No go for VRBO: Austin ignores Courts and refuses to issue short-term rental permits

by | Jan 4, 2022 | Regulatory Risk Analysis and Compliance

The City of Austin is said to have “one of the oldest and most obstructive short-term rental laws in the state.” The city adopted an ordinance in 2016 to ban all “Type 2” short-term rentals (STRs)—i.e., a single-family STR that is not owner-occupied—by 2022. Property owners sued, and in 2019, the Third Court of Appeals held that the ordinance was unconstitutional and void. Yet the City of Austin is still refusing to issue Type 2 permits in residential areas. What gives?

In 2016, the City of Austin amended its short-term rental (STR) regulations, creating three classes of STRs:

  • Type 1—single-family residence that is “owner-occupied or is associated with an owner-occupied principal residential unit;”
  • Type 2—single-family residence that “is not owner-occupied and is not associated with an owner-occupied principal residential unit;” and
  • Type 3—residence that is “part of a multi-family residential use.”

As a practical matter, the difference between Type 1 and Type 2 status depends on whether the owner claims the property as a homestead for tax purposes.[1] If the property is a homestead, it’s a Type 1 rental.

The City of Austin also added an ordinance (section 25-2-950) that would ban all Type 2 STRs (non-homestead rental properties) beginning April 1, 2022. Section 25-2-950 provides, in its entirety:

A person shall discontinue a nonconforming short-term rental use that is regulated under Section 25-2-789 (Short-Term Rental (Type 2) Regulations), not later than the earlier of:

(1) April 1,2022; or

(2) if the license for a short-term rental use is not renewed, the date on which the existing license expires.

A group of property owners sued the City of Austin for declaratory and injunctive relief, alleging that section 25-2-950’s ban on Type 2 STRs is unconstitutional.[2]

The trial court granted the city’s motion for summary judgment, and the plaintiff property owners appealed. The Third Court of Appeals in Austin held, in a decision issued November 27, 2019, that section 25-2-950 (banning Type 2 rentals) is unconstitutional and void.[3]

That put an end to this issue, right? No—in fact, as of October 1, 2022, the case is still pending in the trial court and the City of Austin is still refusing to issue any new Type 2 permits.

After the Third Court of Appeals issued its decision in November 2019, the City of Austin appealed to the Third Court en banc and then to the Texas Supreme Court (Case No. 20-0470). Both appeals were denied, and the appellate court remanded to the trial court for further proceedings consistent with its November 2019 decision.

In September 2021, the property owners asked the trial court to enter a Final Judgment in accordance with the Third Court of Appeals decision, (i) declaring that Austin City Code section 25-2-950 (banning new Type 2 rentals after April 1, 2022) is unconstitutional and void and (ii) permanently enjoining the city from enforcing the ban on Type 2 rentals. The State of Texas, who intervened in the lawsuit, joined the property owners in asking the trial court to enter a final judgment against the City of Austin. 

The property owners’ motion for a final judgment was set for a hearing on November 10, 2021. However, as of October 1, 2022, no final judgment had been entered yet.

Meanwhile, the City of Austin has taken the position that the Third Court of Appeals decision striking down the city’s ban on short-term rentals only applies to pre-existing short-term rentals. On its website, the city says the Third Court of Appeals decision “does not require the City to issue new Type 2 licenses in residential areas.” The city is renewing existing Type 2 licenses in residential and commercial areas but refusing to issue new Type 2 licenses in residential areas.

Until the trial court enters a final judgment affirming that Austin City Code section 25-2-950 is unconstitutional and void, the City of Austin is likely to continue its ban on new Type 2 permits—even though doing so is in direct conflict with the Third Court of Appeals decision.

That hasn’t stopped many folks from operating a STR without a permit. According to the City of Austin, there are more than 10,000 STR advertisements in the city but only about 2,000 permitted STRs.

During a September 2022 meeting of the city’s Housing and Planning Committee, staff reported that a primary challenge facing city code enforcement is finding homes that are operating without a license. Director José Roig said rental advertisers have become “very savvy” when posting their properties by limiting any identifying information such as an address or photos of the front of a house. And once a listing is taken down, code officers have no way to find it again.

Director Roig said enforcement is also difficult because proving operation requires having direct contact with a guest who must admit to booking a stay for less than 30 days. “Oftentimes, it’s hard to make contact with them. They’re moving through Austin, they don’t want to answer the door. They may feel unsafe. They’re not home. We have seen cases where the landlord even gave them a script to say that they’re actually there for a longer period of time so we can’t justify a citation or a violation.”

Since the City of Austin still refuses to issue Type 2 permits, further litigation or intervention by the Texas Legislature is likely necessary. As discussed in another blog post, for nearly a decade, state lawmakers have tried and failed to pass state laws regulating STRs.

If you’re a STR investor or owner, you should stay up to date on STR regulations and changes proposed by your state and local governments.

[1] Anding v. City of Austin, 03-18-00307-CV, 2020 WL 2048255, at *6 (Tex. App.—Austin Apr. 29, 2020, no pet.).

[2] Zaatari v. City of Austin, No. D-1-GN-16-002620, pending in the 53rd Judicial District Court of Travis County, Texas.

[3] Zaatari v. City of Austin, 615 S.W.3d 172 (Tex. App.—Austin 2019, pet. denied).

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