The City of New Orleans’ regulations on short-term rentals (STRs), often referred to as Airbnb or Vrbo rentals, have been partially struck down by the Fifth Circuit Court of Appeals. The court found that certain aspects of the city’s rules are unconstitutional, specifically those that discriminate against business entities and restrict advertising.
Background: The Rise of STRs and City Regulations
The case, *Hignell-Stark v. City of New Orleans*, centers on the city’s efforts to regulate the booming short-term rental market. With the rise of online platforms, STRs have become increasingly popular, leading to both economic opportunities and concerns about their impact on local communities. The city’s regulations aim to control the proliferation of STRs and mitigate potential negative effects.
In 2017, New Orleans began issuing licenses for STRs. However, concerns about the impact of these rentals led the city to revise its regulations in 2019. These revisions included restrictions on who could obtain permits and how STRs could be operated.
This isn’t the first time the city’s STR rules have been challenged. In a previous case, *Hignell-Stark I*, the Fifth Circuit found that the city’s requirement that STRs be located on the same property as the owner’s primary residence and that only city residents could operate them violated the dormant Commerce Clause, which prevents states from discriminating against out-of-state businesses.
The Current Case: Key Provisions Challenged
The current case addresses several aspects of the city’s revised regulations. The court examined the rules concerning:
* Owner and Operator Permits: Who is allowed to get them.
* Advertising Restrictions: What can and cannot be advertised.
* Operator Residency: Where operators must live.
The Court’s Decision: What’s Unconstitutional and Why
The Fifth Circuit’s decision addressed each of these areas, finding some regulations constitutional and others not.
1. Equal Protection Clause Violation: Business Entities Cannot Obtain Permits
The court found that the city’s regulations violate the Equal Protection Clause of the Fourteenth Amendment by prohibiting business entities from obtaining owner and operator permits.
The city’s code states that only “natural persons” can own a property used as an STR, and that an “operator” must also be a natural person. The court found that this distinction between natural persons and business entities is irrational.
The court noted that business entities, like LLCs, are recognized under Louisiana law and have legal “personality,” just like individuals. The court found no rational basis for treating business-owned properties differently from those owned by individuals, especially given that the primary concern is the behavior of the guests, not the legal structure of the owner. The court reasoned that both types of owners and operators are similarly situated and should be treated equally.
The court stated, “The City’s ban on business-held STR licenses and permits is too attenuated to any legitimate state interest to be considered anything other than ‘arbitrary or irrational.’”
2. First Amendment Violation: Restriction on Number of Units Advertised
The court also found that the city’s advertising regulations violated the First Amendment. Specifically, the court struck down the requirement that each STR listing advertise “only one dwelling unit.”
The court stated that the city failed to demonstrate how this restriction “directly advances” any government interest, as required by First Amendment standards for commercial speech. The city did not provide sufficient justification for this restriction, and the court could not create one.
3. Advertising Disclosure Requirements and “Illegal” Advertisements: Constitutional
The court upheld the city’s advertising disclosure requirements. The court found that the required disclosures, such as permit numbers and accessibility information, are “purely factual” and “uncontroversial.” The court also found that the city has a legitimate interest in ensuring customers interact with legitimate STR advertisements and are fully informed.
The court also found that the city could prohibit advertisements for illegal STRs or those that would exceed the legally available limits.
4. Dormant Commerce Clause: Operator Residency Requirement Upheld (with Narrow Interpretation)
The court addressed the argument that the operator-residency requirement violated the dormant Commerce Clause.
The city’s code requires that an STR operator “reside on the property.” The court acknowledged that a broad interpretation of this requirement could discriminate against out-of-state residents. However, the court chose to interpret the code narrowly, accepting the city’s argument that the operator only needs to be present on the property while guests are present. This interpretation avoids any discrimination against out-of-state operators and, therefore, does not violate the dormant Commerce Clause.
The Outcome: Affirmation, Reversal, and Remand
The court’s ruling means that the district court’s judgment was:
* Affirmed in part: The court upheld the city’s authority to regulate STRs under state law and affirmed the constitutionality of the advertising disclosure requirements, as well as the prohibition on advertising illegal STRs.
* Reversed in part: The court overturned the district court’s decision regarding the prohibition on business entities obtaining owner and operator permits, and the restriction on advertising only one dwelling unit.
* Remanded: The case was sent back to the lower court for further proceedings, likely to address how the city will revise its regulations in light of the court’s decision.
Implications and Future Steps
The Fifth Circuit’s decision has significant implications for New Orleans’ short-term rental regulations. The city will need to revise its rules to comply with the court’s findings. This could mean allowing business entities to obtain permits and removing the restriction on advertising multiple units.
The ruling also provides guidance for other cities grappling with similar issues. The court’s reasoning highlights the importance of carefully crafting regulations to avoid discrimination and protect constitutional rights. The case is a reminder that cities must balance their interests in regulating STRs with the rights of property owners and the requirements of the Constitution.