Can cities set quotas on rental properties?

November 6, 2014

For rent gavel and scaleDoes a city have the ability to set a quota on the number of houses that may be rented out on a given block?  The Minnesota Supreme Court is set to hear arguments on that issue today.

The city with the quotas in question is Winona, Minnesota, which has a rule that limits to 30% the number of lots on a block that are eligible to obtain certification as a rental property.  The city purported instituted this ordinance because “[m]embers of the [city’s] planning commission noted that an increasing number of residential properties were being converted from single-family usage to rental usage, which resulted in increased parking demands.”  This increase was attributed to the presence of the local college.

After a little over a year of deliberating the issue – and reviewing data that “95 of the 99 addresses that had two or more calls for police service based on noise and party-related complaints were rental properties” – the city instituted the 30% rule on December 5, 2005.

There are three sets of challengers of the ordinance’s constitutionality, all of whom purchased their houses after the rule was adopted.

First is Ethan Dean, who purchased his house in 2006 with the intent to live in it.  In 2009, however, he was deployed for a military tour in Iraq, and thus wanted to rent the house out.  Because of the 30% rule, he could not obtain rental certification.

Next is Holly Richard, who also purchased her house in 2006.  She took a job in another state in 2009, and tried to sell her house.  After receiving no offers, she decided to rent it out instead, but couldn’t because of the 30% rule.

Finally, we have Ted and Lauren Dzierzbicki, Illinois residents who purchased a house in Winona in 2007 and made improvements to it, intending that their daughter, who attended college there, would be live there and rent the additional space to other students.  They were unable to rent the extra space because of the rule, and the house has remained vacant since 2010, when their daughter graduated.

The Minnesota Court of Appeals ruled in favor of the city back in February, and the homeowners appealed, with the state supreme court agreeing to review the case.

At first blush, the ordinance does seemingly smack of unconstitutionality.  After all, these homeowners are being prevented from doing something that they’re next door neighbors are likely doing, and they are suffering financially because of it.

But if you get into the actual details of constitutional jurisprudence, there actually isn’t much in the way of a theory to support the homeowners’ claims.  The court of appeals specifically rejected the three theories submitted by the homeowners: equal protection, substantive due process, and procedural due process.

On the equal protection claim, the court of appeals found that “the 30% rule establishes a neutral, numerical limit” and that it “applies uniformly” on “a first-come, first-served basis.”  The homeowners weren’t treated differently because of who they are, but only because there weren’t any more permits available.

On the substantive due process claim, the court found that because a fundamental right was not at stake, the law need only provide a reasonable means to a permissible objective (i.e. the law is subject only to the rational basis level of review).  Because the law met these requirements, the court found the challengers’ arguments here unpersuasive.

Finally, on the procedural due process claim, the homeowners argued that the rule “unconstitutionally delegate[es] legislative power to a property owner’s neighbors… transform[ing] city blocks ‘into mini-republics, delegating the power to ban additional licenses to the [license-holding] property owners on each block.’”

While the argument is creative, but, as the court of appeals concluded, the property owners do not determine which other lots may be certified as rental properties, and thus do not exercise legislative authority in this regard.  Thus, the procedural due process claim also failed.

It’d be a different story perhaps if the homeowners had purchased their homes before the ordinance took effect (as then they may be able to make a takings claim), but since their purchases occurred after, they are deemed to be on notice of the law at the time of their respective purchases.

Will the homeowners fare any better with the state supreme court?  It’s hard to say, but we’ll have some idea after oral arguments today.

And the implications reach well beyond one Minnesota city: cities across both the state and the country have enacted similar provisions to address similar concerns.  If the Minnesota Supreme Court sides with the homeowners, it could cause courts in other states to do the same.  And even if that doesn’t happen, cities across Minnesota would feel the impact of the ruling immediately.