Short Term Rental Lawsuit Texas                         

3rd Court of Appeals: Austin’s Short Term Rental Ordinance Void

On November 7, 2019, the Austin-based Third Court of Appeals ruled that the City of Austin‘s ordinance provision banning non-homestead short-term rentals is void. In reaching this holding, the Court found that the ordinance “significantly affects property owners’ substantial interests in well-recognized property rights.”  The appeals Court also found that a provision of the ordinance restricting assembly “infringes on Texans’ fundamental right to assemble because it limits peaceable assembly on private property.”  This opinion is being touted as a victory for Texas property owners participating in the short term rental (“STR”) market.

The Opinion, issued in Zaatari vs. City of Austin, provides a broad narrative of the STR industry. The Court further recognized the role of local governments in regulating this component of the sharing economy:

As short- term rentals have become more common, local governments have looked for ways to balance the rights of short-term rental property owners and tenants against the concerns of neighboring properties.

Austin’s Short Term Rental Ordinance

The City of Austin asserted that its STR ordinance was enacted to address the following concerns:

  • Public-health concerns about over-occupancy affecting the sewage system and creating fire hazards and about “bad actor” tenants who dump trash in the neighborhood and urinate in public;
  • public-safety concerns regarding strangers to neighborhoods, public intoxication, and open drug use;
  • general-welfare concerns about noise, loud music, vulgarity, and illegal parking; and
  • the negative impact on historic  neighborhoods, specifically concerns of residents that that short-term rentals alter a neighborhood’s quality of life and affect housing affordability.

To achieve these objectives, the City adopted its STR ordinance in 2016. One section of the ordinance imposed a ban on “type 2” short term rentals (with all such rentals to be eliminated by 2022). Under the 2016 STR ordinance, a “type 2” property is a single-family residence that “is not owner-occupied and is not associated with an owner-occupied principal residential unit.”

The Lawsuit

A group of property owners sued the City in an effort to have the ordinance invalidated violative of their constitutional rights to privacy, freedom of assembly and association, due course of law, equal protection, and freedom from unwarranted searches. See Tex. Const. art. I, §§ 3 (equal protection), 9 (searches), 19 (due course of law), 27 (assembly). The State of Texas intervened in the case, arguing that the termination of type-2 operating licenses by 2022 is unconstitutional as a retroactive law and an uncompensated taking of private property. See Tex. Const. art. I, §§ 16 (retroactive laws), 17 (takings)

More specifically, the State argued that the ordinance provision terminating all type-2 operating licenses is retroactive because it “tak[es] away th[e] fundamental and settled property right” to lease one’s real estate under the most desirable terms.

The Appeals Court’s Ruling

The Court determined that abolishing type-2  permits would eliminate well-established and settled property rights that existed before the ordinance’s adoption. In reaching this determination, the Court observes that “nothing in the record supports a conclusion that a ban on type- 2 rentals would resolve or prevent the stated concerns.”

Moreover, the Court noted that the City had not offered evidence showing “that these issues have been problems with or specific to short-term rentals in the past. To the contrary, the record shows that, in the four years preceding the adoption of the ordinance, the City did not issue a single citation to a licensed short-term rental owner or guest for violating the City’s noise, trash, or parking ordinances.”

In what many will consider the most important sentence of the opinion, the Court concluded that “owners of type-2 rental properties have a settled interest in their right to lease their property short term.”

The second component of the Opinion relates to the ordinance’s violation of Constitutionally-guaranteed rights to assembly.

Curiously, a provision in the ordinance forbids property owners or tenants from using short-term rentals for assemblies of any kind between 10pm and 7am and for outside assemblies of more than six adults between 7am and 10pm; together with a  ban on more than six unrelated adults (or ten related adults) from being present on the property at any time).

The Texas Constitution, however, plainly grants to citizens “the right to physically congregate, in a peaceable manner, for their shared welfare or benefit.”  “Based on its prominence in the Texas Bill of Rights, its history in the founding of our country, and its early, and still valid, treatment by the U.S. Supreme Court, we hold that the right to assemble granted by the Texas Constitution is a fundamental right.” The Court further noted that — unlike most cases which involve limitations on the right to assemble on public property — the Austin STR ordinance implicates the freedom to assemble with the permission of the owner on private property. Thus, both property and privacy rights are invaded.

The Takeaway

The involvement of the State in the lawsuit reveals that there is a political undertone to the legal war over short term rentals.  The heart of the dispute, however, is grounded in the collision of competing rights among the stakeholders: STR owners, STR tenants, online marketplaces pairing owners and tenants, governmental regulators, neighboring landowners, and law enforcement.STRs are more prevalent that ever, and their popularity shows no sign of waning. Given the dollars at stake, the legal landscape over STR limitations — as imposed by governments, HOAs and neighbors —  will continue to be shaped by intense litigation for the foreseeable future.