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Appellate Court Finds No Vested Right in Renewal of Term-Limited Short-Term Rental Licenses

Posted by Steven Banks | Jun 13, 2023

Some California cities have enacted ordinances to regulate the proliferation of short-term rentals. These ordinances often limit the number of homes that can be offered as short-term rentals by requiring licenses subject to random nonrenewal. The recent case of Hobbs v. City of Pacific Grove (2022) 85 Cal.App.5th 311, involved a challenge to such an ordinance.

The City of Pacific Grove's ordinance allowed short-term rentals subject to licensing, taxes, and other regulations. Owners could apply for one-year licenses subject to earlier revocation for good cause. The City capped the number of short-term rental licenses at 250 and established a density cap of 15 percent per block. After the City later discovered that it had issued rental licenses exceeding these caps, it selected licenses to “sunset” after a grace period after their current term expired. It adopted a random lottery to fairly and equitably reduce the number of licenses without favoritism. The City's voters approved a ballot measure that prohibited and phased out all existing short-term rentals in residential districts, except for those located in the City's “Coastal Zone.”

The owners of two homes sued the City, alleging it unconstitutionally deprived them of “their right to allow guests to stay in their home.” They alleged the ordinance violated the right to due process by (1) arbitrarily limiting how many homes could be offered as short-term rentals, (2) subjecting them to random selection for license nonrenewal, and (3) prohibiting short-term rentals outside the Coastal Zone. The trial court disagreed, and the owners appealed.

The owners asked the Court of Appeal to hold that the City, by granting them one-year licenses to offer the properties for short-term vacation rentals, conferred a property right protected by the state and federal constitutions in the renewal of those licenses. The owners contended that their economic interest in renting their vacation homes exclusively for transient visitors was an entitlement – a “vested right” – subject to state or federal constitutional protection. The appellate court concluded that the owners had no right beyond the defined terms of their licenses and that the claims had no constitutional merit.

The owners also argued that the City's selection of one of their licenses by lottery for nonrenewal denied them an opportunity to be heard on what they characterized as the deprivation of a vested right to continued renewal of their one-year licenses.They claimed nonrenewal of their licenses deprived them of a property interest, but the appellate court found the owners failed to establish that they held any right to renew short-term rental licenses that were expressly term-limited.

In conclusion, community associations in municipalities that permit short-term rentals only subject to term-limited licenses may wish to keep track of the licensure status to ensure that short-term rentals are not being operated unlawfully and to minimize the effects of such rentals on the community. Owners granted a short-term rental license are not entitled to its renewal.

About the Author

Steven Banks

Senior Associate Practice Areas: Community Association Counsel Construction Litigation Civil Litigation Steven Banks joined the firm in 2017 as a Senior Associate. Steve has been practicing law for over thirty years. Practicing primarily in litigation, his experience also includes homeowners as...


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