LEGAL/LEGISLATIVE UPDATE – NOVEMBER 5, 2018

Published on: November 16, 2018

SHORT-TERM RENTAL BATTLE

Airbnb, a leading platform for promoting short-term vacation rentals, is challenging a Boston ordinance that would restrict the ability of property owners to rent their residences for short period. Scheduled to take effect January 1 of 2019, the rules require owners to register their short-term rental properties, allow them to list only one unit at a time on host platforms like Airbnb, prohibit investors and tenants from using the platforms (but allow owners of two- and three-family dwellings to continue doing so), and require platform hosts to enforce those regulations.

It is the enforcement requirement that Airbnb is targeting in its legal challenge. “This is a case about a city trying to conscript home-sharing platforms into enforcing regulations on the city’s behalf,” the company’s complaint contends.

The Boston City Council approved the regulations in June after debating the issue for almost three years. Boston Mayor Marty Walsh, who proposed the measure, said it is needed to curb the diversion of affordable rental units needed by tenants into the vacation rental market. The registration requirement, he said, will generate data local officials need to track the impact of short-term rentals city-wide and in specific neighborhoods.

Airbnb has challenged similar regulations in other cities, reaching a settlement agreement in San Francisco, and still pursuing a request for an injunction barring implementation of restrictions in New York City.

Although the Boston ordinance takes effect in January, enforcement will not begin until September, to give property owners time to adjust to the new regimen.

The Massachusetts Legislature earlier this year approved a long-pending bill establishing a statewide registration requirement for short-term rentals, but Governor Charlie Baker has refused to sign the measure unless lawmakers approve several revisions he has proposed. Neither the state measure nor the Boston ordinance would directly impact condominium associations, which have the authority to enact bylaws restricting short-term rentals or barring them entirely.

DIVIDED SENTIMENTS

American consumers are feeling better about the economic outlook, but gloomier about the housing market. Those divergent sentiments surfaced in Fannie Mae’s monthly Home Purchase Sentiment Index (HPSI), which posted its third decline in four months in October, falling 2 points below the September reading.

Five of the six index components slipped, including the view of home buying prospects (down by 5 percentage points) and expectations for price increases (down by 2 percentage points.) The only component that didn’t fall was the one measuring views of household income, which remained flat, with 10 percent of respondents saying their income is higher than it was a year ago. Countering this generally sour view of housing, the share of consumers who think the economy is on the right track hit a survey high.

“The contrast between the survey’s findings of weak home buying sentiment and overall economic optimism mirrors what we’re seeing in the broader economy,” Doug Duncan, Fannie Mae’s chief economist, said. “While economic growth posted the fastest back-to-back pace in four years in the third quarter” he noted, “residential investment declined for the third consecutive quarter, a first for the current expansion.”

QUALIFYING BUYERS

Eyeing the increasing number of “gig” workers holding part-time jobs, Fannie Mae and Freddie Mac are looking for ways to help them qualify for mortgage credit. This would require adjusting conventional mortgage lending criteria that typically require full-time employment as the income source.

Nearly all of the mortgage executives responding to a recent Fannie Mae survey agreed that current guidelines make it difficult to qualify prospective buyers who are either self-employed or rely on gig income. That potentially excludes a growing pool of potential borrowers. Intuit reports that gig works represented 34 percent of the labor force in 2017 and projects that share will increase to more than 40 percent by 2020.

Freddie Mac is studying automated systems for validating nontraditional income. Bipartisan legislation proposed by Sens. Mark Warner (D-VA0 and Mike Rounds (R-SD) would allow lenders to accept documentation other than W-2 forms to verify borrower income.

Some lenders are already accepting alternative documentation, such as several years of bank statements, to qualify borrowers with nontraditional earnings.

Writing favorably about these innovations in a guest column for National Mortgage Professional. Ray Brousseau, president of Carrington Mortgage Services, observed: “As part-time and gig work continues to increase, the mortgage industry must be prepared to include these borrowers in the lending pool. Just as workers in the gig economy represent a different kind of workforce, they also represent a different kind of borrower: one that needs the same kind of flexibility in their lending as they enjoy in their career.”

TEMPORARY PAUSE

After three successive rate hikes, the Federal Reserve hit the ‘pause button in November, electing to forego another increase for now, but making it clear that another hike in the Fed Funds rate is likely in December.

Brushing off concerns about recent stock market volatility, growing unease about the impact of the Trump Administrations tariffs, and growing evidence of weakness in the housing market, the Federal Open Market Committee (FOMC), the Fed’s policy—making arm, said “risks to the economic outlook appear roughly balanced.”

The committee cited the strong labor market and evidence of continuing economic growth as the major reasons for continuing on a “gradual” rate-tightening, inflation-fighting course.

The decision to leave the Fed’s target rate unchanged in the 2 percent to 2.25 percent range came a week after the Labor Department reported a much stronger than expected gain of 250,000 jobs for October. The unemployment rate remained unchanged at a healthy 3.7 percent and wages increased by 3.1 percent year-over-year, the largest annual gain in nearly a decade.

“The challenge ahead,” Wall Street Journal columnist Nick Timiraos said, is to parse financial and economic developments to determine whether rates are edging closer to a neutral setting that neither spurs nor slows growth.”

STILL SETTING RECORDS

Housing analysts were surprised and relieved when apartment rents, which had been rising sharply and steadily, seemed to stabilize earlier this year. Turns out their relief was premature. The nationwide median monthly rent topped $1,000 for the first time in the third quarter of this year, the U.S. Census Bureau reported, a 10 percent increase year-over-year.

This is not good news for renters generally and for lower-income renters in particular, who are struggling with the impact of a critical shortage of affordable rental housing.

“New supply is clearly not coming online at these low rent levels,” Harvard’s Joint Center for Housing Studies notes in a recent report. “Moreover, not enough existing units are filtering down to counter those lost to abandonment, higher rent levels, or conversion to higher-end condominiums. This increasingly tight low-end rental market is driving up cost-burden rates for the growing numbers of low-income renter households that are forced to pay more than 30% of their income in rent,” the report notes.

While renters are feeling the squeeze of higher costs, first-time buyers have been finding a way to break into the housing market, despite the dual impediments of rising prices and higher interest rates. The Census Bureau reported that the homeownership rate increased slightly in the third quarter compared with last year, driven primarily by first-time buyers.

“In the past two years, first-time homebuyers have purchased at least 1.9 million homes each year,” Tian Liu, chief economist for Genworth Mortgage Insurance, told Housing Wire. “That [exceeds] the pace of household formation over the same period, meaning that the transition from renting to owning is the more powerful driver of housing demand.”

IN CASE YOU MISSED THIS

Housing issues have been largely missing from the national political agenda, but they cropped up on the midterm ballots in several states. In California, for example, voters rejected a ballot proposition that would have repealed 15-year-old limits on the use of rent control. More than 60 percent of voters nixed the idea, while a little more than 38 percent supported it.

U.S. home builders aren’t the only ones complaining about regulatory costs. A Canadian think tank estimates that regulations added an average of $229,000 to the cost of a single-family home in that country between 2007 and 2016.

Reversing a long-standing policy, Apple says it will no longer issue quarterly reports on the number of i-phones, i-pads and Macs it sells each quarter. Analysts attribute the change to a flattening sales trends in those once high-flying product lines.

Analysts are attributing a 13 percent spike in mortgage delinquencies primarily to the residual effects of Hurricane Florence. But they are still concerned about it.

A large majority of older adults want to age-in place in the homes and communities to which they are attached. But a recent AARP survey finds that more than half doubt they will have that option.

LEGAL BRIEF

BEING REASONABLE

It’s hard to argue with a “reasonableness” standard. It sounds so….reasonable. But reasonable people can disagree on how to define the term, which is why we see so many court battles like the two discussed here.

In Barger v. Elite Management Services, an Ohio Appeals Court considered whether the fee a management company charged a homeowner for preparing a closing certification letter (A 6d certificate in Massachusetts) was reasonable.
The owner (Barger) contended that the fee ─ $395 for producing the letter and $100 for expending it ─ was “exorbitant,” exceeding both the industry norm in the area and the cost of providing the service and violating both the HOA’s declaration and the management company’s contract with the association. The trial court ruled that Barger was not a party to the contract and so could not sue Elite for breaching it, and even if she could assert that claim, the court said, nothing in the contract required Elite to charge a “reasonable” fee for the certification letters. The Appeals Court agreed.

The declaration did in fact require the association to charge a reasonable fee, the court noted, and Barger could have sued the association to enforce that provision but did not. Elite, on the other hand, was not a party to the declaration, the court said, “[nor was the company] bound by its management agreement to abide by the Declaration’s reasonable fee requirement. Since it had no obligation to adhere to the Declaration, it could not breach it.”

Barger fared better with her additional claim that the fee Elite charged constituted “unjust enrichment,” because it was “unrelated to the actual cost of the service,” was excessive (10 to 20 times more than the customary price) and was a service she was required to purchase. “The furnishing of the Certification Letter is a prerequisite to the closing of the sale or refinancing of a property governed by an HOA, she argued in her complaint, adding, “Owners of condominium units or houses in planned communities have no alternative other than obtaining the Certification Letter from the HOA or its agent(s).”

The trial court dismissed this claim for the same reason it dismissed the others: Because Barger was not a party to the management agreement between the HOS and Elite, the court reasoned, the management company had no duty to charge a reasonable fee for services it provided to her. But the Appeals Court rejected that reasoning. The unjust enrichment claim, the court said, “lies outside of [the management] agreement,” and should be considered separately. The court remanded the case to the trial court, directing it to address the underlying issue: Whether the fee Elite charged was “reasonable.”

In a Vermont case (Alpine Haven Property Owners’ Association, Inc. v. Brewin ), the state Supreme Court considered whether the fees a voluntary Home Owners Association charged for services it provided owners were reasonable.
The plaintiff homeowners association (Alpine) charged owners for road maintenance, snow removal, trash collection, and other services, which the defendants (the Brewins) paid from 1998 (when the developer transferred control to owners) until 2009. Alpine sued for nonpayment. By the time the case came to trial, Alpine claimed the Brewins owed more than $15,000.

The trial court agreed that the Brewins were responsible for the unpaid fees; the question was, how much should they have been charged. Because the deed did not specify the fee, the trial court determined that it had to be “reasonable.”

Using the association’s detailed summary of the service costs as a starting point, the court calculated what it thought a reasonable fee should be. Instead of allocating the costs equally among all owners, as the association had done, the court decided that the Brewins should pay only for the maintenance and snow removal related to the three-tenths of a mile of roadway they used to reach the highway. The court prorated some overhead costs but excluded others the court deemed to be ‘extraordinary.’

The trial court’s formula produced a delinquency total far below the amount Alpine claimed. Not surprisingly, the association appealed, asserting that:

  • The trial court failed to recognize that the deed specifically granted the association the authority to determine the formula for calculating fees, so it was inappropriate for the trail court to substitute its own analysis.
  • The association’s formula, based on the cost of providing the services, was “reasonable.”
  • It was fair and reasonable for the Brewins to pay a share of the cost of maintaining the entire roadway system, not just a pro rata share of the portion they used. Calculating a separate charge for each owner would be costly, inefficient and difficult to administer, the association maintained.

The Supreme Court sided with the association. On the first issue, the court agreed that the deed clearly assigned responsibility for setting fees to the developer, who transferred his interests to the association. “That does not mean that [Alpine] can set unreasonable rates with abandon,” the court acknowledged. But it does mean that the appropriate question for the trial court was not whether the fee should have been structured differently, but whether the Brewins had demonstrated that the association had violated the covenant of fair dealing or acted in bad faith in setting the fee “and in particular whether the fee [the association] charged fell beyond the bounds of reasonableness.”

While the association presented “substantial evidence” demonstrating that its fee, based on “actual costs plus overhead” was reasonable, the court said, the Brewins presented no evidence that the association “violated the community standards of decency, fairness or reasonableness that the covenant of good faith and fair dealing seeks to protect.”

The court didn’t address the Brewins’ argument that they should pay only the costs related to the small portion of the road they used, finding that the maintenance fee Alpine charged would be reasonable even if it had been based only on their right-of-way.

But the court did address, and reject, the trial court’s conclusion that some of the overhead costs included in the fee calculation were improper. The trial court distinguished between “ordinary” overhead, which it said could be included, and “extraordinary” overhead, which it said the association could not recoup from owners. The Supreme Court found no basis for that distinction.

Overhead costs related to unanticipated expenses – litigation, or emergencies, for example – may be “extraordinary,” the court said, but that does not make them unreasonable. And many of the costs the trial court rejected as extraordinary were related to the collection of delinquent payments, which, the court noted, “the association needs to function.”

“The question is not whether the overhead expenses were extraordinary,” the court said. “[The question is] whether they were unreasonable…. And [the Brewins] failed to establish that [Alpine] acted in bad faith by including its overhead costs in its annual assessment….We thus conclude, as a matter of law, that [Alpine] did not breach the covenant of good faith and fair dealing in determining the fee charged to defendants for its services.”

WORTH QUOTING

“Your ill-advised commentary goes beyond holding the Fed accountable….You appear to be telling the Fed what to do with interest rates, which we believe is unconstructive and dangerous.” Senators Chris Coons (D-DEL) and Jeff Flake (R-AZ) in a letter to President Donald Trump, warning him against “politicizing” the Federal Reserve.


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