Navigating New Jersey’s Restrictions on Short-Term Rentals Under COVID-19

May 23, 2020Alerts

In an April 4, 2020 administrative order, New Jersey Governor Phil Murphy gave New Jersey municipalities and counties the authority to restrict hotels, motels, guest houses and private residences from accepting new transient guests or seasonal tenants, potentially impacting many New Jersey shore towns and vacation areas where these rentals constitute a large segment of the local economy, especially as the summer approaches.

Administrative Order No. 2020-8, which took effect at 8 p.m. on April 5, does not apply to people housed as a part of a state-directed non-congregate shelter initiative, people taking temporary residence supported by federal, state or local emergency and/or other housing assistance, or healthcare workers taking temporary residence.

Since the order was issued, many municipalities and counties have taken action to limit or restrict short-term transient and seasonal rentals within their respective jurisdictions. A chart of the status of various municipalities along the Jersey Shore that have enacted orders can be found in this attachment or by clicking on the image of the chart above.

Considerations for Seasonal Leases

With summer on the horizon, many summer rental properties have been booked for the season with lease agreements in place for months prior to the issuance of the governor’s administrative order. This leaves the parties to such rental agreements uncertain of their rights and obligations. Similarly, owners of rental property still on the market and potential vacationers face uncertainty in whether they should still consider entering into a rental lease.

For those still hoping to enter into a rental contract, detailed provisions should be incorporated with respect to the right of cancellation and return of security deposits and prepaid rental fees. Lease cancellation timing and what specific events constitute a right to cancellation should be set forth with as much specificity as possible. For example, while governmental orders restricting rentals may be lifted, parties still may not be comfortable staying in a rental property due to health concerns.

For rental agreements already in place, parties should attempt to resolve the uncertainty by entering into an addendum or amendment to address these issues. If both parties cannot agree, agreements should be reviewed for force majeure clauses, or other contractual provisions that may excuse performance. In the absence of such clauses, certain common law defenses such as impossibility of performance and frustration of purpose may be available. You should carefully review your contract with your attorney to determine your options.

Business Interruption Insurance Coverage for Hotel, Motel and Campground Operators

The Jersey Shore has many hotels, motels and campgrounds that will be restricted as a result of the administrative order. Many of these businesses will be examining whether insurance will cover some of these losses, with a primary focus on business interruption insurance.

Business interruption insurance is a form of commercial property insurance designed to cover loss of income due to events affecting a business’s ability to operate. Most hotel management agreements and commercial lenders require business interruption insurance. Coverage under these policies is generally based on the occurrence of physical property damage to the insured property as a result of a covered peril as defined in the policy. Even in the absence of a requirement that the property sustain physical damage, communicable diseases are often excluded as a covered peril. Insurance policy coverage will turn on the specific language and definitions applicable to the policy, therefore a careful review of the language is necessary. As litigation is filed for denied claims, it will likewise be important to follow the court’s interpretation of policy provisions in light of the COVID-19 pandemic to determine whether coverage may be available.

State and federal legislators have also attempted to influence the ability of insurers to deny business interruption coverage for losses related to the COVID-19 pandemic. In New Jersey, legislators have introduced Assembly Bill No. 3844, which would compel insurance companies to construe policies to cover losses arising out of the COVID-19 pandemic, but limits such mandated coverage to insureds with fewer than 100 full-time employees. While large casinos and hotels would not benefit from such legislation if it is enacted, smaller motels that dot Jersey shore municipalities such as Wildwood and Ocean City and campgrounds located just outside of these municipalities could benefit and obtain needed coverage.

As the summer draws near, municipalities will continue to consider the importance of taking action in accordance with Administrative Order No. 2020-8 and existing orders will be modified to take into account the ever-changing circumstances surrounding the spread of COVID-19. If you have been affected by seasonal and transient guest rental restrictions, or have questions about filing an insurance claim relating to COVID-19, please contact our office for assistance. More information regarding COVID-19 contract concerns and insurance claims can be found by clicking the links below.

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