The New York Appellate Division’s recent decision that blocked a municipality’s attempt to regulate a homeowner’s renting out of his individual residence as short-term lodging demonstrates challenges that may face municipalities and the commercial hospitality industry in trying to curtail such uses in the new “sharing economy.”

While the ruling in In the Matter of Fruchter v. Zoning Board of Appeals of the Town of Hurley hinged on specific definitions in town zoning ordinances, the ruling has wider potential implications for the tension between emerging economies and local land use law. The Court’s clarification of the rights of municipalities to use zoning ordinances to regulate short-term rental lodging in residences potentially extends to “sharing economy” companies such as Airbnb, Inc., HomeAway, and VRBO.

Citing a ruling in an earlier case, the Appellate Division held that, because Fruchter’s use of his residence did not fall within the definition of activities requiring a special use permit, and the Town Code does not otherwise “expressly prohibit[] petitioner[] from renting [his] residence to vacationers[,] . . . we cannot say that petitioner[’s] decision to do so placed [his] otherwise obviously residential structure outside the Town’s definition of a [residential one-family dwelling].”

Fruchter owns a two-bedroom, single-family residence located in an area zoned A-4 residential, which he considers his permanent residence. In 2012, he began listing the property on unspecified Internet sites, offering to rent it for terms ranging from one night to a month to an entire season. Fruchter asserted that he always rented the entire residence and did not stay there when it was rented, and that he did not serve or offer any food or beverages.

Hurley’s code enforcement officer issued an order to remedy to Fruchter for illegally operating a bed-and-breakfast or hotel. Fruchter appealed to the town’s Zoning Board of Appeals. The board determined that, under the Town Code, his short-term rentals were not allowed unless he obtained a special use permit. Fruchter then commenced a combined Civil Practice Law and Rules (CPLR) article 78 proceeding (used to appeal decisions of New York state or local agencies to the state courts) and action for declaratory judgment in the Supreme Court (New York’s state trial court). The Supreme Court dismissed his petition, and declared that his due process and equal protection rights had not been violated.

Fruchter appealed, contending that the Town Code did not require a special use permit for the type of short-term rentals he provides.

Emphasizing the importance of the specific language of the ordinance, the Appellate Division noted that while the courts were generally deferential to Zoning Board of Appeals’ determinations, it need not be deferential where addressing, as here, a purely legal interpretation of a zoning law or ordinance. In that latter circumstance, it noted “zoning restrictions are in derogation of the common law . . . [and they] are strictly construed against the regulating municipality.”

The Court noted the town had not updated its ordinances to address the ramification of the emerging “sharing economy.” As such, “[t]he issue thus distills to whether the rentals removed the property from the definition of residential one-family dwellings and whether such activity fits under another definition in the Town Code.” The Appellate Division found these rentals did not remove his property from the definition of a single family residence, and did not fit within the definitions of a hotel, motel, or bed-and-breakfast. Accordingly, the Court vacated the Zoning Board of Appeals’ determination. (It did find, however, that the Supreme Court correctly found there had been no denial of Fruchter’s due process or equal protection rights.)

The clash between the emerging sharing economies and the language of local land use ordinances affects both homeowners’ rights and the hospitality industry’s responses to these new competitors. This case provides useful guidance to municipalities drafting ordinances, homeowners seeking to participate in the sharing economy, homeowners’ associations seeking to regulate owner uses of property to residential uses, and hospitality industry members seeking to challenge non-conforming competitors.

Attorneys in Ballard Spahr’s New York office represent clients in all aspects of real estate transactions and disputes. The firm’s practice groups dedicated to Real Estate and Construction Litigation and Resort and Hotel regularly counsel clients in New York and nationally on transactions and disputes involving the hospitality industry. For more information or questions about the New York ruling or other real estate issue, please contact Andrew J. Petrie, who is admitted to practice in New York state courts as well as other state and federal courts, at 303.299.7339 or petriea@ballardspahr.com, Michael Pollack at 212.346.8030 or pollackmv@ballardsphar.com, or Resort and Hotel Practice Group Leader Christopher W. Payne at 303.299.7345 or payne@ballardspahr.com.


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