Real Estate
summer 2022

of short-term
rental restrictions
in question

A judge in Tennessee recently ruled that a local restriction on short term rentals unconstitutional.

Judge Robert E. Lee Davies of Sumner County concluded that the ordinance in question “does not promote the public interest as a whole. … Instead, it promotes some private owners’ interest over other private owners’ interest.”

Further, the ordinance acts as an “unconstitutional infringement upon a property owner’s fundamental right to own, lease, and dispose of property in a lawful manner because it destroys the homeowner’s right to lease his property on a short-term basis,” the judge said.

City officials maintain that there is a clear public interest in restricting short-term rentals, and an appeal is pending.

Meanwhile, courts in New Jersey and New York have ruled to the contrary, and similar lawsuits are popping up around the country as property owners, and the home-sharing sites that support them, look to maintain their rental business in the face of local opposition.

In 2021, a U.S. District Court in New Jersey upheld a Jersey City ordinance that restricts the use of residential properties as short-term rentals.

Several Airbnb operators brought the suit, challenging the ordinance’s constitutionality. In Nekrilov v. Jersey City, the plaintiffs alleged that the ordinance amounted to a “regulatory taking” in which government action denied all economically productive use of a property without just cause or compensation.

In 2015, Jersey City legalized short-term rentals. That changed in 2019 when a new ordinance limited non-owner-occupied properties to no more than 60 rental nights per year. Furthermore, leasing tenants were completely prohibited from offering short-term rentals as a sublease.

The plaintiffs argued they had purchased and developed the properties under the previous law and that the new ordinance rendered their properties’ economic prospects worthless.

The court dismissed the case, finding that a) the ordinance served the public interest and b) that it did not completely wipe away the economic use of the properties. The plaintiffs have filed an appeal.

A state appeals court in New York came to a similar conclusion in 2020, in Wallace v. Town of Grand Island. That court found that the plaintiff had not proven his property “was not capable of producing a reasonable return on his investment or that it was not adaptable to other suitable private use.”

Judge halts ban on real estate ‘love letters’

Would-be homebuyers are still allowed to write personal letters to home sellers in Oregon. That’s after a federal judge granted a preliminary injunction against a law that bans them.

In 2021, Oregon became the first state in the nation to ban homebuyers from writing so-called “love letters” to sellers as a way of improving their chances of being selected to buy a house. HB 2550 prohibited letters, photographs, and any written communication outside “customary documents.”

Supporters of the law say that personal letters fuel housing discrimination because they can reveal a buyer’s race, religion, sexual orientation, or other protected class. But U.S. District Court Judge Marco A. Hernández concluded that the law “likely violates” a real estate agent’s First Amendment rights.

During the initial hearing, real estate agent Cheri Smith suggested HB 2550 would lead to angry and dissatisfied clients. The love letter practice, she said, allowed her clients to compete with higher offers, including those submitted by investors.

Smith also expressed concern that the law would lead to clients accusing her of not fulfilling her ethical and fiduciary duty to “disclose material facts known by the seller’s agent.”

In his opinion, Hernández recognized that evidence had been submitted showing love letters likely do enable discrimination and that sellers are influenced by those letters in determining which offer to select.

Hernández noted the “laudable goal” of the law, as evidence shows that “housing discrimination is an enduring societal problem.” However, he said the law was too broad, as it banned significant speech beyond references to a buyer’s personal characteristics.

Hernández further expressed the opinion that an alternative suggested by the plaintiff, one that required real estate agents to redact personal information, would be “a more precise tool to address the government’s interests.” The injunction will remain in effect until Hernández makes his final decision after discovery.

The suit against HB 2550 was filed by the Pacific Legal Foundation, on behalf of a Bend, Oregon-based real estate firm.

Time limit on asserting property rights

Assert your property rights, or lose them.

That’s the takeaway from a recent decision from the California Court of Appeal.

In the case of Johnson v. Little Rock Ranch, LLC, the appeals court upheld a lower court ruling that ordered a property owner to sell a portion of their land to an encroaching neighbor.

The case illustrates the broad discretion courts have in determining how to resolve encroachment disputes and highlights the importance of maintaining and protecting one’s property boundaries.

The case illustrates the broad discretion courts have in determining how to resolve encroachment disputes and highlights the importance of maintaining and protecting one’s property boundaries.

The California case centered around two adjoining parcels of land, a 677-acre northern parcel and a 210-acre southern parcel owned by the Johnsons.

For more than 50 years, the parcels were more or less separated by a barbed wire fence.

However, the fence was entirely on the Johnsons’ parcel, with the actual property line approximately 50 feet to the north, accounting for a 3.4-acre discrepancy.

The northern and southern parcels were owned by extended family members.

For decades, the Johnsons allowed the northern-parcel family to use land, and the northern family’s cattle grazed right up to the fence line.

Both families knew the fence was inconsistent with the property line.

In 1997, the Johnsons leased their land to a tenant who planted an almond orchard up to the fence line.

The tenant did not use the strip of land beyond the fence, and the Johnsons rarely visited themselves.

In 2012, the northern family sold their land to Little Rock Ranch.

Neither the property owner nor their agent informed Little Rock Ranch that the property in question did not extend all the way to the fence.

Soon after acquiring the land, Little Rock spent more than $1 million preparing to plant a walnut orchard, including grading and irrigation.

However, the title report did disclose a potential discrepancy, without providing specifics.

The agent, reportedly, led the buyer to believe the discrepancy was likely only a foot or two.

Soon after acquiring the land, Little Rock spent more than $1 million preparing to plant a walnut orchard, including grading and irrigation.

Three or four months passed after the improvements before the Johnsons notified Little Rock of their property ownership.

The Johnsons then sued for trespass and sought an injunction, requiring Little Rock to return the land to its prior state.

The court’s ruling

First, the court found that unreasonable delay precluded the request for relief.

The Johnsons had known the fence line didn’t match the property line and had allowed their former neighbors to use the property as their own for decades.

Furthermore, they waited until after Little Rock had improved the land to address the issue.

Second, the court applied the doctrine of “relative hardship.”

The court recognized that restoring the strip to its former state would cause the defendant considerable expense and harm.

Notably, a dissenting judge disagreed.

Meanwhile the plaintiffs rarely used the land, other than for recreational hunting.

In the end, the court ordered the Johnsons to sell the disputed strip of land to Little Rock using the market value of the improved land, as opposed to its previous value.

Notably, a dissenting judge disagreed and argued that Little Rock should be held accountable for failing to investigate disclosures in the title report.

Legal foundation
takes aim at
‘home equity theft’

When a property owner falls behind on their taxes, it’s customary for local government to seize the property and sell it off to satisfy the debt.

In most states, the local government keeps only the proceeds necessary to satisfy the debt and cover administrative fees, then returns any excess proceeds to the property owner.

In a dozen states, governments can keep the entire sale price.

In a dozen states, however, governments can keep the entire sale price.

It’s a windfall for the government and unfair to the homeowner who built up equity. Critics call it “home equity theft.”

It’s not hard to see how the practice can lead to abuse.

In Michigan, for example, 85-year-old Uri Rafaeli lost his rental property when he underpaid a tax bill.

A mere $8.41 miscalculation had grown to $285 in penalties and interest when Rafaeli’s property was seized.

The county sold the home for $24,500, even though it was valued at over $80,000.

In 2020, the Pacific Legal Foundation took Rafaeli’s case to the state supreme court and won.

The court ruled that the county had violated Rafaeli’s constitutional property rights when it took more than was owed to collect unpaid taxes.

The court ruled that the county had violated Rafaeli’s constitutional property rights when it took more than was owed to collect unpaid taxes.

PLF is working to stop this practice around the country.

For example, they filed suit in Massachusetts in March, alleging that the city of New Bedford and a Boston-based developer deprived a homeowner of $210,000 in home equity after a recent foreclosure and sale.

Meanwhile, two Massachusetts representatives have filed a bill to eliminate the practice.

Reportedly, 254 Massachusetts homeowners lost a collective $60 million in home equity in fewer than seven years when municipalities foreclosed and sold their homes. The tax debts were as small as $2,000.

While California offers its citizens better protection, legislators are working to improve those laws too. Currently, California officials who auction off seized property can hold unclaimed funds in trust for a year. If the excess proceeds aren’t claimed in that time, the government gets to keep them.

Assembly Bill 1839 would require enhanced notification to property owners and a longer window to claim the funds.

The California bill also seeks to close a loophole that allows government agencies to sell seized properties to other agencies or nonprofits working on low-income housing.

Those sales don’t generate excess proceeds, so the former owner receives no compensation regardless of how much equity is lost.

The PLF is fighting a similar situation in Michigan, despite the state supreme court’s ruling in the Rafaeli case.

When Oakland County foreclosed on a family home, they sold it through a series of legal transactions to Southfield Neighborhood Revitalization Initiative, a private company managed by Southfield city officials. That company then resold the home for more than $300,000.

An interactive map on the PCF website suggests that “home equity theft” is legal in Alabama, Arizona, Colorado, Illinois, Maine, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, and Wisconsin.

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This newsletter is designed to keep you up-to-date with changes in the law. For help with these or any other legal issues, please call today. The information in this newsletter is intended solely for your information. It does not constitute legal advice, and it should not be relied on without a discussion of your specific situation with an attorney.