Cities that change rules about how property can be used can be forced to compensate the owners, the Arizona Court of Appeals has ruled.
In a unanimous ruling, the judges said the new restriction enacted by Sedona is essentially a "taking" of the property, or at least reducing its value. And they said a 2006 voter-approved initiative mandates that owners be paid for the reduced value of the property.
They said there is an exception in cases where a new regulation is adopted for public health or safety purposes. But the judges said the city presented no such evidence.
According to court records, the city's development code has prohibited short-term rentals of residential property since 1995.
This case involves Sedona Grant which was used an "option agreement" as a sales tool to facilitate the sale of its units. That grants the buyer the right to "inspect the property" for a set period of time.
City officials responded in 2007 that violates the ban on short-term rentals.
In early 2008, the council adopted a new ordinance that makes the rental of residential property for less than 30 days a crime, punishable by six months in jail and a $2,500 fine.
Sedona Grand responded with a claim that the new law will result in financial losses by reducing its previously existing rights to use, lease and sell the property. But a trial judge ruled in favor of the city.
Judge Peter Swann, writing for the appellate court, said the 2006 Private Property Rights Protection Act requires compensation for any reduction in value when "any land use law" enacted after its effective date reduces "the existing rights to use, divide, sell or possess private real property." Here, the judge said, it is clear that Sedona's 2008 ordinance is a "land use law" which is covered by the 2006 initiative.
Attorneys for the city said even if that is true, all the 2008 law does is prohibit the same conduct as the original 1995 code provisions.
Swann said that is not the case.
He said the newer ordinance has 12 "expansive definitions," at least four of which differ from the plain meanings of the 1995 code.
For example, the judge said, the 1995 ban says only that rentals of single-family dwellings for less than 30 consecutive days are prohibited.
By contrast, he said, the 2008 ordinance spells out that a rental occurs when a "transient" and an "operator" exchange "rent" for the right to possess or occupy a "short-term vacation unit." And the judge said the ordinance also has a definition of exactly who is a "transient" which is far more extensive than the 1995 code.
"Under these expansive definitions, numerous arrangements that would not commonly have been understood to be "rentals" now violate the ordinance and subject property owners to criminal penalties, Swann wrote. "Indeed, even a time-share arrangement under which part-owners are entitled to occupancy for less than 30 days would violate the ordinance."
This ruling does not end the matter. Instead, it sends the case back to the trial court to look at whether Sedona Grand's activities would have violated the 1995 ban on short-term rentals and, if not what compensation might be due the property owner.
The appellate court also rejected the city's contention that, regardless of the changes in the law, it does not have to pay anything to the owners of Sedona Grand because the 2006 ballot measure exempts laws enacted for "the protection of the public's health and safety."
As proof, they cited the wording of the 2008 ordinance which says one purpose behind the new law is to eliminate noise, vandalism, overcrowding, neighborhood uncertainty, diminution of neighborhood character and other secondary effects. The ordinances says the regulations are "necessary to protect the integrity and small-town character of the city's residential neighborhoods."
But Swann said that simple declaration, by itself, does not meet the legal burden.
"The nexus between prohibition of short-term occupancy and public health is not self-evidence, and the governing body must do more than incant the language of a statutory exception to demonstrate that it is grounded in actual fact," the judge wrote. In fact, he noted, the text itself suggests the purpose is to protect the character of neighborhoods.
"This may be a desirable goal to policy makers, but neighborhood character and public health are entirely different concepts," he wrote. The judge said if the city intends to rely on that exception it needs to provide real evidence.