LEGAL/LEGISLATIVE UPDATE – MARCH 19, 2019

Published on: March 19, 2019

THE BATTLE CONTINUES

The Jersey Shore is the latest battleground in the ongoing conflict between government officials and the short-term vacation rental industry represented by Airbnb. An 11.6 percent tax on these rentals that took effect in October of last year has provoked an outcry from New Jersey homeowners who say they are having trouble finding renters because of the higher rents they must charge to cover the tax. Critics say the tax will be devastating for homeowners and area businesses, who rely on the income from vacationers. A Massachusetts law taxing short-term rentals, which takes effect July 1, has drawn similar criticism.

“People are actually canceling and forgoing deposits to get away from the taxes,” one owner of seven single-family rentals on the Jersey Shore told the New York Times. “There’s no question that there’s all kind of upheaval being created by this tax.’’

Defenders of the tax have said it needed to prevent unfair competition with hotels and motels. But state officials in New Jersey, have indicated a willingness to rethink the tax, at least as it affects the New Jersey Shore, a prime vacation spot in the state, which, six years after the fact, is still struggling to recover from the effects of Hurricane Sandy.

Underscoring the intensity and nationwide scope of the battle over short-term rentals, another New York Times article recently described the door-to-door efforts of Miami officials to identify and evict vacationers from single-family residences in the Miami Beach area that were being rented illegally.

In an interesting twist, Airbnb, which has fought taxes and other restrictions on single-family rentals elsewhere, has embraced the New Jersey tax as recognition that home sharing is a legitimate and important industry. “Home sharing is bringing economic opportunity to families and businesses in every corner of the Garden State,” Josh Meltzer, a spokesman for the company, said in a press statement. “We are excited to be able to support core state and local services from Jersey City to the Jersey Shore,” he added.

SIGNS OF SPRING?

If you believe a ground hog can predict the weather, we should expect an early spring: Punxsutawney Phil did not see his shadow when he emerged from his winter home last month. On the other hand, this famous Philadelphia rodent is almost always wrong, so perhaps it’s best not to put away the parkas and gloves just yet. We might also hope the housing statistics will be an equally inaccurate predicter of the market outlook, because early indicators have not been positive.

Existing home sales began the new year as they ended the last one – on a downward trend – falling 1.2 percent below the December pace and 8.5 percent below January of 2018, representing the fourth consecutive year-over-year decline. December’s annualized sales total of 4.94 million units was the lowest in three years. Pending sales were a little brighter – up 4.6 percent compared with January, but still 2.3 percent below the same month a year ago.

Lawrence Yun

New home sales fell 6.9 percent below the December pace which was adjusted upward, and 4.1 percent below January of 2018, representing the fifth consecutive year-over-year decline.

It’s not easy to find anything positive to say about those numbers, but Lawrence Yun, the chief economist for the National Association of Realtors, managed this ‘glass-half-full’ observation: Although existing home sales were “weak compared to historical norms,” he acknowledged, “they are likely to have reached a cyclical low.” Translation: The numbers are dismal, but they aren’t likely to get any worse.

INVENTORY IMPROVEMENTS

Inventory levels, a continuing source of housing angst, have improved a bit, reducing both the competition for scarce listings and the resulting bidding wars that had been forcing prices higher. Redfin reports that only 13 percent of the offers submitted by its agents in January triggered bidding wars compared with 53 percent in the same month last year; Zillow reports that approximately 19 percent of homes sold in the second half of last year exceeded the asking price – a three-year low, according to the company’s calculations.

Inventory improvements are a double-edged sword, however, increasing the number of homes for sale, but also reducing the pressure on buyers to purchase them. “Buyers understand that the market is shifting in their favor and have become more sensitive to high home prices. That added sensitivity could continue to put a damper on the sales of new homes, which tend to be more expensive than comparable existing ones,” Daryl Fairweather, Redfin’s chief economist, noted in a press statement.

“Buyers and the sellers are in this dance right now where it’s a little harder to put deals together because nobody’s certain where the market is going to land,” Redfin CEO Glenn Kelman, added. “It’s a little bit better than it was in the fourth quarter,” he told CNBC. “We’re seeing stronger buyer demand, but it’s not as if people are willing to pay any price to get a home, which is what we saw at the beginning of 2018 and for the past four years before that.”

SHORTFALL

The February employment report was “disappointing,” in the opinion of analysts. Employers added only 20,000 jobs – well below the 180,000 total they had expected, and nowhere near the blockbuster January tally of 311,000 workers. Emphasizing the positives, economists pointed out that the job total, while anemic, nonetheless continued the streak of consecutive monthly gains (101 and counting). Although average hourly earnings increased by only 0.4 percent, wages increased by 3.4 percent year-over-year, outpacing the cost-of-living.

Still, the anemic employment growth may support a continuation of the “patience” the Fed cited in its decision to leave interest rates unchanged in January.

Explaining the Fed’s decision to leave rates unchanged in January, Federal Reserve Chairman Jerome Powell said uncertainty about financial markets and the global economic outlook counseled “patience” for the near term. The lackluster January employment report may re-enforce that view.

In recent testimony to the Senate Banking Committee (before the February employment numbers were released), Powell noted: “While we view current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and conflicting signals….Financial markets became more volatile toward year-end,” he noted, “and financial conditions are now less supportive of growth than they were earlier last year….We will carefully monitor these issues as they evolve,” he said.

FLOOD INSURANCE REDUX

Congress is trying once again to amend the national Flood Insurance Program, which is struggling to cope with increasing, and increasingly devastating, flooding, outmoded risk assessment models, inadequate funding, and homeowner resistance to rising premium costs.

Unable to craft reforms that can win broad bipartisan approval, Congress has approved 10 short-term extensions of the existing program since 2017 – most of them hours before it was about to expire. The current program, administered by the Federal Emergency Management Association (FEMA), expires May 31, and a recent hearing before the House Financial Services Committee suggested that lawmakers are no closer to agreement on an overhaul than they have been in the past.

Some proposals have focused on updating flood maps, others on barring insurance to properties that flood repeatedly, and others on comprehensive reform that incorporates sweeping changes in all aspects of the program, including changes that would enable private insurers to participate more broadly in the flood insurance market.

Some lawmakers are convinced that Congress will find a consensus that bridges policy and political divides because, with flood losses mounting steadily, it must. “This committee knows the implications of us doing nothing,” Rep. William Clay (D-MO), said during the hearing. “We need to approach this in a pragmatic way that resolves the issue.”

Separately, the Trump Administration is proposing to fundamentally alter the way FEMA calculates flooding risks. The changes being floated now “will help customers better understand their flood risk and provide them with more accurate rates based on their unique risk,” a FEMA official told Insurance Journal.

More realistic risks will produce higher premiums and potentially reduce property values in flood-prone areas – consequences for which lawmakers have not demonstrated much appetite in the past. A proposal that would have required premiums to fully reflect flooding risks seemed to be garnering bipartisan support in 2012, but when homeowners ─ and the real estate industry – bashed the plan, Congress enacted another short-term extension of the existing flood insurance program instead.

IN CASE YOU MISSED THIS

Efforts to reform the nation’s housing finance system appear to be gaining traction with the Federal Housing Finance Agency, overseer for Fannie Mae and Freddie Mac. But housing industry trade groups and consumer advocates are urging the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, to move slowly to ensure that the transition is smooth and that affordable housing remains a priority.

The New Hampshire Supreme Court has ruled that a labor appeals board was wrong to determine that workers’ compensation insurance can’t reimburse an employee for the cost of medical marijuana.

The tight job market is leading some employers to hire workers before they actually have openings for them, because, as an IBM economist explained, “We know there will be demand for them soon,” one executive explained to the Washington Post.

The homeownership rate has begun to increase (albeit slightly) and first-time buyers, who have been largely missing in action during the housing recovery, are playing a bigger role now. They accounted for 2.07 million purchases last year, the largest number since 2006, according to Genworth Mortgage Insurance Company.

Most Americans aren’t saving for a rainy day – not even a drizzle. A recent Bankrate survey found that more than 20 percent of Americans have no savings, and most of those who are setting money aside are saving less than 10 percent of their income – not enough to create an adequate financial cushion against unforeseen expenses.

LEGAL BRIEF

ASSESSING LIABILITY FOR FAIR HOUSING HARASSMENT

Fair Housing Act regulations enacted by the Department of Housing and Urban Development three years ago made it clear that housing providers, including condominium associations, must protect residents from harassment by employees or other residents. But the HUD guidance left open questions about precisely what this obligation entails and how it would be applied in specific circumstances.

Few court decisions have addressed those questions directly, and this Seventh Circuit Federal Appeals Court decision (Marsha Wetzel v. Glen St. Andrew Living Community) isn’t among them. But it does address questions many condo associations have raised about the extent of their obligation to prevent resident-on-resident harassment and their authority to do so.

The decision is also potentially significant because its conclusion that the housing provider in this case should have acted is based on the text of the Fair Housing Act and does not rely at all on the HUD regulations, which were designed to strengthen anti-harassment protections for residents.

When the plaintiff, Marsha Wetzel, who is gay, moved into the Glen St. Andrew retirement community, she was open about her sexual orientation. Other residents were not welcoming, to say the least. They greeted her with homophobic slurs, threatened her, and physically attacked her – knocking her scooter off of a ramp and bashing her wheelchair into a table, among a litany of incidents about which Wetzel complained to retirement home staff.

Administrators initially downplayed her complaints, then accused her of lying about them and ultimately retaliated against her, Wetzel claimed, by restricting her access to common areas, halting some services, and compiling evidence to justify her eviction. Wetzel eventually sued the owners and managers of the facility for violating the Fair Housing Act by failing to prevent the harassment she had suffered.

A Broad Reading

A District Court dismissed her suit, agreeing with the defendants that they had no liability under the FHA unless they had acted with “discriminatory animus,” which Wetzel had not alleged. Wetzel appealed, and a three-judge panel reached a starkly different conclusion. “We read the FHA more broadly,” the court said. “Not only does it create liability when a landlord intentionally discriminates against a tenant based on a protected characteristic; it also creates liability against a landlord that has actual notice of tenant‐on‐tenant harassment based on a protected status, yet chooses not to take any reasonable steps within its control to stop that harassment.”

Analyzing Wetzel’s complaint, the court focused first on whether the behavior she cited met the statutory definition of discriminatory harassment under the FHA – -behavior that is sufficiently “severe” and “pervasive” enough to create a “hostile environment” that interferes with the use and enjoyment of a home.

“That standard requires us to consider the totality of the circumstances, including the frequency of the discriminatory conduct, its severity, and whether it is physically threatening or humiliating rather than merely offensive,” the court noted, citing language from previous court decisions. These decisions have concluded that there is “no magic number of instances” required to support a harassment claim, the court noted. “While isolated minor affronts are not enough,” the court agreed, prior decisions have held that “either a small number of ‘severe episodes’ or a ‘relentless pattern of lesser harassment’ may suffice.” (Although the Seventh Circuit did not rely on HUD’s 2016 regulations in its decision, the regulations state specifically that a single discriminatory act may constitute harassment under the FHA.)

Rejecting the defendants’ characterization of the “abuse” Wetzel said she suffered as nothing more than the “squabbling” and “bickering” of “crotchety senior residents,” the court said “a jury would be entitled to see the story otherwise. We confess to having trouble seeing the act of throwing an elderly person out of a motorized scooter as one of the ordinary problems of life in a senior facility,” the court observed parenthetically, adding, “The harassment Wetzel describes plausibly can be viewed as both severe and pervasive.”

The key question raised by Wetzel’s suit was whether the defendants had an obligation to prevent the harassment and were liable for the hostile environment it created. Rejecting the defendants’ assertion that they would be liable only if they had acted with discriminatory animus, the court noted that argument focuses only on “what is prohibited, not who is subject to those prohibitions.”

“Analogous” Statutes

But the court also acknowledged that the text of the Fair Housing statute “does not spell out a test for landlord liability.” Turning to “analogous” anti-discrimination statutes for guidance, the court focused on Title IX, (prohibiting sex-based discrimination in educational programs), citing a U.S. Supreme Court decision (Davis v. Monroe County Board of Education) holding program administrators liable for “remain[ing] idle in the face of known student-on-student harassment in …schools.”

“Much of what the Court said in Davis can be applied readily to the housing situation,” the Seventh Circuit said in its decision. Although the Davis court found the actions of the educational institution itself to have been discriminatory, in evaluating Wetzel’s claim, the court noted, “we need only [ask] whether the management defendants…had actual knowledge of the severe harassment [she] was enduring and whether they were deliberately indifferent to it. If so, they subjected Wetzel to conduct that the FHA forbids.” While Wetzel’s arguments may fall in “uncharted territory,” the court acknowledged, “the Supreme Court’s interpretation of analogous anti‐discrimination statutes satisfies us that her claim against St. Andrew is covered by the Act.”

The St. Andrews defendants had argued that because there is no “custodial” relationship between a landlord and a tenant, landlords have no obligation to protect tenants from discriminatory harassment. “But we have not gone that far,” the court said. “We have said only that the duty not to discriminate in housing conditions encompasses the duty not to permit known harassment on protected grounds. The landlord does have responsibility over the common areas of the building,” the court added, “which is where the majority of Wetzel’s harassment took place.”

Direct Liability

If a trial court ultimately found the defendants liable based on the evidence presented, the liability “would be direct,” the appeals court noted, “the result of standing pat” and failing to act on the “barrage of harassment” Wetzel suffered. Citing decisions holding employers liable for the discriminatory actions of third parties, the court noted, “Because liability is direct, ‘it makes no difference whether the person whose acts are complained of is an employee, an independent contractor, or for that matter a customer….The genesis….matters not; what does matter is how the employer handles the problem.” The same framework, the court suggested, applies to discriminatory harassment under the Fair Housing Act.

The court agreed with the defendants’ contention that they could not reasonably be held responsible for actions they lacked the ability to address. “We have no quarrel with the idea that direct liability for inaction makes sense only if defendants had, but failed to deploy, available remedial tools.” But, St. Andrews, in fact, had a variety of tools with which to address harassment, the court noted, including language in the rental agreement justifying the eviction of tenants whose behavior “threatens the health and safety” of others, or “unreasonably interferes with the peaceful use and enjoyment of the community by other tenants.” Simply reminding the tenants responsible for harassing Wetzel of that language “might have deterred some of the bad behavior,” the court said.

Seeking what the court described as a “broader ruling” in this case, Wetzel had cited HUD’s 2016 anti-harassment regulations making housing providers directly liable for discriminatory harassment by third parties if they “knew or should have known of the discriminatory conduct and had the power to correct it.” The HUD rule, the court noted “mirrors the scope” of employer liability for employee-on employee harassment under Title VII. But there are “salient differences” between Title VII and the FHA, the court noted. While it may be possible to overcome those differences the court said, “more analysis than HUD was able to offer is necessary before we can take that step.”

That analysis wasn’t necessary in this case, the court said, because it didn’t have to rely on the HUD rule to establish potential liability. “It is enough for present purposes to say that nothing in the HUD rule stands in the way of recognizing Wetzel’s theory” that St. Andrews could be found directly liable for the discriminatory harassment she suffered.

WORTH QUOTING

“The housing market is a complete wreck.” ─ Elliot Eisenberg, President and Chief Economist at Graphsandlaughs.net.


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