LEGAL/LEGISLATIVE UPDATE – JULY 3, 2019

Published on: July 3, 2019

WILL THEY OR WON’T THEY?

The ‘they’ is the Federal Reserve and the question is whether the policy-setting Federal Open Market Committee (FOMC) will lower interest rates when it meets next in late July. The committee voted 9-1 in June to leave rates unchanged, but a post-meeting statement, eliminating previous references to “patience,” signaled a willingness to consider a rate cut, though probably not before next year. The statement also downgraded the committee’s assessment of economic strength from “solid” to “moderate.”

Sending a similar signal about future rate cuts, and expressing the same concern about economic trends, Fed Chairman Jerome Powell acknowledged that the argument for a more accommodative policy has “strengthened” in the face of growing concern that economic growth, in the U.S. and worldwide, may be slowing. “The crosscurrents have re-emerged, with apparent progress on trade turning to greater uncertainty, and with incoming data raising renewed concerns about the strength of the global economy,” Powell said in a speech after the June FOMC meeting. While not promising a future rate cut, Powell said the Fed will closely monitor economic reports and “act as appropriate to sustain the expansion.”

AN ELUSIVE GOAL

Most Americans still want to own a home, but an increasing number of renters doubt they will attain that goal, and their doubts appear to be deepening. Only 24 percent of renters responding to a recent Freddie Mac survey said it was “extremely likely” that they would ever own a home, compared with 13 percent expressing this view four years ago. More than 80 percent now view renting as more affordable than buying, up from 67 percent in the previous survey.

The high cost of housing, not surprisingly, is the biggest obstacle to ownership. More than 80 percent of Millennials and members of Generation X (born between 1965 and 1996) said their inability to save enough to cover a down payment and closing costs is keeping them on the sidelines, with student debt looming large for many. More than half of the renters between the ages of 23 and 29 cited that burden as a major factor affecting their housing decisions.

Despite a strong economy that has buoyed employment and boosted wages for many workers, the disparity between housing costs and incomes has continued to grow. According to Unison’s Home Affordability Report, it now takes an average of 14 years for someone earning the median income to save a down payment for a median-priced home. That timeline rises to 30 years or more in the nation’s priciest housing markets. Separately, ATTOM Data solutions calculates that the median-priced home is now unaffordable for average wage earners in 74 percent of U.S. housing markets.

“The way things are going, an entire generation of Americans may be approaching retirement before they can securely own a home or be forced to take on more risk than they can reasonably afford in order to realize their dream of homeownership,” Thomas Sponholtz, Unison’s CEO, said in a press statement. “This is a societal and economic problem that impacts all income levels,” he added, “and [it] can only be addressed through massive infrastructure investments and rapid adoption of smarter and safer non-debt-based finance and homeownership solutions.”

DRUG POLICIES

As more states legalize recreational marijuana, employers are struggling with how to reconcile that trend with the anti-drug policies that are standard in most companies. One key question: Can they continue to reject prospective employees who fail drug tests? Nevada employers no longer have that option. Lawmakers there have approved a law prohibiting employers from refusing to hire applicants who test positive for marijuana use – the first state in the nation to take that action. Only prospective firefighters, EMTs, and employees who operate motor vehicles as part of their job are exempt from that rule. “As our legal cannabis industry continues to flourish, it’s important to ensure that the door of economic opportunity remains open for all Nevadans,” Nevada Governor Steve Sisolak said in signing the law.

RENT CONTROL REDUX

The New York state Legislature is planning to rewrite New York City’s rent stabilization laws, resurrecting the battle over rent control that landlords and tenants in many cities fought more than three decades ago. Tenant advocates say the changes are necessary to preserve the supply of affordable rental units, reduced over time by the ability of owners to increase controlled rents or deregulate units (when existing tenants leave), either charging market rents for them or converting them to condominiums. Prohibiting conversions and strictly controlling rent hikes, as the proposed legislation would do, “would really back us into a corner, where we’d have no ability to generate the revenue to improve our buildings or even cover our costs,” one New York landlord, who owns 150 controlled units, told the New York Times. “We would just stop dead in our tracks,” he said. “We would not do any individual apartment renovations. We would keep patching and repairing and putting Band-Aids on everything. I don’t know if I would want to run a building like that. I’m not sure how much longer we would be able to stay in business.”

The proposed legislation would affect an estimated one million rent-regulated units in New York City, representing approximately 40 percent of the city’s rental stock. The law would also allow other cities and towns in the state to enact their own regulations to control apartment rents.

New York isn’t alone in targeting housing affordability concerns. The Seattle City Council recently approved a measure changing zoning regulations in that city to ease restrictions on the construction of multi-family housing. Minneapolis recently eliminated single-family zoning entirely in all of its neighborhoods (the first city to do so). California lawmakers, similarly, are considering legislation that would limit the ability of local communities to prohibit the construction of multi-family housing.

TAKING FLIGHT

Amazon is getting closer to replacing its white delivery trucks with drones. The Federal Aviation Administration (FAA) has given the company permission to begin testing its newest delivery drones in a pilot Amazon Prime program that will begin “within months,” Jeff Wilke, the company’s worldwide consumer CEO, said in a press announcement. The FAA certificate will be valid for a year and can be renewed after that, he noted. UPS and Alphabet’s Wing are also testing drone delivery services. In a joint project with the U.S. Department of Transportation, UPS has been testing daily delivery of medical products in Raleigh, North Carolina, and Wing has gotten FAA approval to deliver packages to residential customers in Virginia. Home builders have also moved quickly to incorporate drones in their operations. More than 40 percent of the builders responding to a recent survey said they have been using aerial drones – primarily to take aerial photographs for use in promotional materials.

IN CASE YOU MISSED THIS

A gauge measuring business conditions had fallen to its lowest point since the 2007-08 financial crisis.

The House of Representatives has approved legislation reversing structural changes enacted two years ago that weakened the Consumer Financial Protection Bureau. The measure, approved in a party line vote, isn’t expected to win Senate approval.

Homeowner equity reached a record of $26.1 trillion in the first quarter – up 4.3 percent in the past year, but the slowest growth rate since 2012.

The Federal Housing Administration (FHA) has revised its underwriting procedures to subject more loans to manual rather than automated scrutiny. FHA officials say the goal is to mitigate risks in the agency’s loan portfolio, but some lenders have warned that the result may be to reduce the number of borrowers who have access to FHA loans.

Reversing conventional wisdom on the question, a recent study has concluded that the best indicator of a borrower’s ability to make mortgage payments is not the size of the down payment they make but their liquidity – the amount of cash they have on hand after the home purchase.

LEGAL BRIEF

MINOR CORRECTIONS

What’s a “minor” correction? Reasonable people might quibble over the definition, but an Indiana Appeals Court ruled that there was nothing “minor” about a wording change eliminating a developer’s obligation to pay condominium assessments. (The Village Pines at the Pines of Greenwood Homeowners’ Association, Inc. v. Pines of Greenwood.)

The declaration establishing this community of single-family homes specified that the developer, Pines of Greenwood LLC (POG) and its successors would pay all assessments for units they owned. Re-enforcing that point, the declaration defined “owners” to include “person or persons, including Declarant, holding fee simple interest” in lots in the community.

A reserve study commissioned by the association in 2006 concluded that the reserves were seriously under-funded and recommended that reserve contributions be doubled by 2009 to prevent the shortfall the association would otherwise face by 2010.

In 2008, while still controlling the association, POG amended the declaration to eliminate the declarant’s obligation to pay assessments. Wording changes in two provisions achieved that result. One stated that the payment obligation applied to “each owner – other than the declarant.” The other said that the payment obligation would begin on the first day of the month following the closing on the sale of a lot to anyone “other than the declarant.”

While the declaration generally required a super majority (two-thirds) of owners to approve any amendments to the document, it also specified that the declarant reserved the right “to correct clerical or typographical errors” without obtaining owner approval, as long as those corrections did not have a “materially adverse effect” on the rights of owners, “substantially impair” their benefits, or “substantially increase” their obligations.

Owners assumed control of the association in 2009 and sued POG two years later, alleging that the developer had breached his fiduciary duty by improperly using reserve funds to cover operating expenses, and had violated his contractual obligation by failing to pay assessments between 2008 and 2010.

The trial court sided with POG, rejecting both HOA claims; the Appeals Court rendered a split decision, rejecting the fiduciary duty claim against POG but agreeing with the HOA that the declaration amendment was improper and did not eliminate POG’s obligation to pay assessments during the development period.

On the fiduciary duty claim, the Appeals Court noted that a two-year statute of limitations applied, beginning at the point at which an aggrieved party “knew or in the exercise of ordinary diligence could have discovered” the damages alleged.

In this case, the court noted, members of the association could reasonably have discovered the transfer of reserve funds as early as 2006, when the reserve study was completed. “We conclude that some ascertainable damage had occurred that, in the exercise of ordinary diligence, could have been discovered prior to the expiration of the applicable statute of limitation period.” Like the lower court, the Appeals Court found “no evidence of any impediment that would have prevented [an HOA member] from filing a derivative action on behalf of the HOA against the board” to challenge those reserve fund transfers.

On the second (breach of contract) claim, the HOA had argued that the declaration amendments POG initiated on its own required owner approval; POG had countered that the changes simply corrected “unintended ambiguities” resulting from clerical errors falling within the category of minor changes the declarant could make unilaterally.

The court rejected POG’s argument, citing both a legal definition of “clerical error” and the clear wording and intent of the declaration. Prior court decisions, the court noted, have defined clerical errors as those “resulting from a minor mistake or inadvertence, [especially] a drafter’s or typist’s technical error that can be rectified without serious doubt about the correct reading.” Eliminating PGO’s payment obligations did not meet that definition, the court said. The amendment also violated the declaration provision specifying that the corrections the declarant was allowed to make could not have a “materially adverse” effect on owners, or “substantially increase” their obligations. Because shifting the developer’s payment obligations to owners increased owners’ obligations and had a “materially adverse” impact on them, the court concluded, “we cannot agree that the [amendment]….merely corrected clerical or typographical errors.”

While upholding the lower court’s judgment on the first (fiduciary duty) claim, the Appeals Court reversed the second (breach of contract) finding, remanding that issue for a hearing on the damages the HOA should be awarded.

WORTH QUOTING

“The canary is still singing [in the housing market]. But without some major changes in zoning laws and construction costs and changes in how student debt is serviced, the music could come to an end in 2020” ─ Diane Swonk, chief economist for Grant Thornton.


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