Short-term rental ban faces strong challenge based on property rights

Opponents of Honolulu’s newly enacted ban on short-term rentals of less than 90 days, except in resort areas, have won their first legal battle in defense of property rights.

Attorney Gregory Kugle talked about his courtroom win on the Oct. 25, 2022, episode of ThinkTech Hawaii’s “Hawaii Together” program with host Keliʻi Akina, president and CEO of the Grassroot Institute of Hawaii.

Kugle represents the Hawaii Legal-Short Term Rental Alliance, which was granted a temporary injunction against the city’s enforcement of the new law by U.S. District Judge Derrick Watson. 

The group’s members believe their legal month-to-month rentals are a valid use of their residential properties, and they have put forth “a number of claims based on constitutional rights — taking of property without compensation, the right to due process, the right to not have contracts impaired and also the excessive fines provisions of both the state and the federal Constitution.”

Kugle said the county is arguing that redefining the length of a rental period is within its permissible powers, and that the State Zoning Enabling Act allows a municipality to phase out or eliminate uses over time.

However, the Alliance contends that the state act “tells the counties they can’t pass a zoning law or amend a zoning law that takes away a use that was previously allowed,” and that renting properties for 30 days at a time “has been the accepted practice and a legal use of property for really the last 30 or 40 years.” 

The judge apparently agreed. 

“The preliminary injunction order that was issued by the federal court makes clear that those arguments [of the county] didn’t carry,” Kugle said. “The court said, I think in some very clear terms, that this ordinance does violate the state statute that says you can’t take these rights away.”

He added: “While government certainly can pass zoning laws that do impact how people use their property, at a certain point, a zoning law could … be so restrictive from a regulatory standpoint that it amounts to a taking of property without the payment of compensation.”

To see Akina’s entire interview with Kugle, click on the video below. A complete transcript is provided.

10-24-22 Keli‘i Akina with Greg Kugle on “Hawaii Together”

Keli‘i Akina: Aloha everyone, and welcome to “Hawaii Together” on the ThinkTech Hawaii Broadcast Network. I’m Keli‘i Akina, president of the Grassroot Institute and your host today. 

My guest is Gregory Kugle. He’s an attorney. We’ll get to him in just a minute, but first, short-term rentals are a hot topic in Hawaii right now. Earlier this year, you’ll recall that Honolulu Mayor Rick Blangiardi signed a law banning most short-term rentals. 

This law would have gone into effect earlier this month, but it was challenged [in] U.S. District Court by the Hawaii Legal Short-Term Rental Alliance as well. 

Today, I’m joined by Gregory Kugle. He’s an attorney with Damon Key Leong Kupchak and Hastert. He also represents the Hawaii Legal-Short Term Rental Alliance in their lawsuit against Honolulu’s Ordinance 22-7.

Gregory joins me to discuss the recent injunction that Judge Derrick Watson issued and how that plays into how the state treats property rights. We’re going to have a very fascinating conversation today. 

I’d like to welcome to the program, Greg Kugle. Greg, thank you for being here with us today.

Greg Kugle: Hi, good afternoon, Keli‘i. I’m, I’m glad to join you. Thank you.

Akina: Well, I appreciate seeing you in the news, and especially with regard to this case. 

Can you explain what started the lawsuit? What exactly is the ordinance in question, and what does it do? Give us a quick primer, if you would.

Kugle: Sure. And not, not to rewrite history, but you really do have to go back a little bit in time, and that’s what a lot of this lawsuit was focused on. So I’ll just do that briefly. 

Akina: Please.

Kugle: Before about 1989, Honolulu zoning code did not define what a short-term rental was. And so, no matter where you owned a property, it could have been rented for any amount of time. 

That change came in 1989 when the land-use ordinance was passed to define a short-term rental as one being less than 30 days. And they confine those only to the resort districts. 

So, what that meant was, in a, for instance, in the residential zone district, a house could be rented for 30 days or longer but couldn’t be rented for less than 30 days.

There were approximately 800 — maybe a few more — homes that were being rented for less than 30 days at the point they passed that law back in the 1980s. 

Those properties were permitted to come in to the city, show proof that they had been operating lawfully before they changed the law, and they received what’s called a nonconforming-use certificate, and they were allowed to continue to operate, subject to renewing that certificate every two years.

Currently on Oahu, there’s about 800 of those still remaining. 

So that was the state of the law for owning and renting property. For the last over 35 years, one could rent your property for 30 days at a time. 

Fast forward to 2019, the last administration passed the first major tinker with this when it passed Ordinance 1918, which is also called Bill 89, that began to regulate advertising, which had never been regulated before, and it also increased some penalties; but it still defined a short-term rental as being one less than 30 days, meaning it preserved what was always the practice, which is you could rent your house for, you know, month-to-month rentals or 30 days at a time.

So fast forward to 2022 and the bill we’re talking about, which is, was called Bill 41 when it was signed by the mayor. In April, it became Ordinance 22-7. And it changes things in several respects. The one, really — I can talk about the other aspects of it — but, most importantly, what it did: It reiterated the prior status of the law that said you cannot do short-term rentals in residential districts or in non-resort districts.

But what it did as it relates to these 30-day rentals is it said the minimum rental period is now 90 days, and you cannot rent a home or a property for less than 90 days. 

It also — separate from that — it also created a registration process for those units that are located in the resort or nearby apartment-zone districts where short-term rentals are still allowed. 

However, now those properties need to register a registration fee with the city and provide some other documentation and to receive a confirmation number or registration number from the city to be able to continue to rent short-term into the future. 

And that actually was a process that went live today (Oct. 24, 2022).

Akina: Now, Greg, your clients are owners or managers of short-term rentals. Exactly how would the ordinance affect them — what are some of the adverse effects? 

And tell me a little bit about what led them to take up this lawsuit.

Kugle: Yeah, so, they are owners or property managers of properties that are currently doing what was perfectly legal before this bill was passed, which was: They were renting their properties for 30 days or more at a time several times throughout the year. 

And this — the bill as it was passed prohibits that, and it would require the minimum rental period to be 90 days. And, you know, there, there was — this would drastically impact a lot of people. And I can talk about, you know, who they are — I think we’ll cover that a little bit later. 

But, you know, it, it would basically say — if you had, say, a cottage on your property, or even bedrooms in your own house that you were renting out, or you had, you were fortunate enough to have an investment property, you would no longer be able to rent that for 30-day intervals. It would have to be there for only four rentals of 90 days or more per year.

Akina: So, in a sense, this law is taking away an opportunity that the managers and owners had previously. And so, let me ask you more generally: What arguments is the Legal Short-Term Rental Alliance making in court?

Kugle: Sure. So, the lawsuit has several different claims in it, and I won’t get too nuanced with that, but, but one of the primary claims was there is a state law, it’s called the State Zoning Enabling Act, which is the law by which the Legislature gave each of the four counties the power to adopt zoning provisions. 

But that power did not come without certain restrictions, and one of those restrictions said that a county cannot change its zoning law to prohibit a use that was permissible, and that’s what we call grandfathering or non-conforming use. 

And so, the state statute tells the counties they can’t pass a zoning law or amend a zoning law that takes away a use that was previously allowed. 

In addition to that claim, there are a number of claims based on constitutional rights: taking of property without compensation, the right to due process, the right to not have contracts impaired and also the excessive fines provisions of both the state and the federal Constitution.

Akina: Let’s go back to the first argument you gave regarding government taking. Could you explain what a government taking is and, really, how it matters when we’re talking about property rights?

Kugle: Sure. So, both the federal Constitution and the state Constitution have a property clause in them, which says, in essence, that the government cannot, cannot take or damage private property without the payment of just compensation. 

That’s what guarantees — that guarantees that we citizens have property, and we can’t be forced to give it up for the benefit of the, call it, the greater good or the public at large. And that’s always served as sort of a protection when it comes to zoning. 

And it — so, while government certainly can pass zoning laws that do impact how people use their property, at a certain point, a zoning law could be — or some other government action — could be so restrictive from a regulatory standpoint that it amounts to a taking of property without the payment of compensation, in violation of the Fifth Amendment of the U.S. Constitution and in violation of Hawaii’s own property right laws.

Akina: Well, property rights are very important to us at the Grassroot Institute. We not only stand in defense of property rights, but on a more general level, we want to propagate economic freedom. 

And across the world, when we examine the quality of economic freedom in nations and cities and provinces and so forth, property rights is one of the major standards. 

Now, you brought that forth definitely as one of the arguments, but what is the city’s defense of the ban?

Kugle: Well, it was severalfold. They were arguing, one, that this is not really taking away rights; it’s just defining or redefining how long a rental period could be, and that’s within the permissible range of powers of a municipality. 

They also argued that this same provision that I mentioned in state law, that requires the protection of non-conforming uses, also has a provision that does allow a municipality to phase out or amortize those uses overtime to eliminate them.

And so they were arguing that that was another thing that was being done by this ordinance. 

The preliminary injunction order that was issued by the federal court makes clear that those arguments didn’t carry the day.

Akina: Well, what do your clients want to accomplish through the lawsuit?

Kugle: Well, it’s sort of a fairly narrow or targeted aim. This lawsuit sought to protect the rights of those who had been engaged in lawful 30-day rentals — the people who had either purchased property or began to use their properties in a way that was perfectly legal to do so earlier this year and has been the accepted practice and a legal use of property for really the last 30 or 40 years. And they wanted to be able to continue to use their properties in that way — much like that other group of, of homes that I mentioned earlier, back in the 1980s, where they received non-conforming use certificates. And those properties can still be rented nightly, really, today. 

This group of owners is not seeking to be that type of a short-term rental. They want to continue to be able to rent their properties for 30 days at a time up to 12 times per year, which, until this ordinance was passed, that had been perfectly legal to do.

Akina: You know, up through the time of the passing of the ordinance, as well as the lawsuit, do you think that there have been any misconceptions out in the public about your plaintiffs or about short-term rental as in industry in and of itself?

Kugle: I think there’s a lot of misconceptions or popular notions that really are not accurate. 

You will often hear, by those people who are advocating for greater and greater restrictions on the rental of property, that a number of false assumptions. 

One, they’ll suggest, well, these are really rich mainland or rich foreign owners who have second or third or fourth homes in Hawaii and who are making a lot of money doing this.

Well, the reality is that’s not the case. Many of these people, as I, as I mentioned as an example, could be retirees who have a cottage on their property or who rent out rooms to supplement their retirement benefits and Social Security income. They’re local people. 

And another misconception is that these units are used only by tourists coming to Hawaii. You read that in the newspaper almost every day when people are defending bans like this.

Well, the reality is there are many, many other types of people who either can’t or don’t want to stay in hotels. 

In Waikiki, for instance, traveling medical professionals, many of which were sent here by the CDC during the pandemic for, you know, contracts of work — 30, 60, 90 days — they don’t want to stay in hotels. They want to stay near their work, they want to stay in a home-like environment.

Similarly true for families from some of the neighbor islands traveling to Oahu for medical care or other things like that where they’ll need to be on Oahu for a protracted period of time, and staying in a hotel doesn’t make sense. 

People displaced by fires, people displaced by the Red Hill fuel leak, for instance. Some were put up in hotels by the military, but many don’t want to be staying in Waikiki when their schools, when their jobs, when their kids’ activities and sports teams are located in some place other than Waikiki. 

So, that’s just another misconception … as to the nature of people who use or rely on these longer-term rentals.

Akina: The judge has issued an injunction, a preliminary injunction, in the case, and I’d appreciate it if you would explain precisely what that is and what practical effect the injunction has. 

It’s not the last word in the matter, and there’s some openness to it.

Kugle: That’s correct. So, it’s not a final judgment. Itt is a decision where the court is asked to look at the situation and the facts at the beginning of a case and determine whether the plaintiffs, my clients in this case, met a three-part test. 

Are they likely to prevail on the merits at the end of the day if this case goes to trial? 

Number two, would they be subjected to irreparable harm if this ordinance took effect without an injunction? 

And then third, what’s in the public interest?

Those are the standards that the … parties have to demonstrate in order to get a preliminary injunction, which is an early view of what the merits of the case will be. And so, in this case, we met that standard. 

The court said, I think in some very clear terms, that this ordinance does violate the state statute that says you can’t take these rights away. 

And the judge also found that it could very well be a taking of property without compensation. He didn’t even need to get to all the other claims in the case. 

The court then looked and said, yes, people will be irreparably harmed if an injunction is not granted; and protecting constitutional rights is always in the public interest, so that hit the third element.

What it means going forward is that the city cannot implement or enforce Ordinance 22-7 to the extent that it restricts the rights of people who were renting property between 30 days and 89 days until further order of the court. 

And so that leaves the city in a quandary as to what they’ll do. 

Other aspects of the ordinance that had nothing to do with that are not enjoined and still go into force.

Akina: Greg, how have public officials and the public in general been responding to the ban?

Kugle: Well, it might be too early to say. It took the mayor about 10 days or so — a week or 10 days — after this injunction came out to hold a press conference, which he did last Thursday, and nobody, certainly I didn’t know, how the city might react to that injunction. 

The mayor indicated that they still intend to aggressively enforce and implement all other provisions of Ordinance 22-7 that were not enjoined by the court. As a practical matter, they didn’t explain how that would occur. The ordinance’s effective date was October 23rd, which was yesterday. And so we are only now seeing what some of that means.

The mayor outlined that by Monday [Oct. 24], which is today, there would be a website available through the Department of Planning and Permitting that would allow people who were engaged in true short-term rentals — which are legal in the resort district and some apartment districts located nearby — to register their units with the city in order to lawfully comply with the ordinance and to be continued to allow to rent on a short-term basis.

And my understanding is there may have been some, some glitches with that website. But when I checked a few minutes ago, it was up, and there was more information than was there over the weekend or last Friday.

Akina: How does the city plan to go after the preliminary injunction?

Kugle: That was another question that the mayor was asked and answered at the Thursday press conference. What they said was they, the city disagrees with the court’s ruling, and that they intended to continue to fight the court case. And whether that means that they would eventually appeal it to the Ninth Circuit or not, we don’t know.

Akina: Now there are several options that they would have. They could settle. They could appeal. They could attempt to pass a different ban. What are your thoughts as to what they might do?

Kugle: That’s hard to say. As Judge Watson’s preliminary injunction order made clear early on in the case, he did order the parties to a settlement conference to attempt to see if there was a way to work this out, and the parties were not able to come to any kind of a settlement. 

So unless there’s a change of heart — and we certainly think there is a way that this should be settled, which is to do exactly what the city did, you know, 30 years ago, and which is to do exactly what the County of Kauai and the County of Hawaii both did more recently, which was allow these owners that are affected by this to come in, to prove that they were doing it lawfully, to prove that they are paying their taxes, to show whatever evidence there is that establishes that they were doing this before and then to create a certification system that they have the right to continue to do it after.

Akina: Now, Greg, I understand that you have cautioned the city in terms of how aggressively it goes after the enforcement of Ordinance 22-7. Would you care to share anything about that?

Kugle: Well, yeah. I mean, a federal court injunction is, is just that — it’s a pretty serious thing, and it’s a court order that the party on the receiving end of the injunction, in this case the city and the Department of Planning and Permitting, they can’t violate that order. 

And given the statements that … other aspects of the ordinance will be enforced aggressively, I think that they tread a very fine line because if they begin to enforce against somebody who’s protected by this injunction, then they violated the court order, and violating a court order like this is subject to contempt of court sanctions. 

And so, if we find that the city is going out and attempting to levy fines on people who are protected by this injunction, then I think we’ll be back in court very quickly seeking a finding of contempt of court.

Akina: Now, you’ve issued a letter stating your concerns for the city in this matter. Is that right?

Kugle: Yes. We just [laughs], we just warned them of the extent of the court’s injunction and, and that if they violate that injunction that there would be consequences.

Akina: Well, it looks like this is pretty serious business. 

So, really, as we kind of wind up now: What’s at stake in this matter in terms of property rights here in Honolulu?

Kugle: Well, I think it is about just establishing that there — while the municipalities, including the City and County of Honolulu, have a lot of leeway about how they pass zoning laws that do restrict people’s rights — there is a certain point at which, or beyond which, you can’t go. 

And I think that this case is testing and establishing what some of those boundaries are. These kinds of things are litigated around the country, and they usually often will end up all the way at the U.S. Supreme Court. But that sets the ground rules for what’s required of respecting property rights. 

A great example is one that I think that Judge Watson mentioned in his decision, talking about what is and isn’t allowed. There was an analysis of residential use, and the court pointed to an example, which we found in other cases, where in a residential neighborhood, certainly somebody cannot open a auto body repair shop or a mechanic shop in a residential zone. It’s been established that regulations like that are permissible. They’re not so invasive of private property rights that they’re struck down as unconstitutional. 

But prohibiting a residential use in a residential zone, as this ordinance attempted to do, that’s just going too far.

Akina: Greg, is there anything else that you think the public needs to know, or some perspectives they should keep in mind as they think through this issue?

Kugle: Well, I mean, I would say that Ordinance 22-7 is pretty complicated, and there’s a lot of people, not just on my side of the aisle, that wonder what it all means. 

But I do think the other word of caution would be: stay tuned. Because as we said, this was a preliminary injunction only, and it’s not a final judgment at this point, so there will be more to come.

But I think people, if people were renting their  properties, whether they’re residential properties or resort district properties, they need to go through Ordinance 22-7 and figure out, on the one hand, were — what they were doing: Was it legal, and is it protected by the preliminary injunction? 

And then on the other hand, for instance, in those residential — I, I’m sorry, resort zone districts — there’s a registration requirement that needs to be met to be able to continue doing what you were doing last week or last month or last year.

Akina: Well, thank you very much. Appreciate your time and your efforts in this case. Much aloha.

Kugle: I thank you, too. Take care.

Akina: My guest today has been Gregory Kugle. He’s an attorney who represents the Hawaii Legal Short-term Rental Alliance in their lawsuit against Honolulu’s Ordinance 22-7, and we’ve had a very informative time listening to him. 

I hope we will see you back in a couple of weeks on ThinkTech Hawaii’s “Hawaii Together.” Until then, I’m Keli‘i Akina. Aloha.

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