LEGAL/LEGISLATIVE UPDATE – MARCH 1, 2016

Published on: March 1, 2016

DRONE CHALLENGE

drone.460A consumer technology group is challenging the Federal Aviation Administration’s (FAA’s) rules requiring the registration of recreational drones. In a suit filed in the Court of Appeals for the District of Columbia, TechFreedom alleges that the FAA does not have the authority to regulate drones and if it does, the agency violated procedural requirements by failing to hold hearings and solicit public input before adopting the registration requirement.

“Whether or not requiring drone registration is a wise policy, the rules the FAA rushed out before Christmas are unlawful,” Berin Szoka, president of TechFreedom, said in a press statement.

FAA officials contend that the agency has the authority to regulate all “aircrafts” flown in the United States. “Congress has defined ‘aircraft’ to include [drones], regardless of whether they are operated by modelers and hobbyists,” the agency said in a press statement.

More than 325,000 owners had registered their drones as of the second week in February, exceeding the 320,000 registered manned aircraft. FAA Administrator Michael Huerta said the speedy response indicates that the registration program is succeeding. But he has also acknowledged that the registration effort has a long way to go. The FAA estimates that more than 1.6 million recreational drones were sold last year; the Consumer Technology Association estimates that another 1 million will be sold in 2016.

“Our challenge is to make sure everyone is aware of the requirement and registers,” Huerta said in a recent speech at a CTA conference. The FAA rules require registration of recreational drones weighing between half-a-pound and 55 pounds. Registration costs $5; failure to register carries penalties of up to $27,500.

IMMIGRATION AND HOUSING COSTS

The debate over illegal immigration, which has occupied center stage in the Republican presidential primaries, also has implications for the housing industry, according to industry experts, who say slowing immigration would reduce the supply of construction workers, forcing homebuilders to increase the price of new homes.

fairhousing_460More than two-thirds of the respondents to a Zillow survey shared that view; more than 40 percent agreed that higher labor costs would force builders to concentrate on luxury homes and scale back the production of less expensive ones; and 30 percent agreed that labor shortages are already contributing to shrinking inventory levels. Separately, more than three-quarters of the homebuilders responding to a Bureau of Labor Statistics survey cited the cost and availability of labor as their major concern this year.

“The supply of homes for sale isn’t keeping up with demand—especially among entry-level homes that first-time buyers want,” Svenja Gudell, chief economist for Zillow, said. “New-home construction has been sluggish, and homes that are getting built are aimed at a higher-end clientele,” she added, noting, “If builders hire relatively more expensive U.S.-born workers, they may continue to focus on the more profitable higher end of the market.”

The study attracted some blow-back from readers posting on-line comments. One signing in as “TheHumbleOneIndeed” termed the Zillow analysis “BS! If we deport 30,000,000 illegals the demand for housing will go down dramatically increasing the supply hence reducing the cost of housing. This will also reduce the cost of raw materials since the demand will be greatly reduced. To me, this sounds like concerned and greedy real estate people whining about their incredibly inflated home market deflating once illegals are deported.”

SUBPRIME GROWING AGAIN

Subprime mortgages, which became a shorthand for the shoddy underwriting practices that contributed to the housing market’s collapse, are coming back, but in smaller numbers and in what industry executives say is a different and more responsible form.

Equifax reports that loans to borrowers with subprime credit scores (below 620) increased by almost 30 percent in the first 10 months of last year. But those loans represented a relatively small (4.7 percent) share of total loan originations, compared with nearly 8 percent in 2008 – the year the housing market imploded. Even more significant, the report notes, subprime borrowers are not receiving the high-risk (no-documentation, interest-only) loans lenders were writing in ‘the bad old days.’

“Now we would look back and call those really dirty subprime,” Amy Crews Cutts, chief economist for Equifax, noted in a press statement. “While there are many characteristics that define a subprime loan, such as the specific terms of the loan and the lender who issues it, credit standards are becoming more accommodating to meet market demand,” she emphasized. “At the same time, lenders are focusing more attention on evaluating consumers’ ability to repay. This has led to a much larger reliance on third-party data verifications that enable lenders to more accurately vet subprime borrowers much earlier in the origination process.”

PATENT TROLLS HITTING APARTMENT OWNERS

You might not expect to find housing industry executives among the supporters of patent reform legislation, but trade groups representing rental property owners are pushing hard for restrictions on “patent trolls,” who purchase broad patents and then allege unsubstantiated patent violations, assuming that their targets will pay the licensing fees they demand rather than incur the expense of a costly legal fight.

According to the National MultiHousing Council (NMHC), real estate companies have been the victims of spurious patent claims involving “off-the-shelf” technology products, Wi-Fi systems, Web-based marketing and transaction platforms and “even routine construction practices.“

“Frivolous, unsupported patent infringement claims are a costly drain for the real estate sector and the economy as a whole,” the trade group explains. “[Trolls] force targeted companies to pay up or mount an expensive and long defense. [They] abuse the current system by acquiring broad patents to launch vague enforcement actions against multiple “end user” business consumers.

The NMHC and the National Apartment Association are urging the adoption of legislation that would make patent regulation and enforcement “more transparent” by requiring patent holders to provide more detail in their demand letters about the infringements they are alleging, and making it more costly for them to pursue frivolous claims.

Lawmakers have considered a variety of measures and the House even passed one of them (the Innovation Act) with strong bipartisan support last year. But the Senate hasn’t matched it and supporters of patent reform in both the House and Senate remain divided on how to curb abuses without impeding innovation and unfairly burdening patent holders who have legitimate infringement claims.

A NEW CYBER-SECURITY CZAR

security-265130_1920The Obama Administration wants to create a new high-level administrator responsible for coordinating public and private-sector efforts to beef up cybersecurity. The President’s 2017 budget proposal – the last he will submit before his term ends ― would add $19 billion to cybersecurity funding for all government agencies, a 35 percent increase over the current funding level, to advance a “Cybersecurity National Action Plan.” The plan would encourage more private sector cyber-security training and require stronger security controls on access to government files containing tax data and information on government benefits.

The centerpiece of the plan is the new administrator, who would bring oversight and consistency to the cybersecurity efforts of various government agencies. “[Under the current structure], every agency, and in some cases, sub-agencies, are building their cyber defenses pretty much on their own,” Tony Scott, the U.S. Chief Information Officer, said in a press statement. As a result, he noted, different agencies have “varying levels of expertise and capabilities, and small agencies struggle with the same challenges as larger agencies, but with fewer resources to address them. That’s just frankly a bad model of how to defend against the critical adversaries [we are facing],” he said.

IN CASE YOU MISSED THIS

Former FHA Commissioner Carol Galante is joining the board of Ocwen Financial Corp. Targeted by regulators for consumer protection violations over the past several years, the mortgage servicing company has been working to overhaul its practices and improve its public image.

Home owners assume correctly that home values have been improving, but most drastically under-estimate the amount of equity they have.

Mortgage delinquency rates, which have been improving steadily for the past three years, have now fallen below their historic averages, according to the Mortgage Bankers Association.

Scant inventories of homes for sale are triggering bidding wars again in some markets, resulting in more homes selling above their asking price.

A recent study (not the first) has found that fallout from the housing crisis has disproportionately affected minority borrowers, making it more difficult for them to purchase homes.

LEGAL BRIEF

SAY WHAT YOU MEAN – AND SAY IT CLEARLY

Oral contracts, we know, aren’t worth the paper they’re written on. Ambiguous contracts may have the same problem. Finding the leasing restrictions in this condo association’s documents to be ambiguous, the Massachusetts Appeals Court ruled (in Boston Redevelopment Authority v. Pham) that an owner who shared his unit with rent-paying roommates didn’t violate either the association’s leasing restrictions or its occupancy requirements.

Boston-Redevelopment-Authority_Orange-and-BlackThe owner, Jeffrey Pham, won a lottery that allowed him to purchase a unit in an affordable housing development financed by the Boston Redevelopment Authority (BRA). The purchase documents he signed included an affidavit affirming that he was occupying the unit as his principal residence and also affirming that he agreed to abide by the condominium’s covenants, bylaws, rules and regulations. The covenants specifically precluded “the leasing of units to others as a regular practice for business, speculative, investment or other similar purpose.” Another provision allowed Pham to lease his unit, but only with prior approval from the BRA, and provided that the rent he received did not exceed 115 percent of his monthly housing costs.

When Pham first occupied his unit, his sister moved in with him, as he had indicated she would in his purchase application. When she moved out two years later, a succession of roommates followed, from whom Pham collected contributions toward his monthly housing cost of $3,000. Those contributions never exceeded $1,500 per month.

Pham travelled extensively for work and spent considerable time visiting his girlfriend (whom he subsequently married) who lived in another state. As a result, he was often absent from his unit for several weeks at a time. His prolonged absences spurred a complaint from another trustee, who said Pham (also a trustee) had missed all but one board meeting and had rented his unit to one tenant for more than the 12 months the bylaws allowed.

The BRA investigated and concluded that Pham was not occupying the unit as his principal residence and had rented it to tenants without obtaining BRA approval, as the covenants required. Based on those findings, the BRA ordered Pham to provide evidence that he was no longer renting the unit, repay to the BRA all payments he had received from his roommates, and arrange to sell his unit within six months to another qualified affordable housing buyer. When he refused to comply, the BRA sued.

The Court’s Decision

A Superior Court sided with Pham, concluding that while the covenants prevented him from renting his unit to a tenant, they did not preclude him from having roommates who contributed to his housing costs. The Appeals Court upheld that decision.

On the first question (occupancy), the Appeals Court agreed that the covenant clearly required Pham to occupy the unit as his primary residence. The BRA contended that he was not “physically present’ in the unit frequently enough to satisfy that requirement. But the court noted that other cases have made it clear that “residence if a word of varied meanings.”

Because the BRA did not specify how long Pham had to be present to meet the requirement, the Superior Court concluded, based on other factors, that Pham met the occupancy requirement: because he maintained his valuable personal possessions in the unit, identified it as his address for tax and other official purposes, maintained the utilities there in his name and never purchased or rented another residence.”

The Appeals Court agreed. “We discern no intention reflected in the BRA documents to prevent purchasers of affordable housing units from pursuing or taking jobs that require frequent travel, provided they maintain the affordable housing unit as their home base,” the court said. “Indeed, any such restrictions on employment appear inconsistent with the goals of assisting persons of moderate and middle income to thrive in difficult economic circumstances as reflected in the covenant.”

A Distinction with a Difference

The court also sided with Pham on the question of whether he had violated the leasing restrictions when he replaced his sister with roommates who contributed toward his monthly housing expenses, drawing a distinction here between renting a unit for business purposes, which the covenants prohibit, and accepting payments to help defray housing expenses, which the court said, is not explicitly barred.

While conceding the basic point — that the documents do not specifically bar roommates ─ the BRA contended that because Pham’s roommates were neither family members nor close personal friends, accepting payments from them constituted a business use of the unit, violating the master deed.

But the appeals court said it could find no language in any of the documents prohibiting unrelated persons from living together in the unit. “We therefore discern no support for the BRA’s assertion that only family members or persons with close personal relationships may live as a roommate with the owner without transforming it into a business investment.”

The contributions roommates make toward the unit’s carrying costs are a factor the court must consider in determining compliance with the leasing restrictions, the court agreed, but that factor “is not dispositive.” Because Pham’s housing costs represented half of his monthly income, the court noted, he could not have afforded the unit without the financial assistance he received, first from his parents (when his sister was living in the unit) and then from roommates after she left.

Fatal Ambiguities

“The controlling documents do not prohibit Pham from making the personal financial decision to share his housing unit with a roommate who is not a family member or friend in order to reduce his costs and make the unit more affordable. If the BRA intended to preclude such a decision, with the resulting financial pressures it thereby places on the moderate and middle income owner occupiers it intends to serve, it must do so unambiguously,” the court concluded.

Ambiguity also counted against one sentence in the Master Deed that might otherwise have supported the BRA’s contention that Pham should have obtained prior permission before accepting roommates. This sentence read: “No Affordable Unit may be occupied by anyone other than its owner or leased to anyone without the express written consent in advance of the municipality as set forth in the LDA.” But the BRA didn’t make that sentence a “focal point” in the litigation, the court noted, nor did the agency cite the language in notifying Pham that he was violating the covenants. The court also found this language to be “conspicuous” by its omission from any of the other primary documents describing the affordable housing restrictions.

“Indeed, situated as it is between provisions requiring owner occupation and controlling rental of the entire unit, it remains unclear to us whether this sentence…requires written consent for a person to occupy a room and shared space in the unit when the owner also continues to occupy the unit.” And that ambiguity, the court said, “should not be construed against Pham.”

WORTH QUOTING

“The stock market seems to be pricing in a steep decline in the economy and, along with it, our sector. We, on the other hand, are seeing signs that reflect strength and positive momentum in our business based on six consecutive quarters of year-over-year contract growth in both dollars and units.” ― Toll Brothers Executive Chairman Robert Toll, disputing predictions that the housing market has begun to cool.

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