We live in a wonderland. That much is true. Tahoe Blue. Living the dream. The secret is out and the masses want a piece. Can’t blame ’em. And if you can’t beat ’em, cater to them. 

That is precisely what many a regional homeowner has done. Rent a residence as a short-term vacation rental and capitalize on the frenzy. The practice has its proponents and its detractors, but it has unequivocally had significant impacts (some would argue otherwise) on housing in Lake Tahoe and Truckee.  

The explosion in the short term rental market has forced many local governments to reckon with the effects wrought by the practice, from parking to noise, taxes to diminished long-term housing stock. And where government regulation impedes upon perceived property rights, litigation is sure to follow.  

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On June 20, the California Court of Appeal, Third Appellate District, issued a decision in South Lake Tahoe Property Owners Group v. City of South Lake Tahoe, concerning a constitutional challenge to Measure T, the city of South Lake Tahoe’s restrictive short-term rental initiative. The decision affirmed the City’s authority to prohibit STRs in areas zoned residential, but indicated a component of the prohibition, as it applies to out-of-state owners, may be unconstitutional. 

In 2018, City voters passed Measure T by the slimmest of margins (58 votes), and the measure became effective on Nov. 6, 2018. Measure T phased out the issuance of STR permits for residential zones, so that by Dec. 31, all existing STR permits in such zones would be discontinued. STR permits in commercial zones and in the “Tourist Core Area” would continue to be issued.  

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Measure T also created an exception for the issuance of STR permits in residential zones. A homeowner who claims a California homeowner’s property tax exemption for the residence and lives in the residence a majority of the year, would – upon application and approval – be permitted to rent the residence on a short-term basis for up to 30 days (consecutive or non-consecutive) a year. 

A group of homeowners adversely affected by Measure T sued the City claiming Measure T (1) unconstitutionally interferes with vested property rights, (2) creates an unconstitutional residency requirement to qualify for the exception to the ban, (3) exceeds the initiative power in violation of land use authority vested in the Tahoe Regional Planning Agency, and (4) violates rights of privacy and equal protection by restricting occupancy.  

The legal challenge came before the court of appeal on competing motions for summary judgment after the El Dorado County trial court ruled in favor of the City. The court of appeal upheld the trial court’s ruling on all issues, except one – the residency requirement – which it sent back to the trial court for further proceedings. 

The court of appeal decision is lengthy and constitutionally complicated, but certain fundamental constitutional principles govern. The City’s authority to enact – through the vote of its electorate – an ordinance banning vacation rentals in residential zones is derived from its constitutional police power. Not “police” as in a law enforcement agency, but rather the broad power of a government to “enact laws to regulate and promote the public convenience and general prosperity and to promote public health, public morals, and public safety.”

But such “power is not limitless.” The due process clauses of the California and United States constitutions provide checks on the exercise of police power. In most instances, government regulation does not violate due process where it is “procedurally fair and reasonably related to a proper legislative goal.” But where “fundamental” rights are concerned, police power is subject to strict legal scrutiny. 

The court of appeal declared constitutional the City’s prohibition of STRs in residential zoned areas. The regulation is reasonably related to, and necessary for, “the preservation and protection of the public peace, health, safety and/or welfare of the community,” and on such basis, any vested rights homeowners may have had in previously issued STR permits could be “impaired or revoked” pursuant to the City’s police power. 

Not so for the residency requirement. The dormant Commerce Clause of the United States Constitution prohibits a state or local government from enacting any law that discriminates against interstate commerce (i.e., a law that grants deferential treatment to in-state residents, as compared to out-of-state residents, in activities that affect commerce across state lines). A law that discriminates against interstate commerce is unconstitutional unless it “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.” 

The court of appeal held, “Measure T’s resident owner exception discriminates on its face against interstate commerce,” because it “forecloses out-of-state owners from accessing the residential vacation market … and [from] directly competing against City residents who let their homes as vacation rentals,” in residential zones. The court further determined the City had not established “reasonable nondiscriminatory alternatives” were unavailable, and so remanded the that particular issue to the trial court for further hearing. 

The appellate decision taken as a whole is a victory for the City, as it confirms the City may entirely prohibit STRs in residential zones. Yet, there is a wrinkle. If the City cannot make a sufficient factual showing to support its local primary residence exception, out-of-state owners of residences within residential zones must be permitted to lease the residences as STRs up to the 30-day limit.

Such an outcome may cut strongly against the purpose of Measure T and the objectives of the City. If that is the case, a more restrictive ordinance may be in order – banning STRs in residential zones for all owners, regardless of where they reside. But that is mere speculation. 

And it is premature. The case must go back to the trial court in El Dorado County, and it may be appealed again. One thing is clear though, the trend in California legislative and appellate case law on short-term vacation rentals is that of support for regulation and prohibition. Gone are the days of free rein vacation rentals. And many would say that is a good thing. Just ask the family that lives between two STRs on any given Saturday night. 

Ravn R. Whitington is a partner at Porter Simon licensed in California and Nevada. Ravn is a member of the firm’s Trial Practice Group where he focuses on all aspects of civil litigation. He has a diverse background in trial practice ranging from personal injury to complex business disputes to construction law, and to all matters in between. He may be reached at whitington@portersimon.com or http://www.portersimon.com.