VRBO Owners Fought the Law – and the Law Won

The market for VRBO, Airbnb, and other short-term rentals has boomed in California as owners use them to earn money on the side and/or as long-term investments. Despite their popularity, short-term rentals have come under attack in California by municipal ordinances that limit how a short-term rental can be used – or prohibit them altogether. Property owners affected by these ordinances often bring legal challenges to no avail, as reflected in the recent case of Hobbs v. City of Pacific Grove.

In Hobbs, the City adopted a series of ordinances regulating short-term rentals. One ordinance required annual licensure. Another imposed a cap on the number of licenses, and, by random lottery, the City selected over 50 short-term rental licenses that would not be renewed.

Plaintiffs were on the losing end of this lottery and sued the City, arguing that nonrenewal of their short-term license violated their due process rights.

Due process comes in two flavors: procedural due process and substantive due process. Procedural due process requires the government to follow certain procedures when infringing upon a property interest conferred by law. Substantive due process subjects any government action affecting a “fundamental” right to very strict scrutiny, while government action affecting lesser rights will be upheld so long as they are not arbitrary and unreasonable.

The trial court dismissed the plaintiffs’ due process claims, and the appellate court agreed.

Regarding procedural due process, the appellate court found that plaintiffs’ property interest in their short-term rental license was limited to the terms and conditions of the license – including the annual expiration date.

Regarding substantive due process, the appellate court first rejected plaintiffs’ argument that they had a “fundamental” right to operate a short-term rental. It next concluded that the ordinance’s cap on the number of licenses was not arbitrary or unreasonable – because it furthered the City’s goal of maintaining its residential character.

Hobbs does not apply across the board to all California short-term rentals because of the variety of regulations different municipalities have enacted. That said, Hobbs gives other municipalities a roadmap on how to limit short-term rentals without violating owners’ private rights. And it reflects the uphill battle that all property owners generally face when they try to fight City Hall.