Opera”). The City of Chicago issued a public way use permit to SL Civic authorizing use of an underground storage vault under the city sidewalk adjacent to the building.

A woman named Bray tripped and fell on an uneven seam in the sidewalk over SL Civic’s vault. She sued the City, SL Civic, and Lyric Opera for negligently maintaining the sidewalk and failing to repair the defect causing her substantial injuries. The City then filed counterclaims against SL Civic and Lyric Opera for contribution and/or indemnity against any liability for damages that might arise against the City from a verdict in favor of Bray.

SL Civic and Lyric Opera asked the circuit court to dismiss the City’s counterclaims. The court granted those requests. The City appealed. Bray was not a party to the appeal, as the issues only involved the counterclaims by the City against the other defendants prior to any decision as to whether any party was liable for Bray’s injuries.

The appellate court began its analysis noting that a defendant in a lawsuit may bring a claim for contribution or indemnity against its codefendants by way of a counterclaim. “While contribution apportions the distribution of loss among joint defendants based on relative degrees of fault, indemnity shifts the entire loss to the joint defendant who was actually at fault.”

The Illinois Joint Tortfeasor Contribution Act provides there is a right of contribution among joint defendants who are potentially liable to the injured party, even though judgment has not yet been entered against any or all of them. In this case, the City needed to allege facts that established that SL Civic was liable in tort to Bray.

Indemnity, on the other hand, is a common law doctrine. To be legally sufficient, the City’s indemnity claim had to allege a pre-tort relationship between it and SL Civic upon which a duty to indemnify could be placed on SL Civic. The right to indemnity may be express, like in a contractual provision, or may be implied in law, arising from the parties’ conduct.

In this case, the permit issued by the City was a contract that required SL Civic to comply with all municipal ordinances. One City ordinance required anyone using space under any City sidewalk “to keep such sidewalk in good and safe condition and repair.” The appellate court concluded that SL Civic could be liable to Bray because it had agreed under the City permit to keep the sidewalk over the vault in good repair and, therefore, owed Bray a duty to do so. Whether SL Civic had actually failed to comply with this agreement was a factual question for the trial court, but at this point in the litigation, the lower court should not have dismissed the City’s counterclaim for contribution and/or indemnity.

Similarly, Lyric Opera could also be liable to Bray because it had agreed to comply with all City ordinances under its lease of the building from SL Civic. The appellate court held that the lower court erred when it dismissed the City’s counterclaim for contribution against Lyric Opera. The ruling dismissing the City’s claim for indemnity against Lyric Opera was affirmed because there was no pre-tort relationship between them upon which a right of indemnity could be based.

The case was returned to the circuit court for further proceedings.

2095 Stonington, LLC v. Village of Hoffman Estates, 2022 IL App (1st) 201026U, involved a Village ordinance enacted in 1996 requiring automatic sprinkler systems in new buildings and in certain preexisting buildings. In 2002, the Village amended the ordinance to exempt multiple family dwellings and churches from having to retrofit with a sprinkler system. After several extensions, the ordinance required compliance by the end of 2016.

The plaintiff in this case owned two adjacent commercial properties in the Village. The single-story buildings were built in 1971, consisted of around 32,000 square feet, and were rented to industrial users. One tenant manufactured auto parts and operated 24 hours a day. Another engaged in carpet restoration. Although the buildings did have fire alarm systems connected directly to the Village fire department, they had not been retrofitted with sprinkler systems in compliance with the ordinance.

The plaintiff filed a complaint against the Village in 2016 for a declaration that the ordinance was unconstitutional as applied to plaintiff. The plaintiff also claimed the ordinance violated the equal protection clause of the Illinois Constitution.

The appellate court characterized the plaintiff’s first argument as a challenge under the due process clause as to how the ordinance was applied to plaintiff. The plaintiff asserted that the lower court should have applied a balancing test because the cost of retrofitting the older buildings with an automatic sprinkler system far outweighed any benefit to the public. The court, however, stated that when an ordinance does not regulate a fundamental right, it is subject to rational basis review, not a balancing test, for purposes of the due process clause. Fundamental rights under due process claims “are limited to those that lie at the heart of the relationship between the individual and a republic form of nationally integrated government [and] include the expression of ideas (i.e., speech), participation in the political process, interstate travel, and intimate personal privacy interest.” Property use is not a fundamental right under the Constitution.

The court then explained the rational basis test:

Under rational basis review, an ordinance does not violate substantive due process protections if it bears a rational relationship to a legitimate governmental purpose and is neither arbitrary nor discriminatory. A rational relationship exists if the challenged legislation, to some degree, tends to prevent some offense or evil or to preserve public health, morals, safety and welfare.” Rational basis review is highly deferential to the judgments made by the legislature and the court should “not [be] concerned with the wisdom of the statute or with whether it is the best means to achieve the desired result.” Therefore, if there is any conceivable basis for finding a rational relationship, the law in question will be upheld.

The court concluded that “there is no question in this case that there is a rational relationship between requiring the installation of automatic sprinklers and defendant’s interest in protecting the health and welfare of its citizens.” Further, the court found that the ordinance was neither arbitrary nor discriminatory, even though it exempted certain structures. “The differences between commercial properties and multi-family dwellings are easily perceived.”

The appellate court also did not agree with the plaintiff’s assertion that the ordinance violated the equal protection clause of the Illinois Constitution. It explained that the guarantee of equal protection requires the government to treat similarly situated individuals in a similar fashion, but it does not prohibit the legislature from distinguishing groups of people from each another. It only prohibits the distinctions if they are unrelated to the purpose of the legislation.

Absent the presence of an inherently suspect classification or of a fundamental right, there is a strong presumption that a classification scheme established by ordinance is valid. It will not be declared unconstitutional if any state of facts may reasonably be conceived to justify it. No fundamental right or suspect class was present in this case. The court found plenty of evidence established at trial that different fire safety concerns arise when dealing with commercial properties as opposed to multiple family dwellings.

The court upheld the Village ordinance.