Fifth Circuit Strikes Down New Orleans Short-Term Rental Restriction

Practical Law Legal Update w-036-7171 (Approx. 5 pages)

Fifth Circuit Strikes Down New Orleans Short-Term Rental Restriction

by Practical Law Real Estate

Background

Until 2017, the City prohibited short-term residential rentals. On April 1, 2017, Ordinance 27204 became effective allowing residential property owners to apply for licenses to rent their property on a short-term basis. As a result of negative impacts on neighborhoods from the growing STR market, on August 8, 2019, the City enacted Ordinance 28157 that revised its licensing program by imposing new and restrictive requirements to qualify for STR licenses. One key provision of Ordinance 28157 restricts the issuance of STR licenses to owners who occupy the property as their primary residence, effectively limiting licenses only to New Orleans residents.

In November 2019, a group of residential property owners (plaintiffs) sued the City seeking a declaration that the new requirements were unconstitutional and asking the United States District Court for the Eastern District of Louisiana to issue a permanent injunction against their enforcement. The plaintiffs alleged, among other things, that:

The plaintiffs had a property interest in their previously-issued STR licenses and the City's refusal to renew the licenses under the new law violated their procedural due process rights under the Fifth and Fourteenth Amendments.
The residency requirement discriminated against out of state individuals in violation of the Commerce Clause of Article I.

The District Court granted summary judgment in favor of the City and held that:

The plaintiffs were not deprived of procedural due process rights since under state law they did not have any property interests in the STR licenses or their renewal.
The residency requirement, while discriminating against interstate commerce, was valid since the local benefits from the residency requirement exceeded the burdens it imposed on interstate commerce.

The plaintiffs appealed to the United States Court of Appeals for the Fifth Circuit.

Outcome

The Fifth Circuit:

Affirmed the District Court's decision that the plaintiffs had no property rights in their STR licenses and therefore were not deprived of procedural due process.
Held that the residency requirement is unconstitutional. The Fifth Circuit found that the residency requirement violated the Commerce Clause and noted that local benefits could not justify discrimination against interstate commerce when there are alternative non-discriminatory methods to achieve legitimate government policy goals.
The plaintiffs are expected to return to the District Court to obtain summary judgment against the City on the residency requirement claim.

In response, some New Orleans officials have vowed to amend or replace the City's STR law and are considering a ban on the issuance of any new STR licenses in the interim.

Practical Implications

Just six days prior to the Fifth Circuit's Hignell-Stark decision and dealing with some overlapping facts and law, the Third Circuit Court of Appeals, in the case of Nekrilov v. City of Jersey City ( (3d Cir. Aug. 16, 2022)), upheld Jersey City's STR ordinance and showed significantly more deference to municipalities than was on display in the Fifth Circuit decision (see Legal Update, Third Circuit Dismisses Constitutional Challenges to Jersey City Short-Term Rental Restrictions). Following so closely on the heels of the Third Circuit's Nekrilov decision, the Fifth Circuit's Hignell-Stark opinion brings into stark relief the complex and often conflicting views concerning short-term rental laws and the constitutional standards applicable to them.

State and local governments, property owners, and attorneys for STR operators should carefully examine existing STR laws and prepare for a period of uncertainty pending an eventual Supreme Court decision that provides some semblance of clarity for the short-term rental market.

Fifth Circuit Strikes Down New Orleans Short-Term Rental Restriction | Practical Law