Thomas A. Berry and Mike Fox
Property owners in New Braunfels, Texas, have long exercised the fundamental rights to acquire and make use of their property, including the right to make their homes available for rent on a short-term basis. That all changed in 2011 when the city adopted an ordinance banning short-term rentals from all residential areas. The city’s purported justifications were to preserve the “residential character” of neighborhoods and abate nuisances, despite numerous studies showing that short-term rentals don’t produce more nuisances than other property uses.
In 2020, a coalition of short-term rental owners filed suit alleging that the ordinance violates the US and Texas Constitutions. The city then moved to dismiss—before any evidence being considered—arguing that the district court must accept its bare assertion that short-term rentals cause an unacceptable risk of nuisances. After the district court agreed to dismiss the case, the owners appealed to the Fifth Circuit. Cato filed an amicus brief during that original appeal in 2022, arguing that the district court should have allowed evidence and reviewed it carefully. The Fifth Circuit agreed, sending the case back to the district court. However, after all evidence was admitted, the district court again ruled in favor of the city—readopting the same logic it had relied upon in its first dismissal and failing to meaningfully engage with the record evidence.
The case is now heading back to the Fifth Circuit a second time, and Cato has once again filed an amicus brief supporting the property owners. In our brief, we explain that property, freedom, and economic liberty are fundamental constitutional rights, deeply rooted in our nation’s history and traditions. Despite this, restrictions on those rights have not been meaningfully scrutinized by modern federal courts. Challenges to such restrictions are subject instead only to highly deferential “rational basis” review. Under this standard, the government wins if it can merely show that it had a “rational basis” for adopting the restriction—a far too lenient test.
Nevertheless, both the Fifth Circuit and the Texas Supreme Court have invalidated economic restrictions under rational basis review when those restrictions were entirely unsupported by evidence. This shows that it is possible to win a case under rational basis review when it is clear that the government had no legitimate motivation for adopting the regulation. That is the case here. The Fifth Circuit should once again reverse the district court. And, in its opinion, the Fifth Circuit should recognize the unacceptable weakness of current doctrinal protections for property, freedom, and economic liberty.