In Hignell-Stark v. City of New Orleans, No. 21-30643 (Aug. 22, 2022), the U.S. Court of Appeals for the Fifth Circuit, like a lot of other courts, reached an unsurprising conclusion: New Orleans' restrictions on short-term rental of residential properties isn't a taking. But there are parts of the opinion that are definitely worth your time to check out. Read on.
The city had gone back-and-forth on whether renting for less than thirty days was a good thing. Originally barring STRs, then in 2016 offering city licenses, and then when the inevitable flood of STRs resulted, retrenching and substantially revising the licensing program:
One year into the initial regime, the City commissioned a study from its Planning Commission to reevaluate the STR policies. The study found that the rapid proliferation of STRs had brought nuisances to the City. Specifically, it discovered that STRs in residential neighborhoods had lowered residents’ quality of life. Many visitors to the City who stayed in STRs were loud and did not clean up after themselves. The study also determined that the expansion of STRs into residential neighborhoods had led to a “loss of neighborhood character.” And it collected “anecdotal evidence” that the booming STR market had made housing less affordable for residents.Because of the study and other efforts to examine the STR market, the City substantially revised its STR licensing regime in 2019.
Slip op. at 2-3.
Bottom line: some owners who had obtained licenses were not allowed to renew, while others were denied new licenses because they did not live in the dwellings they were renting out.
Takings claims (and other claims) followed. See slip op. at 4 ("First, they said the City’s failure to renew their STR licenses violated the Takings Clause because they had a property interest in the renewal of their licenses."). The District Court granted the city summary judgment.
The Fifth Circuit affirmed. The owners do not have a property right in renewal of their licenses. Relying on a case in which the Fifth Circuit held that a business license is property for purposes of procedural due process, the owners asserted that this means they possess a private property interest in getting or renewing a STR license. See slip op. at 5 (citing Bowlby v. City of Aberdeen, 681 F.3d 215 (5th Cir. 2012)). The Fifth Circuit was having none of it:
But there’s a big difference between saying that something is property for purposes of procedural due process and saying that it is property for purposes of the Takings Clause. The former merely obligates a governmental entity to provide the “owner” with procedural protections—and only when a cost-benefit analysis shows that those procedures are worth the cost. See generally Mathews v. Eldridge, 424 U.S. 319 (1976). But the latter means that the government must pay damages. And the test for a property interest protected by procedural due process is quite broad: “A person’s interest in a benefit is a ʻproperty’ interest for due process purposes if there are such rules or mutually explicit understandings that support his claim of entitlement to the benefit . . . .” Perry v. Sindermann, 408 U.S. 593, 601 (1972); accord Bd. of Regents of State Colls. v. Roth, 408 U.S. 564, 577–78 (1972).
Slip op. at 6.
This is ground that has been covered by other courts (see "CA6: There's A Difference Between Due Process 'Property' And Takings Clause 'Property'"), and by us (see "The New New Property - Public Resources and Private Rights").
But the above doesn't really address the question: if Due Process "property" isn't the same as Takings "private property," then what's the difference? The Fifth Circuit concluded that "[s]one 'mutually explicit understandings' can create property interests protected by the Takings Clause." Slip op. at 6. Well okay, but that's pretty cryptic no? The next paragraph of the opinion gets a bit more specific. "[S]ome rights recognized by custom alone could qualify as property for purposes of the Takings Clause." Id. That includes "unwritten common law" and "policies and practices."
And here's the court's actual definition:
We thus concluded [in Dennis Melancon, Inc. v. City of New Orleans, 703 F.3d 262 (5th Cir. 2012)] that “the Fifth Amendment protects expectations arising not just from legislation or judicial precedent, but also those springing from custom and practice.”
Slip op. at 6-7. Ah, so it's expectations that qualify as Takings Clause "private property?" Well, sort of. The expectation has to be "so deeply rooted in custom" that compensation is owed for appropriating it (as opposed to some interest that entitles you to notice and an opportunity to be heard before we appropriate it). Slip op. at 7.
But wait you say, isn't that circular definition? Private property for purposes of the Takings Clause includes those interests and expectations that custom tells us we get compensated for if they are taken. How does that definition advance the ball here? Well, it really doesn't, but let's see how the Fifth Circuit applied that test.
The court first concluded that the STR licenses are privileges, not rights. After all, granting these things are totally discretionary. Slip op. at 8 ("Even an applicant who met the statutory requirements for a license was not entitled to one.") (footnote omitted). Thus, no one could expect to be compensated if a STR license wasn't renewed (except the plaintiffs, that is).
Next, the court considered the length of time that STR licenses have been around. "STR licenses did not exist until 2017, when the City adopted its original licensing regime." Slip op. at 8-9. Then a year later, the city changed the policy. This "short lifespan ... shows that the plaintiffs' licenses were not so rooted in custom and practice that they amounted to property." Slip op. at 9. Apparently, the longer a privilege hangs around unmolested, the more it resembles a right. Got it.
"Together," the court concluded, "those two factors yield one conclusion: The plaintiffs didn't have property interests in the renewal of their licenses." Id.
So there you are - the two questions we need to ask to figure out whether the plaintiff owns Takings Clause private property are (1) does the government call this thing a privilege and have discretion to not recognize the owner's use (that's pretty Hobbesian in our view), and (2) how long has this been going on? It may not be the most satisfying test, but it is indeed a test.
We say "unsatisfying" because we think that when a court defines the scope of the private property interest involved narrowly -- as the Fifth Circuit did here -- that will inevitably lead to a "no property" ruling nearly every time. After all, if the court defines the property interest as the right to have the city issue a STR license, then you never really get past that. The King gives so the King can take away.
But isn't the property right at stake here broader than that? In our view, the property interest at stake here the right to use and to rent your property for less than thirty days, with the real question that should be addressed being whether the government has the authority to interfere with or restrict that right. We acknowledge that this approach may get us to the same place in the end (yes, government can regulate an owner's ability to use property in certain ways if doing so is part of the background principles of property law and nuisance). But even if it does get to the same result, to us, this approach is more realistic and puts the burden on the party restricting property rights (the government), and not the other way around. For an example of how some other courts go this way, see "Tex App: "Property" Includes Right To Rent It Out - City's Short-Term Ban May Be A Taking").
Even though the property owners lost their takings claims here due to a lack of a private property interest, they still had something to celebrate: the Fifth Circuit reversed the district court's rejection of their claim that the residency requirement violated the Commerce Clause:
The district court held that the residency requirement discriminated against interstate commerce. That was the right call. But the court then applied the Pike test to uphold the law. That was a mistake; it should have asked whether the City had reasonable nondiscriminatory alternatives to achieve its policy goals. Because there are many such alternatives, the residency requirement is unconstitutional under the dormant Commerce Clause.
Slip op. at 10. If that kind of stuff floats your boat, read the balance of the Fifth Circuit's opinion.
Hignell-Stark v. City of New Orleans, No. 21-30643 (5th Cir. Aug. 22, 2022)
