LEGAL/LEGISLATIVE UPDATE – APRIL 17, 2019

Published on: April 17, 2019

RENT CONTROL REDUX

Rent control has returned ─as part of the housing policy discussion, if not, as yet, a component of housing policy. Boston City Councilor Althea Garrison has introduced a home rule measure that would restore rent control in the city – two decades after a voter referendum abolished the policy statewide. A recent study cited by the Boston Globe ranked Boston rents the fourth highest in the country, averaging $2,400 for a one-bedroom apartment and $2,750 for a two-bedroom unit.

Garrison said her proposal to restore rent control was “a needed tenant defense against the region’s continuing housing crisis.” Citing similar concerns, U.S Senator Kamala Harris (D-CA) has reintroduced the Rent Relief Act, a measure she proposed in 2017, that would create a refundable tax credit for renters who spend 30 percent or more of their gross income on rent and utilities. Harris, who is seeking the Democratic presidential nomination, said an increasing number of financially strapped Americans need housing assistance.

“Housing is a human right, and we must act now to end the affordable housing crisis and provide relief to working families who are worried about making each month’s rent,” she said in a statement announcing her legislation. Three California representatives are sponsoring a companion measure in the House.

Critics who led the successful effort to abolish rent control in Massachusetts in 1995 argued then that the policy discourages investors from purchasing rental housing or financing its construction, and discourages owners from maintaining their property – arguments that will no doubt be repeated in the new rent control debate. A research paper published recently by the Columbia Business School provides a counter to that argument, concluding that the “overall positive impact of rent control more than compensates for any loss in market efficiency.”

TIME TO EXHALE

“Everyone can relax.” That conclusion, from a Wall Street Journal report, reflected the consensus exhale accompanying the March employment report. Employers added 196,000 jobs for the month, beating analysts’ expectations and pretty much erasing the fears stirred by February’s stunningly anemic 20,000 gain, which was revised upward to 33,000, The statistical adjustments also added another 1,000 jobs to the robust January total, boosting it to 312,000. Average hourly earnings continued to increase in March, but at a slower pace – 3.2 percent year-over-year compared with 3.4 percent in February. The unemployment rate remained unchanged at 3.8 percent.

The labor market report came after the Federal Reserve’s policy-setting Federal Open Market Committee (FOMC) had embraced patience as a virtue at its March meeting, leaving rates unchanged and indicating that further hikes were unlikely this year. Dovish statements by Fed Chairman Jerome Powell and other Fed governors suggest the strong employment picture is unlikely to bring a policy change, at least not in the near term. Concerns that outsized job and wage growth would ignite inflationary pressures that drove successive rate hikes last year appear to have given way to concern that that a stubbornly low inflation rate, which remains stuck below the Fed’s 2 percent target, is a more worrisome indicator of economic weakness.

“It may be some time before the outlook for jobs and inflation calls clearly for a change in [interest rate] policy,” Powell told reporters after the FOMC meeting. “I don’t feel we have convincingly achieved our two percent [inflation] mandate in a symmetrical way,” he added. “It’s one of the major challenges of our time, to have downward pressure on inflation globally.”

HOUSING HOPES

An unexpected but welcome surge in sales of new and existing home in February has buoyed expectations for the spring housing market. “The real estate market is thawing in response to the sustained decline in mortgage rates and rebound in consumer confidence – two of the most important drivers of home sales,” Sam Khater, chief economist for Freddie Mac, observed in a recent report. “Rising sales demand coupled with more inventory than previous spring seasons suggests that the housing market is in the early stages of regaining momentum,” he added.

Declines in pending sales, home starts and building permits have created some angst for would-be optimists, but builders, if not ebullient, remain more upbeat than you might expect. The National Association of Home Builders (NAHB) confidence index held at 62 in March, following two previous monthly increases, buoyed, analysts say, by the expectation that continued employment growth and wage gains will spur home sales this spring.

Consecutive monthly increases in construction spending – up 2.5 percent in January and another 1 percent in February – suggest that builders may be putting their money where their optimism is. A sharp increase in applications for new home mortgage in March suggests that their optimism may be justified.

“The numbers are clearly better than expected, and they included fantastic upward revisions to January,” Christopher Low, chief economist with FTN Financial in New York, told HousingWire. “For builders to come back like this [after the weakness that prevailed at the end of last year], they must be optimistic for a reason,” he added. “They must sense stronger demand.”

MIDDLE CLASS SQUEEZE

The plight of the middle class isn’t confined to the United States. A report by the Organization for Economic Development finds that middle income families are squeezed in developed countries worldwide ─ a trend that, the report warns, threatens their political and economic futures. “The investment of the middle class in education, health, and housing, their support for good quality public services, their intolerance of corruption, and their trust in others and in democratic institutions, are the very foundations of inclusive growth,” the report notes.

The percentage of middle class families ─ defined as those earning between 75 percent and 200 percent of the median national income ─ fell from 64 percent in the mid-1980s to 61 percent in 2015, with steeper declines in some countries, including the United States., Germany, Canada, Finland, Israel and Sweden. The 50 percent share of middle class families in the U.S. is among the smallest for OECD member nations, the report notes.

Rising costs (for housing especially), growing income inequality and automation are the primary forces squeezing middle class incomes, according to the report, which suggests, among other solutions: lowering taxes on the middle class and increasing them on the wealthy; producing more affordable housing; controlling the cost of health care, education, and child care; and increasing workers’ access to job and skills training.

“Today the middle class looks increasingly like a boat in rocky waters,” OECD Secretary-General Angel Gurría says in the report. “Governments must listen to people’s concerns and protect and promote middle-class living standards.”

CLIMATE RISKS

Climate change skeptics continue to attract headlines and trigger hand-wringing queries about what it will take to convince them of the threat. The answer, not surprisingly, is the perception of personal risk. Insurance companies have already begun to factor climate-related risks into the premiums for (and willingness to cover) properties exposed to climate-related disaster. A recent report suggests that real estate investors are also recognizing the need to assess the impact of climate risks on their portfolios. Those risks are “rising exponentially,” the report by the Urban Land Institute, warns. Among other statistical evidence, the report notes:

  • Natural disasters in 2017 caused more than $300 billion in property damage;
  • Much of the East Coast recorded rainfall up to three times normal levels last year;
  • Nine of the 10 years in which records were set for one-day “extreme participation events” have occurred since 1990.

Real estate executives are responding by making the analysis of climate change impacts and the development of risk-mitigating strategies a priority, the report says. “Building for resilience on a portfolio, property and citywide basis, is paramount to staying competitive. Factoring in climate risk is becoming the new normal for our industry,” Edward Walter, CEO of the ULI, notes in a preface to the report.

“This process will be painful for investors who are caught off guard,” the report acknowledges, “but those who are prepared have the potential to outperform.”

IN CASE YOU MISSED THIS

House flipping is back in vogue, but industry executives say it is less risky than it was a decade ago, when it was a factor in the collapse of the housing market.

A Colorado Appeals Court has overturned a $120,000 civil judgment against a foreclosure law firm, accused of violating state consumer protection laws by failing to disclose an ownership interest in a related business. The court held that the alleged “deceptive acts” did not significantly affect consumers and ordered the state to pay the now defunct law firm $1.9 million in legal fees.

Members of the Massachusetts Congressional delegation have proposed legislation that would impose stricter safety regulations on natural gas pipelines. The measure addressed the explosions that killed a teenager and cause millions of dollars in damage in several Merrimack Valley communities last year.

The President does not usually publicly harangue the Federal Reserve, and the Fed does not usually respond. Welcome to the new normal.

The downward trend in mortgage rates is welcome, but some analysts say it won’t spur the homebuying surge industry executives are anticipating.

LEGAL BRIEF

SHARING THE PROCEEDS

“Foolish consistency” may be, as Ralph Waldo Emerson suggested, “the hobgoblin of little minds.” But unintended inconsistency can be fatal (legally) in a condominium’s governing documents. Contradictory language in this case (Village East Association, Inc. v. Lamb), forced the association to ask a court to determine how insurance proceeds should be distributed after a devastating fire.

When wildfires roaring through the Great Smoky Mountains destroyed this 18-unit condominium in Gatlinburg, Tennessee, owners agreed unanimously not to rebuild the community, but they couldn’t agree on the formula for allocating the insurance proceeds. Some said the total should be divided equally among the 18 units; others argued that the total should be divided first among the four buildings, based on the insurance coverage for each, and then shared equally by the unit owners in those buildings.

The trial court focused on conflicting and confusing language in the declaration. The insurance section stated that if a building were not reconstructed following a disaster, owners should receive “an individual share” of the insurance proceeds, “such share being the same as the individual share in the common elements appurtenant to his unit.” The declaration also stated that ownership of the common elements was shared “In equal parts” by owners. But another section stated that each owner had a share in the common elements ‘as set forth in Exhibit ‘E.’ The problem: The documents did not include that exhibit.

Unable to untangle that drafting knot, the court focused on the phrase “appurtenant to his unit” in the insurance section, concluding that meant the proportionate share of the common elements related to that building. Owners arguing for equal distribution of the insurance proceeds contended that expenses had always been allocated equally among owners and that insurance proceeds should follow that formula, too. But the trial court concluded that in a decision not to rebuild, the insurance language should guide. Based on the court’s interpretation of “appurtenant to his unit,” this meant proportionate rather than equal distribution.

The key issue on appeal was whether the trial court’s interpretation of that language was correct. The court said ”the sole purpose” of that phrase was to specify that for purposes of allocating insurance proceeds, owners shared ownership of the common area related to their building; they did not own an equal share of the common area in the entire community. “To hold otherwise would be to entirely read out that language —giving it no effect whatsoever,” the court reasoned. The Appeals Court agreed.

The community’s long-standing policy of sharing expenses equally “made the case an even closer one,” the Appeals Court acknowledged. Both courts struggled a bit with a previous incident at this community, in which repairs to the foundation and walls of a unit damaged by flooding were paid from common funds even though those common areas “would certainly have been appurtenant to that particular building” and thus an expense that should have been shared only by the owners of that building. But the Appeals Court agreed with the Trial Court’s conclusion that the insurance language in the declaration, specifying proportionate distribution if a building were not reconstructed, should prevail over past practice.

Citing previous decisions by Tennessee courts, the Appeals Court noted first: “For the evidence to preponderate against a trial court’s finding of fact, it must support another finding of fact with greater convincing effect,” and then: “”As a rule, where there are, in a contract, both general and special provisions relating to the same thing, the special provisions control.”

WORTH QUOTING

“If I had a magic wand, I would raise taxes and cut retirement spending.” ─ Former Federal Reserve Chair Janet Yellen.


Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.