LEGAL/LEGISLATIVE UPDATE – AUGUST 17, 2016

Published on: August 17, 2016

STILL SAYING NO

Resisting increasing public support to legalize the use of marijuana, the Federal Drug Administration (FDA) has rejected a recent request to rethink its classification as a highly addictive drug – on a par with heroin. Gina Raimondo and Jay Ins, Democratic governors of Rhode Island and Washington, respectively, had asked the FDA to reclassify the drug, noting the conflict between laws in 42 states permitting the medical use of marijuana, and federal law, which continues to view marijuana as a “controlled substance,” possession of which, for any purpose, is a criminal offense.

marijuana-998664_1920“This decision isn’t based on danger,” Chuck Rosenberg, chief of the Drug Enforcement Administration, said in a letter responding to the request. “It is based on whether marijuana, as determined by the Federal Drug Administration, is a safe and effective medicine, and it is not.”

Massachusetts, which already permits the use of marijuana by individuals who have a medical prescription for it, will be asking residents to vote this November on a ballot initiative that would permit the recreational use of the drug. Colorado, Alaska, Oregon, Washington State and the District of Columbia have already taken that step. The Massachusetts initiative would specifically permit “the use, cultivation, possession and distribution of recreational marijuana for individuals at least 21 years old.”

Condo associations in states that permit the medical use of marijuana are grappling with the complicated questions resulting from those laws, among them: How to reconcile the medically authorized use of marijuana with bylaws prohibiting smoking in the community; and how associations can regulate the medically-authorized cultivation of marijuana by residents.

Many condominium attorneys, including MEEB, take the position that smoking, growing and selling marijuana are all illegal under federal law, and condominium associations can ban those activities for that reason. We also think association bylaws prohibiting smoking would include smoking marijuana, notwithstanding state laws permitting the drug’s medical use, because the concerns about the impact of second-hand smoke on other residents applies regardless of whether it is tobacco or marijuana that is being smoked. On the other hand, we tell association clients that they have no need to prohibit or restrict edible forms of marijuana, because eating the substance does not produce side-effects (second-hand smoke or odor) that could disturb or sicken other residents.

STRONG AND STRONGER

hand-648443_1920If the June employment report calmed jittery analysts, the July report had to make them smile. Employers added 255,000 workers to their payrolls, beating far more conservative estimates and providing strong evidence that the labor market is churning along at a steady and sustainable pace. Revisions to the May and June reports added another 18,000 jobs to the three-month total, providing more good news in a report that contained a lot of it.

Wages and hours worked both increased more than predicted and the crucial labor force participation rate increased as well, to 62.8 percent from 62. 7 percent, as the unemployment rate held steady at 4.9 percent.

There was one sour note in the Department of Labor report: The underemployment rate (reflecting workers who have part-time jobs but would prefer full-time employment) climbed to 9.7 percent and the number of “discouraged” workers, who have given up on finding employment, hit a five-month high.

But the second consecutive month of robust job growth eclipsed those negatives and pretty much buried news of the anemic (1.2 percent) second-quarter growth rate, as well.

“The labor market is firming up. Wages are starting to pick up. It’s a positive for consumer spending. This will reinforce the Fed’s view that improvement in the labor market is likely to continue,” Jesse Edgarton, an economist at J.P. Morgan Chase, told Bloomberg News.

fed_reserveASSESSING THE ODDS

A strengthening labor market (see above) and a generally upbeat housing outlook are increasing the odds that the Federal Reserve will boost interest rates this year. While few analysts expect the Fed to act before the November presidential election (to avoid influencing it), 69 of 95 economists surveyed by Reuters predicted an increase before the end of this year, rating the median probability of a December hike at 58 percent. Of the 62 economists responding to a Wall Street Journal poll, 71 percent predicted a December increase.

Of course, every time a consensus begins to form around a rate move, economic indicators undermine that prospect. Consistent with that pattern, retail sales flattened in July after growing steadily for most of this year and producer prices posted their steepest decline in almost a year, while the second quarter growth rate came in at a far from robust 1.2 percent, with no sign of the inflation pressures that would argue strongly for a rate increase.

At least for now, analysts are betting that the positive employment picture will offset other concerns. The “diminished risks” Fed officials cited after declining to raise rates in June have diminished even further, creating the room the Fed needs to raise rates, “if for no other reason,” on analyst suggested, “than to express confidence in the economic recovery.”

INVENTORY CONSTRAINTS

Skimpy inventories, which have consistently plagued the housing recovery, continue to constrain sales and inflate home prices. Although appreciation rates have slowed somewhat, prices were up 5 percent year-over-year in June, according to the Case-Shiller national price index, offsetting to some extent the positive impact of low interest rates. “Until inventory conditions improve markedly, far too many prospective buyers are likely to either be priced out of the market or outbid on the very few properties available for sale,” Lawrence Yun, the

abode-987096_1920NAR’s chief economist, warned in a recent statement. Given those constraints, he cautioned, ‘we may just have hit peak [home buying] levels.”

Underscoring that concern, pending sales, an indicator of future activity, eked out only a tiny 1 percent gain in June after falling by nearly 4 percent in May, compared with the prior month. Depressed inventory levels have held this index below the year-ago figure for 13 consecutive months.

Home construction activity provides some hope of inventory relief: New home starts jumped by nearly 5 percent in June according to the Census Bureau ― the best showing since February — with single-family construction, up 4.4 percent for the month and more than 13 percent for the year.

But even with that improvement, analysts point out, new construction continues to lag demand. “Nationally, new housing supply relative to demand is about 15 percent below the historical average,” Ralph McLaughlin, chief economist for Trulia, notes in a recent statement.

Matthew Pointon, an analyst with Capital Economics, shares that concern. “The bigger picture” in the construction data, he told Housing Wire,” is that there has been no sustained upward progress in homebuilding activity for over a year now.”

AN UNNATURAL PHENOMENON

If nothing else, the Pokémon GO phenomenon is spurring a stream of creative headlines – “Pokémon Go Away” and “Pokémon Whoa”) as condo associations, among others, grapple with the real world effects of this virtual reality game.

pokemon-1581774_1920On-line condominium discussion forums have been filled with complaints about players invading condo properties as they try to nab the elusive ‘Pokémon’ – the object of this modern-day, cell-phone based scavenger hunt. Some ask permission to enter private property; many don’t bother. Some residents are mildly tolerant, but most are not amused. At least one homeowner has asked a court to certify a class action suit against the game’s creators (Nintendo, Niantic and The Pokémon Company), arguing that they have illegally classified private property as Pokémon sites without permission, and are profiting from the result.

There is no question that Pokémon a big deal. According to some estimates, 21 million people are using the I-phone application daily. That represents a lot of people gathering uninvited on a lot of lawns. The Washington Post reported recently that a small town in Virginia has been overrun by hordes of Pokémon, transforming what was once a sleepy, picturesque community into “a virtual-reality super highway.”

Attorneys advise condo owners and boards to deal with Pokémon players as they would with any trespassers – call the police. It is also possible to ask that your property be removed as a Pokémon site by filing an on-line request at https://support.Pokémon go.nianticlabs.com/hc/en-us/articles/222249687-What-can-we-help-you-with.

Not everyone finds the Pokémon game upsetting. One blogger suggested that it is “a great opportunity for condo communities to safely explore their surroundings, learn about local landmarks and develop stronger relationships with neighbors.” But one of the headlines quoted earlier probably comes closer to reflecting the view of most condo boards and managers, who wish Pokémon and its players would “go away.”

IN CASE YOU MISSED THIS

Fannie Mae and Freddie Mac are concerned about a proposed modernization of the national flood insurance program that would allow homeowners to meet a flood insurance requirement with policies issued by private companies.

Consumer confidence in the housing market hit an all-time high in Fannie Mae’s most recent National Housing Survey.

In another sign of a growing housing affordability problem, a recent survey has found that the rents of the lowest-cost apartments are increasing faster than apartment rents overall.

Only 37 percent of the consumers who took a financial literacy test were able to pass it – down from 42 percent who managed to pass in 2009.

Delinquencies are rising on home equity lines of credit, and lenders fear that trend will worsen as more HELOCs begin to reset this year at higher rates.

LEGAL BRIEFS

EXPANDING CONSTRUCTION DEFECT COVERAGE

Opening a liability window insurers had hoped to close, the New Jersey Supreme Court ruled that a contractor’s commercial general liability policy covered damage resulting from work performed by subcontractors the contractor had hired. The unanimous decision (Cyprus Point Condo Association, Inc. v. Towers) is significant because the contract language the court interpreted is included in the standard form produced by the Insurance Service Office (SO) and used industry-wide.

homes-under-construction2The underlying litigation arose when the condominium association sued the developer and several subcontractors for water-related damages to the luxury development resulting from defects in the construction. When the developer asked its insurers to defend the claim, the insurers refused, arguing that the CGL policy specifically excluded coverage for work performed by the contractor itself or by subcontractors working on the contractor’s behalf. A trial court granted summary judgment for the insurers on that point but an Appeals Court overturned that ruling, and the state Supreme Court agreed to consider the insurance company’s further appeal.

The court considered two base line questions: Did the insurance policy cover work performed by subcontractors; and did the damage to the property meet the definition of an “occurrence” that the policy would cover.

On the first question, the insurers had pointed to language excluding damage resulting from “your work” – referring to the contractor’s work on the project. But the court pointed out that ISO issued a revised CGL form in 1986, adding language stating specifically that the “your work” exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

That left the second question underpinning the insurer’s central argument: Whether the damage was an “occurrence,” which the policy defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The Supreme Court agreed with the Appeals Court that the faulty work of the subcontractors, covered by the revised ISO policy language, was responsible for water-related “property damage”; and the event causing that damage – rain penetrating the building – was an “occurrence” under the “plain language” of the policy.

“The result of the subcontractors’ faulty workmanship – consequential water damage to the completed and non-defective portions of Cypress Point – was an “accident,” the court said, which makes it an “occurrence” as defined by the policies, and eligible for coverage under them.

Acknowledging that the New Jersey courts have not previously interpreted “property damage” caused by an “occurrence” under the 1986 ISO language, the Supreme Court relied in part on decisions in other jurisdictions, citing specifically:

  • A Fourth Circuit Court of Appeals ruling that the ISO language covers damages caused by a subcontractor’s faulty workmanship, but would not cover the cost of replacing or repairing the construction flaws themselves; and
  • A Florida Supreme Court decision holding that to conclude that a subcontractor’s defective work doesn’t constitute property damage caused by an “occurrence” “would undermine the subcontractor exception to the ‘your work’ exclusion.”
  • In a recent decision that wasn’t cited by the court (National Surety Corp. v. Westlake Investments, LLC) the Iowa Supreme Court held similarly that, interpreted in light of the ISO’s “completed operations” provision, defective work performed by an insured’s subcontractor “may constitute an occurrence under the policy.”

“These cases, while not controlling, represent a strong recent trend of interpreting the term ‘occurrence’ to encompass unanticipated damage to non-defective property resulting from poor workmanship,” the New Jersey Court concluded.

WORTH QUOTING

“I don’t think we are in a normal housing market…The losers are clearly the rising rental population that isn’t able to participate in this housing equity appreciation. They are missing out on [a big] source of middle-class wealth.” — Lawrence Yun, chief economist, National Association of Realtors.

 

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