Folly Beach

Folly Beach Short-Term Rental Cap Overturned, Highlighting Legal Limits on Local Regulation

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This blog has discussed the limits of fractional ownership before. Short-term rentals continue to be a subject of controversy in South Carolina, particularly in the communities surrounding Charleston. Recently, this blog discussed the Court of Appeals decision overturning a Sullivans Island zoning determination that fractional ownership structures violated the Town’s limitation on vacation rentals.  Now, a Circuit Court judge in Charleston County has invalidated Folly Beach’s referendum enacted short-term rental cap.  

The ordinance at issue originated in an unusual way. In 2022, Folly Beach City Council rejected a proposal that would have capped the number of short-term rentals within the city. Supporters of the proposal turned to South Carolina’s initiative and referendum process and eventually submitted a petition seeking adoption of substantially the same restrictions. After City Council declined to adopt the ordinance a second time, the matter was placed before the town’s voters and narrowly passed by referendum.

The ordinance placed a hard cap on the number of short-term rental licenses the town could issue to properties that were not the primary residence of the owners. Because property owners with existing licenses in good standing were grandfathered in under the ordinance, the effect of the ordinance was that no new licenses could be issued until the number of licenses dipped below the hard cap of 800. 

The challenger to the statute was an owner with an existing license that the City determined was not in good standing to be renewed. The owner challenged the ordinance on the ground that the ordinance was unconstitutionally enacted through the referendum process.

Although the stated goal of the ordinance was to regulate the number of short-term rentals, the Circuit Judge found that the effect of the ordinance was to limit the City’s authority to issue short-term rental business licenses. Because a business license fee is treated under South Carolina law as a tax, the court concluded that the ordinance was not lawfully enacted, because South Carolina’s expressly prohibits initiatives that appropriate money or authorize the levy of taxes.

The court found that the ordinance defined when the City could issue business licenses and collect the corresponding business license taxes. Reasoning that giving voters the option to restrict the City’s ability to levy taxes and fees by referendum would undermine the ability of elected bodies to maintain control over municipal revenues. The Court therefore ruled that the short-term rental cap provisions are void.

The Town will appeal the Court’s ruling and separately has voted to place a six-month moratorium on the issuance of new short-term rental licenses while it studies the issue further and considers repealing and replacing the short-term rental ordinance with something new.

 This case is another reminder of the difficulties faced by towns where there is a substantial tourism industry where it comes to short-term rentals. In most places, there is significant support behind both sides of the issue and while there seems to be a great deal of energy behind those citizens who would seek to limit the impact of short-term rentals on their communities, motivated investors and owners of vacation homes seem equally motivated to defend their property rights.

The controversy is a good reminder that restrictions on the use of property must be implemented through legally authorized governmental processes and that there is a perhaps equal number of motivated investor owners who will ask the courts to be the ultimate referee.

Owner of Folly Beach lots loses takings case in SC Supreme Court

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Braden’s Folly, LLC v. City of Folly Beach* involves two small, contiguous developed residential coastal properties on the northeast end of Folly Beach. The City of Folly Beach amended an ordinance to require certain contiguous properties under common ownership, like the properties in question, to be merged into a single, larger property.

The ordinance did not impact the existing uses of the contiguous lots as vacation rental properties, but Braden’s Folly challenged the ordinance, claiming it had planned to sell one of the developed properties, and that the merger ordinance interfered with its investment-backed expectation under the Penn Central** test, which states that in regulatory takings cases, courts must examine the economic impact of the regulation on the property owner’s investment-backed expectations, as well as the character of the government action.

Folly Beach denied the claim of an unconstitutional regulatory taking, and pursuant to cross-motions for summary judgment, the circuit court agreed with Braden’s Folly. Folly Beach appealed to the South Carolina Supreme Court, which reversed and remanded the case for entry of judgment in favor of Folly Beach.

The Court stressed that underlying its applicability of the Penn Central test was the distinct fragility of Folly Beach’s coastline, which was subject to such extreme erosion that the General Assembly exempted Folly Beach from parts of the South Carolina Beachfront Management Act. The exemption empowered the City to act instead of the State in protecting the beach.

A portion of the northeast end of Folly beach has a double row of properties. The “A lots” are directly adjacent to the ocean-side of East Ashley Avenue, and the “B lots”—also known as “super-beachfront” lots—are closer to the ocean. There is no road between the A and B lots, so the B lots are accessible only through the A lots. Between beach renourishments, the B lots could be surrounded by the ocean on three sides. Braden’s Folly owns adjacent lots (Lot A and Lot B) on East Ashley Avenue. Both lots are very small.

Braden’s Folly contended that it had always intended to keep one of the lots and sell the other—whichever received the highest offer—to pay for the construction of a house on each lot. When the merger ordinance passed, the City sent a letter to Braden’s Folly requesting it stop marketing the lots separately. In response, Braden’s Folly filed the subject lawsuit.

The Supreme Court found that some facts weighed in favor of finding Braden’s Folly’s investment-backed expectation was reasonable and some facts weighed in favor of finding its expectation unreasonable. The Penn Central balancing test did not weigh in favor of either party, according to the Court.

Folly Beach and its witnesses set out the advantages to local beachfront property owners and the public at large of unwinding the super-beachfront development. The most important of the benefits to local property owners is the continued existence of federal funding for beach renourishment which in turn (1) protects A and B lots—particularly given that all the lots would be underwater if it were not for the continual renourishment; and (2) avoids property owners paying higher taxes if federal funding is extinguished.

The Court held that the merger ordinance was not a taking but responsible land use policy. Braden’s Folly retains, according to the Court, a near-full “bundle of sticks” incident to its ownership of the lots.

*South Carolina Supreme Court Opinion 28148 (April 5, 2023)

**Penn Cent. Transp. Co. v. City of N.Y., 438 U.S. 104 (1978)