LEGAL/LEGISLATIVE UPDATE – APRIL 13, 2017

Published on: April 13, 2017

EMPLOYMENT REPORT DISAPPOINTS.

The employment numbers for March fell below expectations, disappointing many analysts, but they aren’t expected to alter the Federal Reserve’s plan to boost interest rates at least twice and maybe three more times this year.

Employers added only 98,000 jobs in March, falling far short of the 200,000-plus mark they had registered in January and February and missing the consensus forecast that called for gains close to that level. Despite the stumble, the unemployment rate fell to 4.5 percent from 4.7 percent and wages ticked up, suggesting to many analysts, that the employment market remains strong despite the weakest report in nearly a year.

Many blamed unseasonably warm weather in January and February for inflating the statistics for those months. “This is mostly just weather-related noise,” Paul Ashworth, an economist with Capital Economics, told the Wall Street Journal. “There was always going to be some payback in March, when the weather snapped back to seasonal norms,” he added.

Gus Faucher, an analyst with PNC Financial Services Group, quoted in the same Journal article, echoed that view. Even with the March dip, he noted, employment gains are still running close to last year’s healthy pace. Combined with other positive indicators (especially wage growth and labor market participation), he predicts the Fed will probably view the weak March figure as “an aberration,” and not an argument for scaling back its interest rate plans.

MIXED HOUSING MESSAGE.

Existing home sales fell more than expected in February, declining by 3.7 percent to a seasonally adjusted annual rate of 5.48 million units. Analysts had predicted that sales would fall by only 2 percent from January, when sales reached the highest level in nearly a decade.

Pending sales, on the other hand, rebounded sharply in February after pretty much tanking in January, reaching their second-highest level in almost a decade and providing hope that sales will be stronger this year than many analysts are predicting.

New home sales also improved in February, increasing by more than 6 percent compared with a dismal January performance. The annualized rate of nearly 600,000 units represented the second-strongest performance for new homes since the housing market recovery began five years ago.

Single-family construction activity also increased in February, as did permitting levels, a marker for future construction, which reached an annualized rate of 832,000 units – the highest level since September of 2007.

Prospective buyers should be encouraged by those statistics, Ralph McLaughlin, chief economist at Trulia, told USA Today, because they indicate that “a healthy dose of new homes will be available this spring in an otherwise inventory-constrained market.”

VIRTUAL TRESPASSING?

When hordes of avid and determined ‘Pokémon Go’ players traipsed across private property in search of the game’s virtual monsters, they were clearly trespassing. But was the games developer, Niantic, Inc., also guilty of criminal trespass and negligence? That is the interesting legal question raised in a suit now pending in U.S. District Court in San Francisco, where plaintiffs are seeking class action status for their complaint.

The action consolidates three separate suits filed by residents in New Jersey, Florida and Michigan, who say the creator of this virtual game is guilty of virtual trespass and negligence, because the game encourages players to ignore private property rights and further violates owners’ rights by placing virtual characters on or near their property without their permission.

“The law here is very messy,” Shawn Bayern, a law professor at Florida State University, told the Wall Street journal, because “each state handles it slightly differently.” Adapting traditional legal concepts of trespass to the global positioning technology behind virtual games won’t be easy, but it is necessary, Gregory Keating, a professor at the University of Southern California Gould School of Law, noted in that Journal article, because “the technology is not going away.”

Niantic contends that trespass laws assume “physical” intrusions, not virtual ones. Holding companies responsible for the actions of consumers who use their global positioning software would threaten a host of on-line services, including applications that list real estate open houses or identify destination shortcuts, “all of which can attract visitors and impact nearby residents,” Niantic argues in its legal brief, asking the court to dismiss the suit against it.

Niantic also argues that the terms of use for the game specifically prohibit players from trespassing on private property, and the company shouldn’t be blamed if some players ignore that requirement. Niantic simply creates the virtual game, the brief notes. “[It] does not control millions of players’ real-world movements.”

BLOCKING LEGAL BARRIERS.

Maryland lawmakers are considering legislation that would make it more difficult for condominium developers to block construction defect claims filed by condo associations and individual condo owners. The legislation would preclude developers from including in condominium governing documents or purchase agreements provisions that:

  • Specify a statute of limitations on defect claims shorter than that provided in state law.
  • Waive application of the “discovery rule” defining the period within which owners or associations must identify a defect. (Maryland’s discovery rule generally provides that the statute of limitations on a claim begins to run when the defect was discovered or should have been discovered through the exercise of “reasonable” due diligence.
  • Set a deadline for initiating arbitration proceedings shorter than the statute of limitations; or
  • Have the effect of preventing associations or owners from asserting claims or beginning arbitration before the statute of limitations expires.

The Maryland Judicial Proceedings Committee recently issued a favorable report on the measure, which the Maryland House of Delegates approved unanimously in March.

WOULD EASIER CREDIT BOOST THE ECONOMY?

Few dispute that overly aggressive (and often questionable) mortgage lending practices contributed significantly to the financial tailspin that brought the housing market – and the entire economy – to its knees. But some analysts contend overly restrictive lending policies that have slowed home buying activity are at least partly responsible for the tepid recovery from that economic downturn.

According to these analysts, the homeownership rate has sunk to a 50-year low not because fewer people want to own homes, but because many qualified buyers are unable to obtain the financing they need to purchase them. As a result, they say, housing has not been able to play its traditional role las a major driver of economic growth.

“If you want to get the economy going, housing is typically the flywheel,” Ken Rosen, chairman of Rosen Consulting, told the Wall Street Journal recently. He was commenting on a study newly published by his company estimating that if builders were constructing homes at an historically normal pace, housing would have added more than $300 billion to the economy last year, boosting GDP by 1.8 percent.

Housing contributed 15.6 percent of GDP last year, according to this study, compared with a 60-year average of close to 19 percent. Spending related to new-home construction and remodeling represented 3.6 percent of GDP last year, about half the contribution in 2005.

Economists and financial industry regulators regularly cite the dramatic decline in loan default rates resulting from tighter lending policies as evidence that the economy has regained its footing (and lenders have regained their sanity). But analysts concerned about the low home ownership rate contend that default rates are actually too low, suggesting to them that credit standards are tighter than they need to be.

“We’re being paternalistic in our regulatory environment,” Rosen told the Journal, “and that is forcing lower middle-class people…to rent [instead of buy].”

IN CASE YOU MISSED THIS

Although an improving economy has improved employment prospects for Millennials hard-hit by the downturn, more than 34 percent of these 18-34-year-olds are still living with their parents, and more than 20 percent of them are 26 or older.

Rising home prices turned negative equity positive for more than 1 million homeowners last year.

Nearly 200,000 home buyers “flipped” the homes they purchased last year ─a 10-yaer high for this activity.

The Mortgage Bankers Association insists that mortgage credit is more widely available today than it has been since 2011. The Urban Institute begs to differ.

Two courts have upheld the “fiduciary rule” the Trump Administration is trying to revoke and a third has rejected an industry effort to delay its implementation. The Obama-era regulation would classify brokers as “fiduciaries” required to put their clients’ interest ahead of their own.

LEGAL BRIEF

A FOUL COVENANT.

Why did the chicken cross the road? Maybe to demonstrate that it was really a household pet.

That was the question before the courts in Eldorado Community Improvement Association, Inc. v. Billings. The plaintiffs (Billings and other residents of this Santa Fe, New Mexico condominium community) insisted that the chickens they kept in their backyards were not “poultry,” which the association’s covenants prohibited, but pets, which the covenants allowed. The association’s board disagreed and said the chickens had to go. When the owners refused to comply, the association sued them. The trial court agreed that chickens did not qualify as the “recognized household pets” the covenants allowed and the owners appealed that decision.

The key question for the appeals court was how the admittedly ambiguous covenant language should be interpreted. The covenant stated: “No animals, birds or poultry shall be kept or maintained on any lot, except recognized household pets, which may be kept thereon in reasonable numbers as pets for the pleasure and use of the occupants but not for any commercial use or purpose.”

No one alleged that the owners were keeping an “unreasonable” number of birds or that they were using the chickens for commercial purposes. But were the chickens “recognized household pets?” Turning to the dictionary, the Appeals Court concluded that chickens kept for “pleasure or companionship rather than utility” could, in fact, qualify as household pets. But it got hung up on whether chickens were “commonly recognized” as such.

In dealing with that question, the trial court had relied heavily on “extrinsic evidence” to support its conclusion that the chickens were not “commonly recognized” as household pets, either within the condominium community or in the world at large. That evidence included affidavits from former board members and managers about past policies and practices in the community and the testimony of an academic expert in veterinary medicine, who cited studies showing that of the owners who had backyard chicken flocks, 86 percent used them for food, meat, or eggs, while only 42 percent treated them as “pets, companions, or hobby animals.”

The lower court also found persuasive the results of a special election in the community in which 55.4 percent of the voting owners had favored amending the covenants to specifically prohibit chickens, while only 44.6 percent supported language allowing them.

But the defendant chicken owners pointed out that the vote did not trigger a change in the covenants because too few owners had participated in the election. Only 35 percent of the total owner population voted to bar chickens ― short of the 50 percent (plus one) votes required to amend the covenants. Thirty percent of the population voted in favor of the chickens and nearly one-third of the owners didn’t vote at all. As a result, the defendants contended, the vote amounted to an “ad hoc inconclusive opinion poll,” that should be given no weight in the interpretation of the covenants.
The Appeals Court agreed that the lower court had given too much weight to the vote and to other extrinsic evidence in its interpretation of the covenant language. “What the developer may have had in mind, how individual association members over time may have viewed the language, whether the association over time successfully enforced [the covenant] without court assistance, and any ‘community’ or ‘broader society’ sense of [the covenant’s] meaning, constitute fleeting and speculative proof of meaning in this case,” the court said.

The Appeals Court also found that the lower court had had wrongly applied contract principals in its conclusion that ambiguities in the covenant language should be resolved in favor of the association. Ambiguities in restrictive use covenants, the Appeals Court said, “should be resolved in favor of free use.”

The Appeals Court also rejected the association’s argument, which the lower court had embraced, that accepting the owner’s argument that the ambiguous language permitted chickens “would create a dangerous precedent, [opening] the door to an unlimited multitude of different kinds of creatures being kept inside and outside of homes, without regulation or control under the covenants (except nuisances) leaving the other homeowners without recourse.”

The court found no evidence to suggest that “the sky would fall” if chickens were defined as allowable pets in the community. “Such a Chicken Little-esque view of possible results and calamity is not convincing,” the court said. Nor did the court buy the argument that the 35 percent of owners who had voted in favor of barring chickens provided sufficient support for the board’s enforcement of the ambiguous covenant language against the chicken owners.

“We…disagree with an interpretation that whether hens may be permitted depends on a majority vote… or on a vote of some particular number below 50 percent of voting lot owners,” the court said, adding, “If the association or the lot owners of the subdivision want a different result,” they would have to achieve it thorough “the required amendment election process set out in the covenants.”

WORTH QUOTING:

“No one is going to be thrown out on the street. What would that accomplish? That doesn’t make any sense and is certainly not going to happen while I’m around. We do have a responsibility.” — HUD Secretary Ben Carson, insisting that a proposed $6 billion cut in HUD’s budget won’t have the devastating impact on housing assistance programs that critics fear.


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