LEGAL/LEGISLATIVE UPDATE – JANUARY 3, 2018

Published on: January 3, 2018

TRENDING OLDER

The rental population is trending older and wealthier, the shortage of affordable apartments is becoming more acute, reflecting demographic trends and public policies that are changing the face of the apartment market. Those conclusions come from the 2017 rental housing report published Harvard’s Joint Center for Housing Studies. The report describes two categories of renters: Older, affluent individuals, at or near retirement age, who are choosing to rent, rather than buy, and are finding an array of attractive options in newly constructed buildings in desirable downtown neighborhoods; and younger folks – millennials, mainly — saddled with student loans and income limitations that make it difficult for them to get a toehold in a housing market defined increasingly by rising prices and limited inventories

The median age of renter was 40 in 2017, up from 38 the year before, and more than 13 percent of them were earning more than $100,000, compared with 8 percent a decade ago. But even with those shifts, renters are more likely to be younger and have lower incomes – more than half the households earning $35,000 were renters. A strengthening economy has reduced the number of “cost-burdened” renters, spending more than 50 percent of their income on housing, but the future does not look promising for this group: Congress is considering proposals that would sharply cut government-funded rental assistance programs (primarily Section 8), many currently subsidized units are aging out and returning to the private market, and most new rental construction is concentrated at the higher end of the market.

“While the market has responded to rental housing needs for higher-income households, there are alarming trends that suggest a growing inability to supply housing that is affordable for middle- and working-class renters, let alone those with very low incomes,” Christopher Herbert, the Harvard Center’s managing director, warned.

CREDIT CARD DEBT

Americans are accumulating more credit cards and more debt, reflecting a strengthening economy, but also providing cause for some concern. The Consumer Financial Protection Bureau reports that credit card lines – used and unused, totaled more than $4 trillion as of the middle of last year – still below the pre-recession high of $4.4 trillion, but heading steadily toward that target. Consumers opened approximately 110 million new credit card accounts in 2016 – the largest one-year total since 2007, according to the CFPB. Meanwhile, the delinquency rate, which had plummeted to historic lows since the downturn, has begun to increase again. The uptick last year, though small, was nonetheless “a troubling sign,” Bruce McClary, vice president for communications at the National Foundation for Credit Counseling, told NBC News.

That is not the only danger sign. Average credit card balance, which have increased by about 9 percent overall since 2015, have increased by 26 percent for subprime borrowers, who pay well-above market rates. With the Fed expected to continue ratcheting interest rates upward, many of these borrowers could find themselves in financial trouble. “The larger the credit card balance,” McClary noted, “the more these subprime borrowers will feel the financial squeeze from interest rates that can sometimes be well above 25 percent.”

REVERSING DIRECTION

The National Labor Relations Board (NLRB) has overturned an Obama-era change in the “joint employer” standards, that had greatly expanded the potential liability of employers, including community associations and association management companies, for workplace complaints filed by employees.

The Obama change that had seriously rattled employers of all kinds, broadened the standard for determining joint-employer status. Under the new standard, employees that exercised indirect control over employees might qualify as joint employers, as might employers who had a reserved right to control, even if they didn’t exercise it. The NLRB, now with a Republican majority, voted on party lines to return to the old standard, under which control must be direct, immediate and unlimited.

“Today’s decision restores years of established law and brings back clarity for restaurants and small businesses across the country,” a spokesman for the National Restaurant Association, said in a statement. The NRA was among the many business trade groups that had been lobbying aggressively to overturn the Obama rule.

Responding to those efforts, the House last year approved legislation that restored the old joint employer standard. Industry observers predict that lobbyists will continue to press for legislation, because of concern that a future labor board, dominated by Democrats, might resurrect the Obama era rule.

ROOM TO RUN

Forecasters are predicting that the economic expansion, already the third-longest in U.S. history, still has room to run. Economists responding to a Wall Street Journal survey put the odds of a new recession within the next three years below 50 percent; in the October survey, the recession probability was 58 percent. Optimistic analysts are pinning their predictions on the tax reform bill, which 42 percent think will make a recession less likely; 22 percent think the tax reform measure increases the recession risks, while 37 percent don’t think it affects the recession outlook one way or the other.

“Tax reform will foster greater capital formation and economic growth,” Thomas Kevin Swift, chief economist at the American Chemistry Council, told the Journal. Reflecting the opposite view, Rajeev Dhawan, director of Georgia State University’s Economic Forecasting Center, predicted that tax-propelled stimulus will bring “a very aggressive Fed response,” in the form of higher interest rates, which would “[upset] the apple cart.”

In the housing sector, industry executives predict changes in the deductions allowed for mortgage interest and property taxes will have a negative impact, slowing both home sales and appreciation rates.

“Sales do have room for growth in most areas, but nationally, overall activity could be slightly negative,” Lawrence Yun, chief economist for the National Association of Realtors, predicts, as markets in which home prices and housing prices are high “will likely feel some impact from the reduced tax benefits of owning a home.”

EQUITY GAINS

Although rising home prices have boosted the equity of homeowners and significantly increased their net worth, not all owners have shared those benefits. Many of the owners who were driven underwater by the economic downturn continue to struggle with negative equity. CoreLogic estimates that about 2.5 million homeowners still have mortgages that exceed the value of their homes.

The overall trend remains positive, however. The number of underwater homes declined by 22 percent in the third quarter, compared with the same period a year ago, according to the CoreLogic analysis, as another 260,000 homes moved into positive equity territory; 700,000 have made that move in the past year, adding almost $871 billion to the equity total, CoreLogic reports.

IN CASE YOU MISSED THIS

The median down payment for single-family homes and condos was $20,000 in the third quarter of last year, up from $18,161 in the same quarter of 2016.

Millennials are moving from the sidelines of the housing market to center stage, accounting for an increasing proportion of home purchases in multiple price ranges, and taking on an out-sized amount of debt in the process.

The economy is strong by most measures, but more than 65 percent of consumers are still losing sleep over their finances.

Passage of the tax reform law in December ignited a furious, confused and (for many homeowners) frustrating scramble to prepay property taxes, to fully claim a deduction that will be capped next year. Some industry executives are predicting that the tax changes will also trigger an “exodus” of homeowners from high-tax states to states in which the property tax deduction is less important.

The Seattle City Council has approved new rules designed to limit the impact of short-term rentals on the city’s rental housing stock. Under the new rules, owners will be allowed to own no more than two short-term rental units and rental platforms (such as Airbnb and HomeAway) will be required to obtain “platform licenses.”

LEGAL BRIEF

POISON PILL PREVIEW?

The Massachusetts Supreme Judicial Court (SJC) is expected to decide this year whether so-called “poison pill” provisions restricting the ability of condo associations to sue developers for construction defects and other issues are permissible under state law. Industry executives, including MEEB attorneys who are representing a condominium association in this litigation, are hoping the SJC does not follow the lead of the Colorado Supreme Court, which recently addressed the question.

In the Colorado case (Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc.), an association embroiled in a construction defect dispute with its developer Metropolitan), amended its declaration to eliminate a provision requiring mandatory arbitration of disputes with the declarant. The association obtained the 67 percent vote of owners that the declaration required, but it did not obtain the written permission of the declarant, which the declaration also required to amend the arbitration provision.

When efforts to negotiate a settlement of the construction defect claims failed, the association sued. The developer moved to compel arbitration, arguing that the elimination of that provision was invalid, because the developer had not agreed to it. The trial court sided with the association, ruling that the declarant consent requirement violated the Colorado Common Interest Ownership Act. The Appeals Court disagreed, finding no conflict with the condominium statute. The court also rejected the association’s argument that the state Consumer Protection Act established a right to civil action, because, the court said, under that statute, the right to sue could be waived to permit arbitration.

The Supreme Court addressed both issues. On the ‘poison pill’ requirement that the developer approve revisions in the declaration’s arbitration provision, the association had argued that the provision violated the CCPIA on several points. The first: The statute precludes associations from requiring more than a 67 percent vote to amend a declaration. Requiring the developer’s consent added an additional requirement, which violated that cap. The court read this provision differently, noting that it addressed only the vote of owners. “Nothing in that section’s plain language precludes a declaration from imposing additional (i.e. non-percentage-based) requirements for amendments,” the court said.

The association’s second point targeted a CCIOA provision precluding declarant’s from using any devices intended “to evade the limitations or prohibitions” specified in the declaration or the condominium law. The court found this reasoning flawed, noting that it was based on the assumption the court had rejected – that the condo statute precluded any amendment requirements beyond a 67 [percent owners’ vote. “Because we disagree [with that premise],” the court said, “we cannot conclude that the consent-t0-amend provision represents an illegal attempt to avoid the [presumed] 67 percent limitation.”

The court found flaws in a related argument – that the statute precluded the declaration from imposing any limitations on the association’s power to deal with the declarant more restrictive than its powers to deal with “other persons.” On this point, the court reasoned that it was the owners, and not the association, that had the power to amend the declaration. The developer-consent requirement did not improperly limit the association’s power, the court said, because “it is impossible to limit a power that has not been conferred.”

The court also found that the consent provision did not violate either the statutory intent or public policy. On the contrary, the court noted, in approving the CCIOA, lawmakers “specifically endorsed and encouraged associations, unit owners, managers, declarations and all other parties to disputes arising under this article to agree to make use of all available public or private resources for alternative dispute resolution.” Given that language, the court said it could not conclude that the consent-to-amend provision “contravenes any of the CCIOA’s policies or purposes…. Indeed… [the provision] appears to be fully consistent with both CCIOA and Colorado’s public policy favoring arbitration as a mechanism of alternative dispute resolution.

The association found no relief under the Colorado Consumer Protection Act, on which it had also relied. The argument here was that because the statute created a right to sue, the association’s construction defect suit was not subject to the declaration’s arbitration requirement. The court disagreed. Unlike other statutes creating a right to sue, the court noted, the CCPA does not include a non-waiver provision. Citing previous decisions, the court noted, “the absence of particular language is usually considered an indication of legislative intent, not a mere oversight.”

The court was similarly unpersuaded by the association’s argument that the Colorado Construction Defect Reform Act precluded waiver of the right to sue. The association cited language rejecting as “contrary to public policy…any express waiver of, or limitations on the legal rights, remedies or damages” specified in this statute or in the Consumer Protection Act. But the court pointed out that the sentences preceding those the association quoted made it clear that the statute was precluding restrictions “within the context of a civil action or arbitration proceeding…. It does not preclude the arbitration of Consumer Protection Act claims themselves. To the contrary,” the court said, the statute “expressly envisions the possibility of arbitration proceedings involving CCPA claims.”

WORTH QUOTING

“Continuing to raise rates in the absence of increasing inflation could needlessly hold down wage growth while potentially increasing the chance of a recession…While the yield curve has not yet inverted, the bond market is telling us that the odds of a recession are increasing.” ─ Neal Kashkari, President, Federal Reserve Bank of Minneapolis.


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