Illinois Court Rules Condominium Declaration and Zoning Ordinance Prohibiting Short-Term Rentals Are Enforceable

Illinois Court Rules Condominium Declaration and Zoning Ordinance Prohibiting Short-Term Rentals Are Enforceable

In the past few years, there has been a rise in issues with owners, condominium associations, and short-term renters. The Seventh Circuit’s decision in Mogan v. City of Chicago, 115 F.4th 841 (7th Cir. 2024) has significant implications for condominium associations and their ability to regulate short-term rentals within their communities. The court’s ruling not only reaffirms the authority of condominium associations to impose leasing restrictions but also underscores the importance of clearly defined property rights in governing documents. This blog article will discuss the court’s ruling and practical considerations for condominium associations moving forward.

Background

Michael Mogan, a condominium owner in the Roscoe Village Lofts Condominium Association, challenged the City of Chicago’s Shared Housing Ordinance which regulates short-term rentals. The Shared Housing Ordinance provides that condominium associations may determine that no licensed vacation rentals or short-term rentals are permitted to operate anywhere within the building. If the condominium association opts into the ordinance, the condominium association is added to the “prohibited buildings list” and units in the condominium association may not be registered with the City of Chicago as short-term rentals or vacation rentals or listed on intermediary platforms such as Airbnb.

Mr. Mogan purchased the unit with the intent to lease the unit. Mr. Mogan painted and carpeted his unit and spent thousands of dollars to furnish it to generate leasing revenue. Mr. Mogan contended that the value of his unit was significantly lower because it could not be used as a short-term rental. He argued that prior to the passage of the Shared Housing Ordinance and the placement of the condominium association on the prohibited buildings list, he was able to conduct short-term rentals of the unit, and that ability was a major part of his decision to purchase the unit.

Mr. Mogan argued that the ordinance violated his Fifth Amendment rights under the Takings Clause and constituted inverse condemnation under the Illinois Constitution. Mogan sought a declaration that the city and his condominium association had a duty to allow him to lease his unit on home-sharing platforms such as Airbnb. The district court dismissed Mogan’s claims which prompted his appeal to the Seventh Circuit.

Seventh Circuit’s Ruling

The Seventh Circuit affirmed the district court’s decision. The Seventh Circuit found that Mr. Mogan’s claims under the Takings Clause failed because his property rights never included the right to engage in short-term rentals. The court looked to the condominium association’s declaration which provided that no leases of less than 30 days were allowed, and no leases for more than 30 days were allowed where hotel services are furnished. The court noted that Mr. Mogan purchased the unit subject to the condominium association’s declaration. The court found that the plain language of the declaration expressly prohibited these types of short-term rentals. Furthermore, the court found that Mr. Mogan was aware from the time he purchased his unit that he had no right to lease the unit for periods of less than 30 days and was prohibited from doing so. The court found that Mr. Mogan’s property interest in his unit never included the right of short-term rentals because the unit was restricted in that manner by the declaration. As such, the Shared Housing Ordinance did not constitute a taking because Mr. Mogan never had a legitimate expectation of short-term rental rights.

Practical Considerations

1. Courts will enforce the plain language of short-term rental restrictions in a Declaration.

The Seventh Circuit’s ruling affirms that condominium associations have the power to regulate short-term rentals through their governing documents. The court deferred to the association’s existing restrictions, signaling that such rules carry significant weight. In Mogan, the declaration contained the following restriction:

…except that no Unit shall be leased, subleased or assigned for transient or hotel purposes, which are hereby defined as being for a period of less than thirty (30) days or for a period of more than thirty (30) days where hotels services normally furnished by a hotel (such as room service and maid service) are furnished.

…except that no Unit shall be leased, subleased or assigned for transient or hotel purposes, which are hereby defined as being for a period of less than thirty (30) days where hotel services normally furnished by a hotel (such as room service and maid service) are furnished. Id.

Mogan v. City of Chicago, 115 F.4th 841, 848, 2024 WL 4249160 (7th Cir. 2024), reh’g denied, 22-2801, 2024 WL 4534752 (7th Cir. Oct. 21, 2024).

However, in his complaint, Mr. Mogan misquoted the declaration’s exception as follows:

…except that no Unit shall be leased, subleased or assigned for transient or hotel purposes, which are hereby defined as being for a period of less than thirty (30) days where hotel services normally furnished by a hotel (such as room service and maid service) are furnished. Id.

Under Mr. Mogan’s version, leases for less than 30 days are allowed unless hotel services are provided. After reviewing the declaration, the Seventh Circuit interpreted the declaration as follows:

But the actual language of the Declaration provides that no leases of less than 30 days are allowed, and no leases for more than 30 days are allowed where hotel services are furnished. The “hotel services” language clearly modifies only the leases of more than 30 days, because otherwise the distinction between leases of less than 30 days and more than 30 days would have no meaning. Transient leases and hotel leases are prohibited, and that includes: (a) any leases of less than 30 days; and (b) any leases of more than 30 days where hotel services are provided. “Transient” rentals are similarly defined in the Ordinance in this case as rentals for less than a month. Based on the plain language of the Declaration, which controlled the rights and expectations of persons purchasing a condominium unit in that building, Mogan was aware from the time that he purchased Unit 307 that he had no right to lease the unit for periods of less than 30 days, and in fact was prohibited from doing so. Id.

In Mogan, the Seventh Circuit reviewed the plain language of the association’s declaration and determined that the declaration’s actual language provided that no leases of less than 30 days are allowed, and no leases for more than 30 days are allowed where hotel services are furnished. When interpreting an association’s governing documents, a court will review the plain language of the documents to determine its meaning. As such, provisions restricting leasing or renting of units should be clearly set forth in the association’s governing documents.

2. Zoning Ordinances that restrict short term rentals in condominium associations are enforceable under Illinois law.

Condominium associations located in Chicago whose governing documents contain a ban on short-term rentals may rely on the City of Chicago Shared Housing Ordinance. In Mogan, the Seventh Circuit set forth a description of the Shared Housing Ordinance as follows:

The Ordinance at issue in this case provides, in relevant part, that condominium homeowners associations may determine that no licensed vacation rentals or shared housing units (defined as short term rentals) are permitted to operate anywhere within the building, and the association may notify the Commissioner of Business Affairs and Consumer Protection of that decision. Municipal Code of Chicago (MCC) § 4-13-260(a)(9). When that occurs, the building is added to the “prohibited buildings list,” and units in the building may not be registered with the City as shared housing units or vacation rentals or listed on intermediary platforms such as Airbnb. Id. at §§ 4-14-050(i), 4-6-300(h)(4), 4-13-260(a)(9). A party can request a hearing to contest a unit’s ineligibility and can appeal the final determination. Id. at § 4-13-260(b). If a host rents a unit that is on the prohibited buildings list 28 days after the final notice of ineligibility, the host can be subjected to a $5,000 fine per day that the violation continues. Id. at §§ 4-14-050(i), 4-6-300(h)(4). And if a host fails to remove an ineligible listing from a platform such as Airbnb after receiving the final ineligibility determination from the City, the host can be fined $5,000 per day that the violation continues. Id. at §§ 4-6-300(h)(4), 4-14-030(c). The City amended the Ordinance in 2020, adding a prohibition on rentals of less than ten hours, severely restricting single-night rentals, and limiting the maximum occupancy of shared housing units to two adults per guest room and one person per 125 feet of floor area of the unit. Id. at §§ 4-6-300(g)(5), 4-14-050(b).

Accordingly, condominium associations in Chicago whose governing documents contain language prohibiting short-term rentals should contact the Commissioner of Business Affairs and Consumer Protection to ensure that their association is added to the “prohibited buildings list.” The addition to the “prohibited buildings list” will provide additional protection for condominium associations who seek to prohibit short-term rentals as unit owners who are found in violation of the Shared Housing Ordinance can be liable for fines of up to $5,000/day.

Conclusion

Mogan v. City of Chicago reinforces the rights of condominium associations to impose and enforce rental restrictions. Condominium associations can rely on clauses limiting illegal activity or restricting commercial use to prohibit short-term rentals in the association. Furthermore, condominium associations located in Chicago whose documents contain restrictions on short-term renting can be added to the “prohibited buildings list” as an additional layer of protection against short-term rentals. As the short-term rental market continues to evolve, condominium boards should work closely with legal counsel to ensure compliance with both municipal ordinances and their governing documents. The attorneys at Hirzel Law, PLC are experienced condominium attorneys who can provide guidance to condominium associations who are faced with the challenges of short-term rentals in their communities.

 

Jeremy Fernando is an Associate Attorney at Hirzel Law, PLC. Mr. Fernando is licensed to practice law in the State of Illinois. He concentrates his practice on community association law, condominium law, homeowners association law, and real estate law. Mr. Fernando’s legal career includes serving in corporate practice where he represented insurance companies and institutional investors in U.S. and cross-border private placements of securities, including transactions in the Netherlands, England, Ireland, Australia, and Germany. Mr. Fernando earned his Juris Doctor from Marquette University Law School, where he graduated with honors and ranked in the top 15% of his class. He also served as an Associate Editor of the Marquette Law Review. Mr. Fernando is committed to providing effective legal representation to his clients and is passionate about helping communities navigate complex legal challenges. He may be reached at 312-552-7669 or jfernando@hirzellaw.com.