Arizona Court of Appeals Division One Holds That Municipality’s Declared Purpose in Passing Ordinance Is Not Dispositive as to Whether the Law Falls Within the “Health and Safety” Exemption of Arizona Private Property Rights Protection Act.

Since 1995, the City of Sedona Land Development Code has prohibited short-term rentals of residential property. 

In 2006, Arizona voters approved initiative measure Proposition 207, the Private Property Rights Protection Act, codified at A.R.S. §§ 12-1131 to 12-1138.  The Act requires just compensation for diminution in value when “any land use law” enacted after its effective date (and after an owner received an interest in the property) reduces “the existing rights to use, divide, sell or possess private real property.”  A.R.S. § 12-1134(A).

Sedona Grand, LLC owns residential property in the City of Sedona.  In January 2007, Sedona Grand notified the City that it was using an “Option Agreement” as a “sales tool” for its properties, granting exclusive rights to a “buyer” to “inspect” a property for a set period of time.  The City asserted that the Option violated the City’s ban on short-term rentals. 

The City later enacted an ordinance with a stated intent to promote the aims of the 1995 ban on short-term rentals in residential districts (the “Ordinance”).  The Ordinance made “rentals” of residential property for less than 30 consecutive days a class one misdemeanor.

Sedona Grand filed a Notice of Claim pursuant to the Private Property Rights Protection Act, seeking compensation for its alleged reduction of rights to use its properties.  On cross-motions for summary judgment, the trial court ruled that the Ordinance is a land use law as defined in § 12-1136, but that it fell within the “health and safety” exemption under § 12-1134(B)(1).  Both sides appealed.

The Court of Appeals reversed.  The Court agreed that the Ordinance was a land-use law under A.R.S. § 12-1136(3) because it regulates transactions involving the possession of real property.  But the trial court erred by finding that the Ordinance fell within the public “health and safety” exemption of the Private Property Rights Protection Act based solely on the declared intent of the Ordinance.  Because the nexus between the prohibition of short-term occupancy and public health is not “self-evident,” the City must establish by a preponderance of the evidence that the law was enacted for the principal purpose of protecting the public’s health and safety before the exemption can apply.

The Court, therefore, reversed and remanded to the trial court for further proceedings.

Judge Swann authored the opinion; Presiding Judge Downie and Judge Kessler concurred.