LEGAL/LEGISLATIVE UPDATE – JULY 21, 2017

Published on: July 21, 2017

A HIGH NOTE

Massachusetts lawmakers working on implementation language for the voter referendum legalizing recreational use of marijuana in the state have agreed on a compromise that would tax retail sales of the drug at a 20 percent rate. The House version of the bill had called for a 28 percent rate; the Senate version retained the 12 percent rate proposed in the initiative voters approved last November.

The 20 percent tax on marijuana sales that lawmakers have endorsed is below the rate approved by other states that have approved recreational marijuana use. But Rep. Mark Cusack (D-Braintree), who was involved in the negotiations, said legislators “feel confident this will bring in enough revenue to properly implement and regulate this new marketplace and allow us to invest in key areas, such as substance abuse.”

The compromise language approved by House and Senate negotiators also resolves a dispute over local control of retail marijuana shops. Under the compromise, in the 260 communities where voters approved the marijuana measure, a voter referendum would be required to restrict or ban local retail marijuana stores. In communities where voters opposed the referendum, the city council or board of selectmen could vote to ban the stores.

EMPLOYMENT GAINS

The June employment report provided a strong dose of good economic news, as employers added 220,000 jobs for the month, erasing a weaker-than-expected May report. Revisions added nearly 50,000 jobs to the relatively weak April and May reports. The unemployment rate inched up slightly, as nearly 5 million discouraged workers, who had given up on finding jobs, re-entered the market.

Wage gains remained smaller than economists would like to see, but apparently large enough to make consumers feel better about their finances. More than one-third of the adults responding to a New York Federal Reserve survey said they are better off economically today than they were a year ago (a high point for this survey since it was introduced four years ago) and more than half said they expect to spend more this year than they did last year.

Somewhat less encouraging for the Fed, which is basing its rate-hike plans on the expectation that inflation will increase, consumers’ inflation expectations, reflected in the New York Fed survey, have declined to a four-year low. But longer-term inflation expectations ― over the next three years — have jumped, lending some support for the Fed’s assumption that the current inflation lag won’t last much longer.

“LOPSIDED” CONDITIONS

Despite the drag created by the shortage of listings and the affordability pressure created by still rising prices, existing home sales increased by a little more than 1 percent in May compared to the previous month, totals for which were revised lower.

“The fact that sales of existing homes rose in May, despite incredibly limited selection, shrinking times on market and rapidly rising prices, is a testament to just how strong the draw to homeownership is right now for millions of Americans,” Svenja Gudell, chief economist for Zillow, told Housing Wire “It’s no exaggeration to say that current buying conditions in many markets are terrible, with sellers in complete control and buyers forced to contend with cutthroat competition and intense pressure to make a deal,” she added.

“Current demand levels indicate sales should be stronger,” the NAR’s Yun added, “but it’s clear some would-be buyers are having to delay or postpone their home search because low supply is leading to worsening affordability conditions.”

Listing constraints appear to have cut sharply into pending sales, which declined in May for the third consecutive month. The problems are most apparent at the lower end of the price range: Compared with last year, pending sales declined by more than 7 percent for homes priced below $100,000, and increased by only 2 percent for homes priced between $100,000 and $200,000. By stark contrast, pending sales for homes priced between $750,000 and $1 million jumped by 26 percent.

Those disparities are creating “lopsided” conditions, Yun said, with investors and repeat buyers with large down payments accounting for the bulk of activity in many markets.

Although new home sales increased in May (reversing a steep May decline), housing starts and permits for new construction both declined, deepening the concern of housing analysts who fear that today’s housing shortage could turn into a full-fledged housing emergency.

THINKING VS. DOING

Recent housing reports reflect a significant and increasing disparity between what consumers are saying and what they are doing. Although more than 70 percent of the homeowners responding to the National Association of Realtors’ (NAR’s) quarterly HOME survey said they think this is a good time to sell, those positive thoughts haven’t produced an increase in listings, which remain sparse.

“There are just not enough homeowners deciding to sell because they’re either content where they are, holding off until they build more equity, or hesitant [because they see] it will be difficult to find an affordable home to buy,” Lawrence Yun, the NAR’s chief economist, suggested. Whatever the reasons, the reluctance of existing owners to sell their homes is starving the market of the inventory it needs to keep pace with buyer demand.

Drawn in part by the prospect that mortgage rates will be increasing, more buyers are entering the market, but the lack of inventory is leaving many frustrated. Those frustrations are reflected in the widening confidence gap between potential sellers and potential buyers. The percentage of homeowners who think this is a good time to sell jumped by 7 points in Fannie Mae’s Home Purchase Index for the second quarter, while the share of renters who think this is a good time to buy rose by only 3 points.

MEDIATION DISPUTE

A pending rule that would bar mandatory arbitration agreements in consumer financial products (mainly credit cards and bank accounts) has ignited a rare public spat between federal regulators, who, it seems, might benefit from mediation themselves.

Citing potential “safety and soundness” concerns for financial institutions, Acting Comptroller of the Currency Keith Noreika, asked the Consumer Financial Protection Bureau (CFPB) to allow the Office of the Comptroller of the Currency (OCC) to review the data on which the CFPB based the rule, which bars contractual provisions requiring consumers to arbitrate disputes and prohibiting them from initiating class action suits to challenge alleged abuses.

Expressing surprise at the request, CFPB Director Richard Cordray noted that the rulemaking process for the arbitration rule had “spanned more than two years,” and this was the first time the OCC had raised any questions about it. Noreika repeated his data request in a follow-up letter, asking Cordray to delay publication of the rule pending the OCC review.

Making no effort to disguise his annoyance, Cordray fired back, flatly rejecting the request. The OCC, he said, had not explained why it would be “appropriate” to derail the regulatory review process “to review a claim that is so plainly frivolous….I continue to fail to see any plausible basis for your claim that the arbitration rule could somehow affect the safety and soundness of the banking system,” Cordray stated.

The OCC isn’t alone in pushing back against the CFPB rule, which has been unpopular, to say the least, with financial institutions and with Republican lawmakers. Sen. Ron Cotton (R-AK) has initiated a process, authorized by the Congressional Review Act, through which legislators can rescind a rule adopted by a regulatory agency.

“The last thing Americans need is more anti-business regulation that will prompt frivolous lawsuits while hurting consumers,” he said in a press statement. The opposition has not altered Cordray’s plan to implement the rule, which will become effective 60 days after publication in the Federal Register and apply to contacts signed 180 days after that.

IN CASE YOU MISSED THIS

A recent study has concluded that medical marijuana dispensaries actually reduce crime in the areas in which they are located. However, other studies have found that crime rates increase in areas “nearby” those in which dispensaries are located.

The number of equity-challenged underwater borrowers, with mortgages exceeding the current value of their homes, has fallen below the two-million mark for the first time in 11 years. But the number of households spending more than 30 percent of their income on housing costs has increased by more than 145 percent, and nearly half of all Americans have total expenses exceeding their income.

More buyers are making offers on homes they have seen only in photos, but not in person.

Several Senate Democrats, led by Sen. Tim Kaine (D-VA) are sponsoring legislation that would add gender identity and sexual orientation to the categories protected from discrimination under the federal Fair Housing Act. “No American should be turned away from a home they love because of who they love,” Kaine said.

Purchases of U.S. residential property by foreign buyers and recent immigrants increased by nearly 50 percent over the past year, from $102.6 billion to $103.9 billion. The statistics indicate that “foreigners increasingly acted on their beliefs that the U.S. is a safe and secure place to live, work and invest,” Lawrence Yun, chief economist of the National Association of Realtors, said.

LEGAL BRIEFS

VOTING RIGHTS

“One man – one vote” is a fundamental democratic principal. Members of the London Towne Homeowners Association applied that principal when they revised the community’s bylaws, replacing a provision that allowed owners to cast one vote for each unit they owned with one that allowed only one vote per owner, regardless of how many units they owned. As a result, an owner of 12 units, who had previously been entitled to cast 12 votes, was allowed to cast only one. He sued, arguing that the bylaw amendment illegally deprived him of property rights protected by both state law and the condominium declaration. In an appellate decision (Serota v. London Towne Homeowners Association) the Commonwealth Court of Pennsylvania agreed.

In siding with the owner (Serota), the trial court and the appeals court considered the declaration and the Pennsylvania Uniform Planned Community Act (PUPCA), which was enacted after the condominium was created.

 

The declaration and the bylaws both allocated a single vote to each unit, allowing owners to cast a vote for each unit they owned. The declaration also allowed associations to amend their bylaws with the approval of 75 percent of the owners. The PUPCA requires the unanimous consent of owners affected by a bylaw amendment. But it also specifies that the law’s provisions would not apply automatically to a community created before the law took effect “if the result accomplished by the amendment was permitted by [another statute predating the PUPCA].” In that case, the PUCPA says, bylaw changes must comply with that prior law and with the requirements of the community’s governing documents.

The association argued that the bylaw change reducing Serota’s voting rights met those requirements: It was approved by the required 75 percent of owners (per the governing documents); and it was not superseded by the PUCPA.

If the PUCPA did not apply, the appeals court reasoned, the bylaw change must be authorized by another statute. The association argued that the Pennsylvania Nonprofit Corporation Law, in effect when the condominium was established, allowed corporations to modify their governing documents “as desired.”

But the court pointed out that in a case challenging that statute, the Pennsylvania Supreme Court had ruled that nonprofit corporations could not “diminish the substantial property or contractual rights a shareholder had acquired under previously existing bylaws [or] other governing documents, without the shareholder’s consent.”

The association argued that Serota’s voting rights fell outside of that protective umbrella, because they involved association governance and not the financial interests with which the Supreme Court was concerned. The appeals court disagreed.

“Voting rights are considered the basic and fundamental right of a shareholder,” the court noted. The bylaws and declaration in effect when Serota purchased his lots granted him the right to cast a vote for each lot, the court argued, and his voting rights , “by the terms of the declaration, run with the land and are ‘binding on all parties having any right, title or interest in the numbered lots, their heirs, successors and assigns…’”

Dismissing the association’s contention that voting rights were not ‘financial interests,’ the court noted that Serota was required to pay assessments and fees on all the lots he owned and “had a proportional vote in the financial decisions of the association,” because of the financial impact those decisions would have on his units. “The diminishment of that proportional say in the financial decisions and the financial impact he will experience as a result does involve his pecuniary interests,” the court said. As a result, the association could not alter the allocation of voting rights without his assent.

WORTH QUOTING

“It’s premature to reach the judgment that we’re not on the path to 2 percent inflation over the next couple of years….We’re watching this very closely ─–Federal Reserve Chair Janet Yellen, testifying before the House Financial Services Committee.


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