LEGAL/LEGISLATIVE UPDATE – JANUARY 16, 2018

Published on: January 16, 2018

A HEALTHY START

The consensus view of economists last year was that both inflation and unemployment would be higher at year’s end. They were wrong on both counts. Inflation has remained stubbornly (and surprisingly) below the Federal Reserve’s targets, and the employment market has been strong. The 148,000 jobs created in December fell well short of expectations, but the number was positive (employers hired more folks than they fired) for the 87th consecutive month, extending what is already the longest period employment growth on record. Most economists expect the positive employment trend to continue this year, with job gains less robust but still healthy.

“The job market is very healthy as 2018 begins,” Stuart Hoffman, an analyst with PNC Financial Services Group, told Business Insider. “The solid economy will add about 140,000 jobs per month this year, well above the pace of the underlying growth in the labor force, so the unemployment rate will decline to 3.7% by year-end 2018.”

There is less certainty in the forecasts for income growth, but there appears to be a growing consensus that the strong wage growth, elusive throughout the recovery will surface this year, as employers compete more aggressively for the workers they need in a growing economy. But some analysts are predicting that employers will choose to compete by increasing benefits rather than by boosting salaries.

INTEREST RATE OUTLOOK

Janet Yellen

Jerome Powell

The Federal Reserve increased interest rates by a quarter of a point at its December meeting – a move Fed officials had telegraphed clearly in advance. Most analysts expect the Fed to remain on the track policy makers have defined, to raise rates at least three times this year and twice in 2019 reflecting expectations that the economy generally, and the labor market, will remain strong. A change in leadership at the Fed, as Jerome Powell Succeeds Janet Yellen, isn’t expected to bring a change in policy direction. Mortgage rates are heading up – hardly a surprising prediction given the Fed’s anticipated rate increases this year. The consensus forecast puts the 30-year rate around 4.7 percent by the end of this year compared with an average of just over 4 percent in November of 2017. “Not only are mortgage rates higher [than they have been], rates will be at the highest level since 2011,” according to Frank Nothaft, chief economist for CoreLogic, who predicts, “We’re looking at an environment, going forward, where this era of cheap mortgage rates will largely be behind us.”

TAX REFORM

The sweeping tax reform legislation enacted at the end of last year colors many of the forecasts for this year, but doesn’t appear to alter them substantially. “Don’t expect to see much impact on either jobs or wages anytime soon from the tax bill,” Andrew Chamberlain, chief economist for Glassdoor, wrote in his 2018 forecast. The consensus view is that tax reductions will have a modestly positive impact on growth over the next two years; long-term, the forecasts are less positive. Ninety percent of the economists responding to the Wall Street Journal survey cited earlier said they expect the tax changes to increase GDP this year and next; but 47 percent say the tax changes will either have no impact, or will weaken growth going forward; 22 percent said the tax bill will increase the risk of a recession beginning by late in 2020.

Lewis Alexander, chief U.S. economist at Nomura Securities, predicts that tax cuts and increased government expenditures will add 0.7 percent to GDP growth this year, and 0.2 percent in 2019. Goldman Sachs analysts have revised their growth forecasts for 2018 and 2019 upward by 0.3 percentage points and 0.2 percentage points to reflect tax reform stimulus.

The biggest concern cited by many analysts, is that the tax cuts will over-stimulate the economy, triggering aggressive rate hikes by the Fed to counter inflationary pressures, a scenario that would “upset the apple cart,” Rajeev Dhawan, director of Georgia State University’s Economic Forecasting Center, and one of the analysts quoted in the WSJ survey, warned.

DON’T LET BED BUGS BITE

Cities that end up on “top 10” lists usually trumpet the results. Who wouldn’t want to brag about being among the “most livable,” “most affordable” or “most healthy” metropolises? But don’t expect Baltimore to issue a press release announcing its top ranking among cities most plagued by bed bugs. That list is based on a calculation by the pest control company, Orkin, of the number of treatments ordered to eliminate the pests in 2017. And it’s’ the second consecutive year Baltimore had claimed this dubious title. Washington, D.C., Chicago, Los Angeles, and Columbus, Ohio rounded out the top 5 on the 2017 list. Bed bugs aren’t new ─ they are mentioned (not fondly) in the Bible. But mobility and global travel have exacerbated the problem over the past decade, producing what is estimated to be a multi-billion-dollar industry to deal with it.

The pests don’t just nibble on people; they take a huge bite out of the bottom lines for owners of properties vulnerable to infestations, multifamily (apartments and condominiums), office buildings and hotels, among them. Hotels have been especially hard-hit. Four out of five hotels responding to a recent survey had treated for bed bugs in the past year, reporting an average of nearly $6,400 per incident in lost revenue and treatment costs. Litigation expenses added another $17,000 to that per incident total.

NEW YEAR – OLD HOUSING PROBLEMS

The trends that challenged the housing market last year ─ scant inventories and rising prices ─ will continue to plague it in 2018, industry analysts predict, mitigated somewhat by a strong economy and solid employment gains. Lawrence Yun, chief economist for the National Association of Realtors (NAR) expects the capping of the mortgage interest deduction, the increase in the standard deduction and limits on the deductibility of state and local property taxes (key features of the newly enacted tax reform legislation that the NAR opposed) will have a “mildly negative” impact on home sales this year, with strong economic fundamental largely cushioning the blow.

“The strengthening economy, and expectation that more millennials will want to buy, serve as promising signs for solid homebuying demand next year,” Yun predicts. But those trends will also exacerbate the pressures created by inventory shortages and rising prices in many markets, he cautions. Markets in which home prices and property taxes are high “will likely feel some impact” from tax changes that have reduced the benefits of home ownership.

Yun’s bottom line: Existing home sales this year will match and may fall slightly below t, the 5.54 million totals expected for 2017, with price increases moderating to an average of around 2 percent for the year.

Rob Dietz, chief economist at the National Association of Home Builders, expects tax reform to put a significant dent in new home sales, producing a year-over-year increase of only about 5 percent, rather than the 10 percent to 15 percent gain industry analysts had been predicting. “The longer-run trends will remain in place but there are going to be transition effects due to tax reform,” Dietz told the Wall Street Journal.

IN CASE YOU MISSED THIS

›The construction industry added about 30,000 jobs last month, building on steady gains and fueling hopes for a construction boom this year.

›Renters consistently cite on-site fitness centers as a must-have in apartment buildings they will consider. More than 80 percent say this is a priority for them. But fewer than 40 percent actually use the facilities in their buildings.

›Los Angeles is now the nation’s least affordable housing market according to a recent survey, edging out San Francisco, which held that position for the past five years.

›New home sales, which typically slip around the holidays, didn’t last year. The Mortgage Bankers Association reports that applications for new loans were 18 percent higher in December than November.

›The Department of Housing and Urban Development is delaying by two years an Obama Administration policy requiring municipalities to look for evidence of bias in local housing patterns and adopt corrective policies, if necessary. HUD officials say elected officials need more time to understand the new policy and technical assistance to implement it.

LEGAL BRIEF

ARBITRATION AND ASSESSMENTS: A ‘TWO-FER’

We’re going to cover two recent decisions in this update, selected because the issues they raise, while different, are both timely and topical for condominium associations.

The first, Greenbriar Oceanaire Community Association, Inc., vs. U.S. Home Corporation, focuses on the enforceability of mandatory arbitration agreements against condo associations; the second, Davis v. Lakewood Property Association, Inc., considers the applicability of the “business judgment rule.”

In Greenbriar, a New Jersey condo association filed suit against the developer of the community, alleging construction defects, violations of pre-sale disclosure requirements and breaches of fiduciary duty, among other claims.

The developer moved to compel arbitration of the dispute, as required by a mandatory arbitration requirement in the purchase agreements signed by owners. The association argued that the arbitration provision did not cover claims submitted on the association’s behalf, because while owners had accepted it, the association had not. A trial court concluded otherwise and sided with the developer; the appeals court went the other way, agreeing that the association could not be bound by agreements to which it was not a party.

That conclusion didn’t resolve the dispute entirely in the association’s favor, however. The issue was a bit muddled, the court said, because the association had “conflated” some of its claims with those submitted on behalf of owners. The key question, the court said, was whether that conflation left it with only two options: “Either compel arbitration of all the claims or none of them.”

The court decided that it “need not be left lost in the confusion created, intentionally or otherwise, by the pleadings,” but rather, should craft a decision that would “ensure a correct resolution” of the dispute. Accordingly, the court remanded the case to the lower court to distinguish between claims attributable to the owners, which would be subject to arbitration, and those attributable to the association, which would not.

Davis v. Lakewood Property Owners Association, the second case on our list, considers the business judgment rule, and finds the protection it provides board members to be somewhat less sturdy than they may assume. That protection didn’t survive this dispute challenging the process the board of a Missouri condominium association used to calculate an increase in the common area fee.

The association’s 1973 declaration authorized the board to levy an annual assessment without the approval of owners, as long as the assessment did not exceed a maximum amount, which the board was required to calculate each year, based on a formula the declaration described. Under that formula, starting from the baseline assessment of $200 in 1974, the maximum assessment could be increased each year by an amount equal to 150 percent of the rise, if any, in the Consumer Price Index (CPI) published for the preceding July.

Apparently, no one objected to those calculations, at least not publicly, until 2015, when the board increased the levy by $84, from $1,236 to $1,320. Two owners complained that the increase exceeded the maximum allowed without a vote by owners.

In the ensuing litigation, the board indicated that it had been calculating the amount by which the CPI increased each year compared with the base year of 1973. Although the original bylaws echoed the language in the covenant describing how this calculation was to be made, an amendment to the bylaw adopted around 1979 substituted a mathematical formula, which boards had been using ever since.

The trial court accepted the association’s argument that the board had acted in good faith, based on historical precedent and within the authority granted by the declaration, and so was protected by the business judgment rule. The complaining owners appealed, contending that because the formula the board used was not authorized by the declaration, they had exceeded their authority, which negated application of the business judgment rule.

The appeals court began its analysis by pointing out that the bylaws stated specifically that in any conflict with the declaration, the declaration would control. That wasn’t a good omen for the association, and precedent didn’t improve the outlook.

 

The court found this case to be indistinguishable from a previous decision involving an association using the same assessment formula. In that case, the appeals court had concluded that the maximum assessment had to be based on the year-over-year change in the CPI, as required by the Declaration, not in the cumulative change over many years.

The same logic applied to this case, the court said. As in the earlier case, the court noted, “the unambiguous language of Lakewood’s Declaration limits the amount of the increase in the maximum annual assessment without a vote of the membership to the increase in the CPI over the preceding year. The Declaration does not authorize the Board to increase the maximum annual assessment based on the cumulative increases in the CPI since Lakewood’s inception.”

The fact that the board had been using a formula outlined in the bylaws over a long period of time did not make that formula correct, the court added. The board’s calculation, though made in good faith, nonetheless exceeded its authority, the court concluded. As a result, board members were not protected by the business judgment rule.

WORTH QUOTING

“…[S]ome of the catastrophic events, such as the series of three extremely damaging hurricanes, or the very severe flooding in South Asia after extraordinarily heavy monsoon rains, are giving us a foretaste of what is to come. Our experts expect such extreme weather to occur more often in future.” ─ From a report on climate change published recently by Munich Re, a Munich, Germany-based reinsurance group.


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