How owner-occupancy regulations are contributing to the housing crisis

Can a town concerned about blight require that a grocery store be operated by Trader Joe’s or Whole Foods rather than a dollar-store chain? In a 1975 decision, New York’s high court said no, rejecting a zoning commission’s requirement that a grocery store be owned and operated by a specific high-end chain. The court reasoned that zoning cannot regulate ownership.  

Zoning treatises have long cited the maxim that zoning governs uses, not users. In other words, zoning governs what goes where, but it cannot say who goes where.  

Except, that is, when it comes to housing. Historically, courts across the country have looked the other way in cases in which zoning requires housing to be occupied by the person who owns the property. Such owner-occupancy requirements have the consequence of constraining housing supply, thus affecting affordability and decreasing renters’ choices about where to live. 

Owner-occupancy requirements are back-door attempts to block renters 

Cities and towns argue that owner-occupancy requirements ensure absentee landlords and renters do not cause blight. In addition, rightfully or wrongfully, many people blame “investors” for some or all of today’s housing affordability crisis. 

Restrictions on rentals appear in zoning codes, homeowners’ association rules, rules issued by subsidized lenders, and local ordinances. For example, when California preempted local prohibitions on duplex conversions and lot splits in the Housing Opportunity and More Efficiency (HOME) Act, commonly referred to as SB9, it specifically permitted local governments to adopt owner-occupancy requirements for these splits. Owner-occupancy requirements are particularly common in zoning rules around accessory dwelling units (ADUs), a sampling of which are summarized in Table 1. 

Table 1: Owner-occupancy rules are common for ADUs 

These owner-occupancy rules have several negative effects on equity, efforts to build multifamily housing, and the overall housing supply. Because renters typically have lower incomes than homeowners and are racially more diverse, owner-occupancy requirements affect the economic and demographic makeup of neighborhoods. Owner-occupancy requirements also prevent property owners from developing repeat expertise in acquiring and renovating existing housing stock to add ADUs; as a result, lenders are less likely to finance ADUs. Finally, owner-occupancy rules constrain supply because each existing house can only give rise to one rental unit, not two, and homes owned by non-residents cannot add an ADU. (Relatedly, many codes are explicit that if an investor purchases an owner-occupied home, it must leave the ADU vacant.)  

Local governments could avoid these impacts by simply regulating upkeep. Rather than assume that renters will be bad neighbors, local officials could enforce housing codes, blight ordinances, and noise ordinances. Instead, they rely on owner-occupancy as a shortcut for regulating maintenance.  

In upholding owner-occupancy requirements, courts do not explain how these requirements relate to property maintenance. Instead, they rely on unspoken assumptions and biases about renters. In the few cases where courts have interrogated the nexus between homeownership and home maintenance, they have refused to enforce owner-occupancy requirements. In the filings for a 2019 New Jersey case, zoning officials argued that an owner-occupancy requirement would ensure “adequate supervision” of a two-family house. In response, the property owner’s lawyers cheekily noted that it was “unclear…whether the public was concerned about the tenants adequately supervising the [owners] or if the concern was the [owners] were expected to adequately supervise the tenants.” In any event, the court concluded that “the status of a house’s occupant as a property-owner rather than as a tenant is no guarantee that he or she will be a law-abiding and considerate neighbor.” The court refused to allow local officials to “functionally delegate to a private landlord a portion of the municipality’s police powers and its own exclusive responsibility to enforce the local laws and keep the peace.”  

A decade earlier, North Carolina’s high court reached the same conclusion, finding that an owner-occupancy requirement had “no foundation in reason” and bore “no substantial relation” to public health or welfare. And recently, a federal appeals court also ruled that even if an owner-occupancy requirement for short-term rentals did advance local policy goals related to nuisance prevention and neighborhood character preservation, those same policy goals could have been achieved through alternative means. Because the court concluded that the owner-occupancy restrictions discriminated against interstate commerce, the availability of non-discriminatory alternatives rendered the owner-occupancy requirements unconstitutional. 

Policymakers shouldn’t rely on zoning to solve all problems 

Owner-occupancy requirements are one example of “zoning creep,” or when planners and politicians use zoning to address problems well outside the scope of land use and zoning regulations. These problems could—and should—be regulated directly in order to avoid the consequences (sometimes intended) of using zoning. Owner-occupancy requirements, for example, tend to exclude renters from a neighborhood. Similarly, minimum lot sizes—which have devastating effects on housing affordability, segregation, and the environment—are justified as a way to manage stormwater and wastewater, even though public health codes already regulate stormwater and wastewater.  

A few state and local legislatures have seen fit to address this problem through statute or ordinance. But there is a role for the courts here as well—a role that most are failing to fulfill. Outside of New Jersey and North Carolina, courts have been friendly to owner-occupancy requirements. In case law, most courts acknowledge that zoning governs use, not ownership. Nevertheless, courts defer to towns’ allegations that owner-occupants are better stewards of property. 

So long as courts refuse to interrogate the nexus between a zoning ordinance’s claimed purpose and its actual effect, there will be no judicial remedy for zoning creep. Thankfully, courts in New Jersey and North Carolina have shown a way forward—one that courts in other states ought to emulate.