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Wednesday, August 24, 2022

Appeals Court Decides Challenge to Short Term Rental Ordinance

Short-term rental (STR) uses have been a topic of discussion among local government officials with the popularity of individuals listing their homes for short term stays on platforms such as Airbnb and VRBO. This week, the Fifth Circuit Court of Appeals (which has appellate jurisdiction over federal cases out of Texas, Louisiana, and Mississippi) invalidating New Orleans’s STR ordinance. Hignell-Stark, et al. v. City of New Orleans.

New Orleans created a licensing regime for STR uses in 2017, allowing property owners to apply for a license to rent their property for a period shorter than 30 days. The initial City code provisions made clear that an STR license was a privilege, not a right, and that the City exercised broad discretion to issue or withhold licenses. 

After receiving complaints from neighbors that short-term rentals were creating nuisances in residential neighborhoods, affecting neighborhood character, and increasing housing costs, the City revised its licensing program in 2019. These changes restricted STR licenses to the owner’s “primary residence.” The new ordinances also placed substantial limitations on advertising STRs.

A group of property owners challenged the new licensing scheme as unconstitutional under three theories: (1) the failure to renew their STR licenses was an impermissible “taking” under the Fifth Amendment; (2) the residency requirement violated the dormant Commerce Clause of the U.S. Constitution; and (3) the advertising restrictions violated the First Amendment.

The case made its way to the Fifth Circuit. First, the Court found in favor of the City on the owner's takings claims under the Fifth Amendment. Because an STR licenses was not a property "right," the Court held that the City’s refusal to renew a license did not violate a property right. The Court clarified that, while custom and practice may create property interests, STR licenses were not so deeply rooted in custom that the property owners were owed compensation when their renewal applications were denied. The recent creation of an STR licensing program in the City prevented the Court from concluding that the license holders had property interests in the renewal of their licenses.

Second, the Fifth Circuit ruled in favor of the owners on their dormant Commerce Clause claim. Under the dormant Commerce Clause, states and local governments may not discriminate against nor impose undue burdens on interstate commerce. The Court held that the residency requirement for STR licenses was discriminatory on its face because out-of-state property owners without a “primary residence” in the City were forbidden from participating in the STR market in residential areas. The City failed to show that the residency restriction was the only policy alternative for promoting its valid interests in reducing nuisances, retaining neighborhood character, and promoting affordable housing. Therefore, the City failed to show that the discriminatory residential requirement was constitutional.

Finally, the Court found it had no authority to decide the First Amendment claim. The district court had found that the Free Speech claim was “viable,” but had not yet issued a formal judgment granting or denying the property owners’ claims so the appeal was premature. 

This case provides a helpful overview of several constitutional issues that are implicated by the growing popularity of short-term rentals (and local government responses). While the Fifth Circuit does not have direct authority over Illinois cases, this decision provides more insight as to how higher courts may review STR regulations going forward.

Authored by Erin Monforti & Julie Tappendorf, Ancel Glink


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