Leasing

Rent Control Rears Its Ugly Head Once Again

by Rich Vetstein on March 29, 2019

Recent Studies of Cambridge and San Francisco Prove It Not Only Doesn’t Work But Results In Gentrification, Displacement and Higher Rents

Rent control. Like a diseased zombie rising again from the dead after 25 years. Banned statewide by a voter referendum in 1994 and widely proven ineffective and counter-productive by economists, the debate over rental control is back in Massachusetts. As reported in the Boston Globe, a group of liberal urban lawmakers are readying legislation which would effectively override the 1994 voter ballot question, and allow cities and towns to impose rent control as a mechanism to curb rent increases and encourage affordable housing.

I’m all for a robust, healthy debate, so allow me to weigh in. The great thing about the 1994 vote banning rent control is we now have empirical data and a reliable study from prominent economists which has compared the Cambridge housing market during rent control vs. after rent control. We also have data and a similar study out of San Francisco. Both studies (and others from the past) have found that rent control did not work at all, and actually had the exact opposite effect — contributing to gentrification, displacement of tenants and income inequality.

Are rent control advocates and politicians aware of all this economic literature? I don’t know, but I do know that human beings are emotional creatures, and the debate over rent control has become very emotional. In fact, it reminds me of the climate change debate, but this time rent control advocates are behaving like climate change deniers. Faced with overwhelming evidence that rent control doesn’t work, these advocates continue to push the idea in a knee-jerk emotional reaction to the affordable housing crisis and high rent prices.

Study of Effect of Rent Control In Cambridge Market

Economists Autor, Palmer, and Pathak (2014), studied the effect of rent control on the Cambridge market. From December 1970 through 1994, all rental units in Cambridge built prior to 1969 were regulated by a rent control ordinance that placed strict caps on rent increases and tightly restricted the removal of units from the rental stock. The legislative intent of the rent control ordinance was to provide affordable rental housing, and at the eve of rent control’s elimination in 1994, controlled units typically rented at 40-plus percent below the price of nearby non-controlled properties. 

The economists found that newly decontrolled properties’ market values increased by 45%. In addition to these direct effects of rent decontrol, the economists concluded that removing rent control had substantial beneficial indirect effects on neighboring properties, boosting their values too. Post-decontrol price appreciation was significantly greater at properties that had a larger fraction of formerly controlled neighbors: residential properties at the 75th percentile of rent control exposure gained approximately 13% more in property value following decontrol than did properties at the 25th percentile of exposure. This differential appreciation of properties in rent control–intensive locations was equally pronounced among decontrolled and never-controlled units, suggesting that the effect of rent control had been to reduce the whole neighborhood’s desirability.

The economic magnitude of the effect of rent control removal on the value of Cambridge’s housing stock was large, boosting property values by $2.0 billion between 1994 and 2004. (And of course, that huge increase in property value translated to massive real estate tax revenue for the city). Of this total effect, only $300 million is accounted for by the direct effect of decontrol on formerly controlled units, while $1.7 billion is due to the indirect effect. These estimates imply that more than half of the capitalized cost of rent control was borne by owners of never-controlled properties. The economists ultimately concluded that rent controlled properties create substantial negative externalities on the nearby housing market, lowering the amenity value of these neighborhoods and making them less desirable places to live. In short, the policy imposed $2.0 billion in costs to local property owners, but only $300 million of that cost was transferred to renters in rent-controlled apartments.

To summarize in plain English, the economists concluded that rent control is a really bad idea, both in concept and in actual practice.

San Francisco: Another Failed Experiment

Economists came to the same conclusions when studying rent control in San Francisco. Its rent control law was different than Massachusetts’. It applied to buildings with five or more apartments and regulated rent increases, linked to the CPI, within a tenancy, but no price regulation between tenants. New construction was also exempt.

Economists Diamond, McQuade, and Qian (2018), concluded that San Francisco’s rent control ordinance encouraged condo conversions resulting in more owner occupied units (and less rental units) while encouraging rent controlled owners to defer maintenance and upkeep. As the economists found “it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal. Indeed, by simultaneously bringing in higher income residents and preventing displacement of minorities, rent control has contributed to widening income inequality of the city.”

Rent Control Just Doesn’t Work

In addition to the Cambridge and SF studies, there are many other articles by economists critical of rent control. The Urban Institute concluded that [g]iven the current research, there seems to be little one can say in favor of rent control.” Lisa Sturtevant, Ph.D. recently surveyed 30 different peer reviewed rent control studies, concluding that rent control decreased the supply of available rental housing, does a poor job in targeting benefits and generally leads to higher rents in the uncontrolled market.

As these studies show, rent control in the long-run decreases affordability, fuels gentrification, and creates negative externalities on the surrounding neighborhood. When the government forces landlords to provide insurance to tenants against rent increases, it will ultimately be counterproductive. There are better ideas to address the affordable housing problem than rent control. We can do much better than this outdated, tired idea.

For a good summary of why rent control doesn’t work, check out the Masslandlords.net page on Rent Control.

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Rent Escrow, Security Deposit Reform, and Elderly Housing Legislation Filed By Trade Group

Historically, Massachusetts rental property owners have struggled to overcome the coordinated and organized political lobbying of tenant rights and rent control groups at the State House. I remember just a few years ago I testified on Beacon Hill for the rent escrow bill against a small army of tenant advocates. That is now changing in a big way.

Previously splintered across many small groups, property owners have consolidated their lobbying efforts through a state-wide organization, MassLandlords.net. Created by Executive Director Doug Quattrochi, MassLandlords.net has hired a full time lobbyist, and has been instrumental in filing a record number of legal reform bills during the current legislative session. This is really important given that tenant rights groups have been very active recently in pushing just cause eviction, rent control and other socialist proposals.

Here is a summary of some of the bills backed by MassLandlords filed in the current legislative session:

H.D. 1191 – Rent Escrow (sponsored by Rep. Boldyga) — Tenants must pay rent into court if they are invoking rent withholding due to code violations or necessary repairs

H.D. 1194 – Elderly Tenants (sponsored by Rep. Boldyga) — Creating rental voucher program for elderly tenants (age 75+), protections during evictions

H.D. 1205 – Equal Counsel (sponsored by Rep. Boldyga) — Allowing rental companies to represent themselves in court without an attorney

H.D. 1192 – Late Fees (sponsored by Rep. Boldyga) — Changing late fees on unpaid rent to 10 days overdue from 30 days

H.D. 1202 — Tenant Sale Disclosure (sponsored by Rep. Boldyga) — Requiring property owners to notify tenants upon advertising of property for sale

H.D. 1457 — Security and LMR Deposit Reform (sponsored by Rep. Barrows) — Eliminating triple damage penalty and streamlining payment of deposit interest

H.D. 1474 — Rent Escrow (sponsored by Rep. Barrows) — Requiring tenants to pay monthly rent into escrow during pendency of any eviction action unless it would cause undue hardship

S.D. 231 – Rent Escrow (sponsored by Sen. Tarr) — Requiring rent escrow where tenant is withholding rent due to code violations

Whether these bills will advance through committee hearings to actual vote and passage is unknown. But this is a great start for the up and coming MassLandlords group, and I’ll be monitoring the progress of the bills in the coming months.

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New Occupancy Tax, Statewide Registry, Insurance Requirements, and Inspections

At the very end of 2018 without much fanfare, Governor Baker signed into law a bill regulating and taxing short-term rentals. The new law provides for new taxes, a statewide registry, insurance requirements, and inspections varying by town/city. It becomes effective on July 1, 2019.

Overview of Requirements
The new law expands the state’s hotel and motel tax to include the short-term rental of homes (condominiums, single family, multifamily, etc.). This applies to Airbnb, VRBO, and all other short term rental platforms. The tax applies to all rentals for a period of 31 days or less, regardless of whether the rental is for recreational, vacation, personal, or business use. The burden is on the owner to collect and remit the taxes to their local town/city and the Mass. Dept. of Revenue, which is expected to issue guidance later in the year.

Tax Structure
The short-term rental rate varies by locality and is the total of the following rates:

  • State: 5.7%
  • Local: up to 6% (Boston 6.5%)
  • Cape Cod & Islands: includes additional 2.75% to fund Cape Cod and Islands Water Protection Fund
  • A community impact fee of up to 3% may be assessed locally on professionally managed properties (Owners of two or more units in one town).

The law requires regulations to minimize the administrative burden on tax filings for those who only rent their unit five (5) months or less each year.

Are there any exemptions in the law?
The tax imposed by the new law does not apply to properties rented for fewer than fourteen (14) days per calendar year. It is important to note that these properties are still subject to the other requirements of the law, such as insurance and registration.

When will this law take effect? 
July 1, 2019

What about the 2019 rentals I already booked? 
The law exempts from tax any 2019 rental that is booked on or before December 31, 2018. Rentals booked on or after January 1, 2019 for stays on or after July 1, 2019 will be subject to the tax. We anticipate that the Department of Revenue will issue guidance on how to handle the tax on bookings made on or after January 1, 2019.

Does this apply to the units I rent? 
As stated above, the new law applies to all rentals for a period of 31 days or less. Ordinary rentals, such as an annual lease or a tenancy-at-will are not covered. The new law applies regardless of whether the owner rents the property themselves, hires a rental agent to rent the property, or uses an online platform to facilitate the rental.

Do I need to collect the tax? 
Most likely, yes. The law requires intermediaries (which includes rental agents who post the property for rent online) who enter into a written agreement with the owner or operator to collect rent or facilitate the collection or payment of rent on behalf of the operator to collect and remit the tax. The Department of Revenue will issue regulations to clarify how often the tax should be remitted to the Department. This also means that an agent who does not collect or facilitate the collection of rent on behalf of the owner or operator does not need to collect and remit the tax.

Do I need to carry insurance for the listed properties?
Yes. Owners are required to maintain $1 million dollars in liability insurance to cover each short-term rental. The coverage is required to defend and indemnify the owner or operator and any tenants in the building for bodily injury and property damage. Realtors may elect to offer insurance coverage as part of their services but are not required to.

Before offering a property for short-term rentals, a hosting platform (including Realtors) must provide notice to the owner or operator that standard homeowners or renters insurance may not cover property damage or bodily injury to a third-party arising from the short-term rental.

Do the properties need to be registered with the state or city/town? 
Each rental unit will need to be listed with the state short-term rental registry. Additionally, each city and town is permitted to create a registration requirement for short term rentals. Check with your municipal government office for details.

Are there any inspections required? 
Cities and towns may implement a health and safety inspection requirement and set the frequency of inspections. Short-term rental operators are required to cover the cost of inspections and will likely face a fee to cover registration costs as well.

What are some best practices I can apply as the new law gets implemented? 

  • Owners and rental agents should disclose to prospective renters that any booking made on or after January 1, 2019 may be subject to a tax and that the tax rate may change before the rental period.
  • Develop a policy to verify the number of units owned by each client in a municipality and that those units are properly insured.

The Mass. Association of Realtors has provided the following documents to help manage short-term rentals: an updated Short-Term Rental Lease, a Community Impact Fee Form, a 14-day Exemption Form, and a required Insurance Disclosure Form. These documents can be found at marealtor.com/ShortTermRentals

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Court Challenge Puts City of Boston Short Term Rental Ordinance In Legal Limbo

Referring to new City of Boston short term rental rules as “Orwellian,” Airbnb has sued the City of Boston in federal court, challenging the legality and constitutionality of recently enacted short term rental rules passed by the City Council. The rules, set to take effect on January 1, are among the most stringent efforts in the nation to regulate the burgeoning industry. The rules would bar investors and tenants from renting their homes by the night through popular websites such as Airbnb, while allowing homeowners and owner-occupants of two- and three-family houses to continue to do so.

Airbnb is not challenging the law on those grounds. Instead, it argues that requiring online hosts to enforce the rules violates the federal Communications Decency Act, which protects online platforms from being sued over third-party content, and also infringes on the company’s First Amendment right to free speech.

Airbnb means business, as it has hired one of the best attorneys in Boston, Howard Cooper of Todd & Weld. “This is a case about a city trying to conscript home-sharing platforms into enforcing regulations on the city’s behalf,” Mr. Cooper told the Boston Globe. “The City of Boston has enacted an ordinance limiting short-term residential rentals by hosts. But it goes much further than that. The ordinance also enlists home-sharing platforms like Airbnb into enforcing those limits under threat of draconian penalties, including $300-per-violation-per-day fines and complete banishment from doing business in Boston.”

A bill on Beacon Hill that would have created the nation’s first statewide short-term registry has been in legislative limbo since August, when Governor Charlie Baker sent it back to lawmakers, requesting several key changes, after the end of the legislative session.

Airbnb is seeking an injunction to prevent the new rules from going into effect. A hearing is expected to occur sometime in the next 30 days. Check back here for more developments as they occur. A copy of the lawsuit is embedded below.

Airbnb v. City of Boston by Richard Vetstein on Scribd

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Land Court Considers Local Ban On Airbnb Rentals in Lynnfield

Over Memorial Day in 2016, a contemporary mansion in Lynnfield was the scene of a raucous Airbnb house party where neighbors described bikini clad college women prancing around to hip-hop music reverberating through the bucolic neighborhood. At 3AM, however, the party turned into a crime scene when 33-year-old Keivan Heath was shot several times and died.

The owner of the 6 bedroom, 5,545 square foot European style residence, Alexander Styller, rented the home to a group of old college roommates at over $2,000/night through the controversial short term rental platform, Airbnb. In the aftermath of the murder, the Lynnfield building inspector and Zoning Board of Appeals issued an order prohibiting the owner from using the premises for short term rentals. The case went up to the Land Court where Judge Keith Long just issued his ruling, upholding the ZBA’s interpretation of the zoning by-law prohibiting short term rentals in a residential zoning district. The decision is one of the first to consider the legality of local prohibitions against short term rentals in a residential zoning district.

Judge Long Rules In Favor of Town

Judge Long ruled that local municipalities have the power under zoning law to regulate (or prohibit) short term rental platforms like Airbnb in a residential single family zoning district, and that the local zoning board has the authority to consider it a non-“grandfathered” use. Demonstrating a solid grasp of the burgeoning technology that is Airbnb, Judge Long ruled that AirBnB-type rental arrangements are not such grandfathered uses. Rather, he reasoned “they are ever-changing technologies that produce materially-different uses as the technology changes, and AirBnB and the other platforms have reserved the right, at their sole discretion, at any time, for any reason, to change that technology and the types of rentals they make available.” The judge further noted that “zoning was created, and is justified, by the degree of certainty it provides to its various designated districts. When that certainty no longer exists, the protections of zoning no longer exist.” Nor could Airbnb be considered an allowed “accessory use” to the home like an in-law suite. “Homes are expected to be used as residences, not for profit,” Judge Long reasoned. “Continuous rentals of a primary residence are contrary to the fundamental use of the home, as it leaves its primary residents without a place to stay. For those same reasons, Mr. Styller’s rentals have become, “in effect, a conversion of the principal use of the premises to one not permitted.”

Judge Long also had some interesting comments about the very nature of Airbnb and its effect on the surrounding neighborhood —

“From the neighbors’ perspective, however, it is all downside. The owner may not be there to experience the external effects of frequent short-term rentals — a constantly-changing cast of strangers in the building or neighborhood, unknown cars on the street, and the traffic and noise from parties (a not-infrequent purpose of AirBnB-type rentals, as evidenced by the incident that led to this case). But the neighbors are there to experience those effects, and may not be pleased. These effects are likely worse in non-owner occupied properties where the owner never lives there but instead rents it out in a continuous series of short term arrangements, calculating that the rental income will be higher than that received from longer-term tenants. This has a community-wide effect as well as effects on the immediate neighbors. Short-term AirBnB-style rentals may be good for tourists, but they decrease the number of properties available for long-term rental by residents and thus, if the practice is widespread, drive up the overall cost of rentals.”

The effect of this ruling will be that towns and cities will be on stronger legal footing if they seek to regulate or even prohibit Airbnb and other short term rental platforms under their local zoning codes. Also, the state legislature has taken up the debate, with a comprehensive bill passed this summer, only to be rejected by Gov. Baker. The Airbnb issue will be receiving plenty of legal attention in the months and years to come. This case will be appealable to the Appeals Court or SJC, so check back for more updates.

Link:  Styller v. Lynnfield Board of Appeals 

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Bill Sent to Study Committee, Effectively Killing It

After intense lobbying on both sides by property owner groups and tenant rights activities, lawmakers sent the Jim Brooks Community Stabilization Act to study effectively killing it for this legislative session. The Act, a Home Rule Petition requiring full State House approval, would require that a landlord or foreclosing owner provide a city-approved “notice of basic rights” and a list of tenant assistance organizations simultaneously with the issuance of a notice to quit/termination or notice of lease renewal/expiration. It also provided that tenants of foreclosed properties could only be evicted for certain “just cause” reasons. The Boston City Council had originally approved the measure in November 2017, but state lawmakers had to approve it as well. Property owner groups were vehemently opposed to the measure, asserting that it was actually a return to Rent Control.

The reactions by proponents and opponents of the bill were naturally mixed on social media. Boston City Councilor Ayanna Pressley, a supporter of the measure, said that the bill “was not supported by the Judiciary Committee…but where it stands now is not promising.” The bill was vehemently opposed by property owner groups, such as Masslandlords.com and the Small Property Owners Association, which mounted a strong coordinated campaign to lobby legislators.

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Property Owners Vehemently Opposed to “Right of First Refusal” Proposals Giving Tenants Up to 240 Days to Purchase Rental Properties For Sale

In an effort to stem the affordable housing problem, cities like Cambridge and Somerville are exploring giving tenants a legal right to purchase the homes and apartments they are renting when owners go to sell them on the open market. The concept is a “right of first refusal” which would be triggered when the owner lists the property for sale and gets a bona fide offer from a third party buyer. Under the Cambridge proposal embedded below, a tenant would have up to 240 days to put down a deposit, obtain financing and close on the purchase, and would also have the right to assign the contract to a non-profit housing trust for affordable housing. The proposed law would apply to all rented single family homes, condominium units, multifamily and apartment buildings except owner two-family residences fully owner occupied or with one of the units occupied by the owner’s immediate family. (These definitions are somewhat unclear).  

Somerville State Senator Denise Provost originally filed a Tenant Right to Purchase Bill with the Legislature, but it did not move past committee. Now, Cambridge and Somerville are considering Home Rule Petitions to pass their own Right of First Refusal laws. If these proposals gain traction, they could spread to other cities and towns like Boston.

Property owner groups vehemently oppose these proposals. A similar proposal was passed in Washington, D.C, and the Huffington Post has exposed how it’s been an abysmal failure and abused by tenants. As the HuffPost, writes, “some tenants are using [the Act] to extract money from landlords, should a landlord decide to sell a building. At present, TOPA is holding up or blocking real estate transactions, causing grief for developers and homeowners and victimizing low-income residents stuck living in buildings owners are unable to sell but forced to maintain at a financial loss.”

I agree that this would be a terrible idea and extremely unfair to Massachusetts property owners. No, it’s not just terrible. It’s crazy and socialist. First, any sale of rental property is always subject to an existing tenancy or lease. That’s been the law in Massachusetts for centuries. So renters are already protected from displacement. Second, the proposal would wreck havoc on the local real estate market and skew free market dynamics. The Cambridge law would give tenants with no skin in the game 8 months to purchase a property. That’s 3 real estate cycles! Knowing that any offer would be subject to a tenant right of first refusal, investors would avoid making offers for occupied properties for sale, or would reduce offering prices, thus chilling sales. Tenants would be able to “flip” their right of first refusal to local nonprofits for affordable housing, walking away with a tidy profit. There are much better ways to create affordable housing than this idea.

Update (3/6/18): After Owner Outcry, Cambridge City Council Votes Down Proposal

Cambridge MA Tenant Right of First Refusal Home Rule Petition by Richard Vetstein on Scribd

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Property Owners — Shovel Early and Often!

As I sit here working from home watching the “Bomb Cyclone” storm make its way up the East Coast, the clicks on my blog searching for “Massachusetts snow removal law” are going as rapidly upward as the barometric pressure of this “Bombogensis” storm system. Massachusetts law underwent a monumental change back in 2010 with a Supreme Judicial Court decision overruling the 125 year old “Massachusetts Rule” which allowed property owners to leave “natural” accumulations of snow and avoid liability. Now, all Massachusetts property owners are under a legal duty to keep their property free from dangerous snow and ice. Moreover, cities and towns have been passing all types of new snow removal ordinances and by-laws regulating whether owners must shovel public/private sidewalks, and how long they have to clear snow. So let’s do a quick Frequently Asked Question post.

I own a rental property with a driveway and one common walkway and entrance. Am I responsible for shoveling snow on the driveway and/or walkway?

My opinion is the answer is yes. Under the previously referenced 2010 Supreme Judicial Court ruling, all property owners (rental or owner occupied) can be held liable for failing to remove snow and ice from their property. The old rule was that owners didn’t have to remove “natural accumulations” of snow and ice, but the court overruled that in favor of a general obligation to keep property safe for all visitors and guests. There are also many local town and city ordinances which likewise obligate property owners to keep snow and ice off their property and sidewalks. I will discuss some of those below.

Can I use a lease which provides that the tenant is responsible for snow removal. Is that legal and will that protect me from liability?

It depends on your particular property. Landlords have the primary responsibility for snow removal at a rental property. Under the State Sanitary Code, property owners/landlords must keep all means of egress free from obstruction — that cannot be negotiated away. As for the removal of snow and ice, the Code provides that the landlord shall maintain all means of egress at all times in a safe, operable condition and shall keep all exterior stairways, fire escapes, egress balconies and bridges free of snow and ice. Again, those obligations cannot be negotiated away.

A landlord may require the tenant be responsible for snow and ice remove in a lease provision only where a dwelling has an independent means of egress, not shared with other occupants, and a written lease provides for same. On its face, this exception only applies to entrance-ways and not driveways or parking areas. I am not aware of a court ruling on this particular Code provision, but if I were a landlord I would not risk being on the wrong side of a “test case” where someone is injured badly.

So, in the example above with an owner occupied two family with one common entrance and driveway, that lease provision would be illegal.

Even if the tenant is responsible for snow removal under a legal lease provision, the landlord could still face personal injury liability for slip and falls on snow and ice under the SJC ruling.  A guest or visitor who is injured due to untreated snow or ice will likely sue both the property owner and the tenant. The property owner must ultimately ensure that the property is safe for visitors.

How soon do I have to shovel the snow before I get in legal trouble?

The City of Boston’s policy is to give businesses 3 hours to clean snow, and 6 hours to residents. In Worcester, it’s 10 hours to clear snow. Those are the minimums. As with any dangerous condition, my advice is to shovel and treat snow and ice early and often. Even a thin coating of black ice can cause someone to slip and fall and seriously hurt themselves. (Admit it if you’ve dumped on your rear end like I have!). If you are an out-of-town landlord, you must hire someone to shovel your snow.

Am I required to shovel the public sidewalk in front of my house/business after a storm?

In most Massachusetts towns and cities, the answer is yes. Check your local town ordinances for guidance. The cities of Boston, Cambridge, Somerville, Arlington, Belmont, Newton, Lynn, and Worcester (among others) all require property owners and businesses to clear municipal sidewalks in front of their residences or businesses. Fines are assessed against non-compliance. In Somerville, for example, if snow ceases to fall after sunrise (during daylight hours), property owners must shovel sidewalks by 10 p.m, and if snow ceases to fall after sunset (overnight), property owners must shovel sidewalks by 10 a.m. You can also be fined for shoveling snow onto the street, blocking a curb cut or putting snow on municipal owned property.

In some more residential towns, the local DPW will clear the sidewalks, but the default rule is that property owners are generally responsible for clearing their own sidewalks and driveways.

Will my homeowner’s or CGL insurance policy cover any injuries from slip and fall on snow/ice?

Yes, usually. The standard Massachusetts homeowners insurance policy and commercial general liability insurance policy (CGL) will have liability coverage for slip and falls on property. Make sure you have ample liability coverage of at least $500,000 to 1 Million. (You can never have enough insurance!). As with any insurance question, it’s best to contact your personal insurance agent.

I’m just a regular homeowner. What if the mailman or delivery person slips on my walkway?

You may be liable if you left dangerous snow and ice on your walkway. The new law applies to every property owner in Massachusetts, not just landlords. Get some Ice-melt and sand and spread on your walkway. If it re-freezes overnight into black ice, you will remain liable.

Helpful Links

City of Boston Snow Removal Notice

City of Worcester Snow Removal

City of Newton Snow Removal

City of Framingham Snow Removal

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Tax Reform Act Not Nearly As Bad As Feared For Massachusetts Homeowners

With Paul Ryan and Mitch McConnell and their minions burning the midnight legislative oil, the Tax Cuts and Jobs Act of 2017 is set to pass with President Trump’s signature before Christmas. (Updated: President Trump signed the bill into law on Dec. 22).  Everyone is asking me the same question. How will the biggest change in US tax policy in 30 years affect the Massachusetts real estate market and homeowners? There’s been a ton of commentary that the Act is the second coming of the Apocalypse for the real estate market, but I’m not convinced. While I do have many concerns with the overall bill (bloating the deficit, etc.), my opinion is that it will be a small net positive for the real estate industry.

(Disclaimer: I am neither a tax attorney nor a CPA, and I don’t play one on TV, so consult your own tax professional for any tax advice).

Capital Gain Exclusion on Sale of Primary Residence – No Change 

Excellent news here. The long-standing rule has been that the gain (increase in value) of the sale of a primary residence is non-taxable up to $250,000 for a single person and up to $500,000 for a married couple, if you occupied the home for 2 out of the last 5 years. This provision has been a huge incentive for home sales for many years. In prior GOP tax reform bill drafts, the exemption was increased so that owners needed to reside in the home for 5 out of the 8 years preceding the sale. The National Association of Realtors argued that this change would have resulted in a 10% drop in home sales. In response to the NAR’s intense lobbying, the final bill does not include any changes to the capital gains exclusion.

So the current rule stays in place – you can exclude up to $250,000 as a single filer and $500,000 for joint married filer in capital gain on the sale of your primary residence if you lived there for 2 out of the last 5 years. This is really great news for the Massachusetts real estate market.

SALT – Real Estate Taxes and State Income Taxes — $10,000 Cap

This change is a “loss” to homeowners, especially those with high value properties and in wealthy towns. Currently, all real estate taxes paid in Massachusetts are 100% tax deductible if you itemize your deductions. In Massachusetts, those real estate tax bills can be quite large.

Under the Act, there is now a deductibility cap of $10,000 — which includes not only local real estate taxes but all state and local income taxes. This will be a huge hit to taxpayers in wealthy towns with high real estate tax bills. Going forward, taxpayers will only be allowed to deduct $10,000 of all real estate taxes and state/local income taxes. This is definitely a major “loss” for Massachusetts homeowners, especially those in towns with high real estate taxes. This change, however, may be offset by the increase in the standard deduction ($12,000 for single, $24,000 for married) and the boost in child tax credits, but if you live in Weston or Boston, for example, this is likely going to hurt.

Tax Tip:  If your real estate tax bill is over $10,000, consider pre-paying your real estate tax bill before 12/31/17, so you can still deduct it. According to the Boston Globe, most town assessors around the state are accepting such payments. Update (12/28/17): The IRS has issued a Formal Advisory on Real Estate Tax Pre-Payments. Click to read my full review here.

Mortgage Interest Deduction – Deductible Up to $750,000. No Deductions For HELOC/Vacation Homes 

Again, due to the NAR’s strong lobbying efforts, the GOP kept the mortgage interest deduction intact for the most part, but with caps, and equity lines and second mortgages losing their deductibility. I would say this is a net “win” for homeowners. Starting in 2018, homeowners can keep the mortgage interest deduction on a loan of up to $750,000, down from the current law’s limit of $1 million.

Individuals who take out home equity (HELOC) loans, however, will no longer be able to deduct that interest under the new bill. The same is true for second mortgages and vacation homes. No more interest deductions for those. So this change may impact the vacation home market, particular down the Cape and Islands. However, a rental property owner could offset this loss by renting out the home for a few weeks, per the new benefits for rental housing discussed below.

Importantly, these new rules only apply to new mortgages applied for after Jan. 1, 2018. Existing mortgages incurred on or before Dec. 15, 2017 will remain fully tax deductible. There is some IRS guidance on these new rules, so consult your CPA.

Rental Property Owners/Landlords — Thumbs Up! 

As Bloomberg News reports, the Tax Reform Act will be very good for rental property owners and landlords if they do business via pass-through entities — real estate investment trusts, partnerships, limited liability companies, and S corporations — all of which are set to get big tax breaks in the Act. Under the new rules, all pass through income for qualified entities will enjoy a 20% deduction on the owner’s individual 1040 return. For landlords who have greater than $157,500 (single) or $315,000 (married filing jointly) in qualified taxable income, they can select an alternative deduction of (i) the greater of 50% of all W–2 wages, or (ii) the sum of 25% of the W–2 wages plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

Attorney’s Advice: I’ve always counseled clients to set up an LLC to hold title to rental property, both from a liability and tax planning standpoint. With the Tax Reform Act giving even greater benefit to pass-through entities, it makes even more sense to set up that LLC. If you need assistance setting up an LLC, please email me at [email protected].

Also for depreciation rules, the depreciable life term has been reduced — from 27.5 years to 25 years for residential property and from 39 years to 25 years for nonresidential property. In addition, while most other businesses will find their interest deduction limited under the Senate bill, that limitation doesn’t apply to landlords, who can continue to deduct their mortgage interest in full.

There are other rules also favoring rental property owners, so definitely consult your CPA to prepare for 2018.

Thoughts and Comments?

As an attorney who has handled thousands of residential purchases and refinance loans, I’ve never been one to ascribe to the notion that the tax code has a ultimate determinative effect on whether a buyer is going to purchase a home or not. I’ve always believed that tax implications are one factor out of many in the home buying and selling equation. In my opinion, income, job security and consumer confidence play a larger role. I would doubt that the young couple searching for a starter home in Medway is going to say “geez, now that the SALT deduction is limited to $10k, let’s scrap this whole home buying idea.” If people have decided they want to buy a house, they will usually do so.

Overall, I think the Tax Cuts and Jobs Act of 2017 will have a net positive effect on the national and Massachusetts real estate market, despite the SALT cap and changes to HELOC/second mortgage deductibility. I’m hopeful that the increase in standard deductions and child tax credits will offset the mortgage deductibility and real estate tax changes. The no-change to the capital gain rules was critical and we have the NAR to thank for that. That was a game changer. And lastly, the rental and investment property market will get a big boost.

Rick Moore, Senior Mortgage Advisor with Zenith Mortgage Advisors in Holliston, is one local loan officer who is happy with the Tax Reform Act, both personally and professionally. “I think it’s a historic day, and I’m happy to have the extra money for some home improvement projects. Overall, if the economy will get a boost as expected by the administration, then that’s good for me as a loan officer. I’m looking forward to a very prosperous 2018!”

I do, however, worry about the addition of some 1.5 Trillion to the federal deficit as a result of the tax reform act. This is never good for long term stability of the economy and the housing market. It’s probably a safe bet to say that interest rates are going to rise to keep inflation at bay. I’m concerned that in exchange for some short term gain, we may be setting ourselves up for some long term pain. Only time will tell, but I hope Rick is right!

Feel free to post your comments below and on Facebook.

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No Triple Damages Although Landlord Failed To Provided Sworn Statement of Itemized Damage at Move Out

When a tenant leaves damage to a rental unit at move out, the Massachusetts Security Deposit Law allows a landlord to deduct the cost of repairs from the security deposit, provided the landlord issues a sworn statement of itemized damage along with repair estimates within 30 days of the move out. I’ve seen many landlords attempt to comply with the law only to be on the receiving end of a Chapter 93A letter from a tenant attorney demanding triple damages for messing up this requirement. This is one of many reasons why I advise my landlord clients to decline taking a security deposit from tenants.

Last week, the Supreme Judicial Court had the opportunity to clarify this particular provision of the law in the class action case of Phillips v. Equity Residential Management LLC. In this case, Equity Residential, attempted to deduct $968.08 in carpet and other cleaning charges from a tenant’s security deposit. However, Equity failed to provide the required itemized statement sworn under the pains and penalties of perjury. The tenant filed a class action seeking return of the deposit, triple damages, and attorneys’ fees under the statute.

I won’t bore you with all the technicalities of the Court’s ruling, but the SJC came down on the landlord’s side on this case, holding that while the landlord mistakenly failed to provide the sworn statement the law was clear that this is not one of the situations where triple damages is the proper remedy. (Equity did have to return the tenant’s security deposit in full). Yes, I know a rare victory for property owners in Massachusetts…

Again, while this case came out on the landlord’s side, it demonstrates the risks involved in failing to comply strictly with the Massachusetts Security Deposit Law. As a reminder, if a landlord is claiming that a tenant caused damage at the end of the tenancy and wants to deduct it from the deposit, it must provide within thirty days “an itemized list of damages, sworn to by the lessor or his agent under pains and penalties of perjury, itemizing in precise detail the nature of the damage and of the repairs necessary to correct such damage, and written evidence, such as estimates, bills, invoices or receipts, indicating the actual or estimated cost thereof.” The law also requires that landlord provide a “statement of condition” at the beginning of the tenancy, so that damage can be verified. Only then will a landlord be allowed to deduct repair costs from a security deposit.

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Richard D. Vetstein, Esq. is an experienced Massachusetts residential landlord – tenant attorney. You can contact him at [email protected].

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Rent Escrow Bill Heads Back Up To State House

by Rich Vetstein on September 25, 2017

Public Hearing Scheduled For September 26, 1pm

Small property owner groups are saying that this may finally be the year when state legislators pass a Rent Escrow bill on Beacon Hill. The bill is designed to reform tenant abuses of the rent withholding law and level the playing field with landlords.

Under current law, if a tenant is being evicted, she may report the landlord to the health department and withhold paying rent if an inspection reveals any sanitary or building code violation  — even if very minor. Evictions often last for months, and therefore, the rent withholding gives tenants incredible financial leverage to gain advantage during the process.

Unlike most other states, there is no requirement in Massachusetts that a tenant post the withheld rent into some form of escrow account. There have been many instances where tenants have intentionally inflicted property damage to claim code violations or just made them up altogether.

A rent escrow bill would simply require any tenant who withholds rent to pay ongoing monthly rent into a court ordered escrow account until the eviction case is heard on the merits by a judge. Fairly, the bill has a carve out giving judges discretion to not require an escrow deposit if it would result in “undue hardship” to the tenant. This way, the tenant has some “skin in the game,” and is less likely to financially cripple the landlord over a minor code issue.

The leading bill is House Bill 980, sponsored by Rep. Chris Walsh. The text of the bill is as follows:

Notwithstanding the foregoing, in the event that the originally scheduled trial date is continued for any reason, and upon motion of any party, the court after hearing shall require the tenant or occupant claiming under this section to deposit with the clerk of the court, the plaintiff’s attorney, or other secure depository each month (or at such other intervals as the court deems just) the amounts due for use and occupancy, calculated according to the fair market value of the premises, which amounts shall be held in escrow pending final disposition, unless the court determines that such requirement would result in undue hardship to the tenant or occupant. In the event that a tenant or occupant fails to comply with an order requiring deposit, the court upon motion shall order the matter to be scheduled for bench trial at the earliest date available and make such further orders as the court deems just.

The bill, along with several other rental housing bills, will be heard on September 26, 2017 at 1pm in Hearing Room B-2 at the State House. All members of the public are welcome to testify in support or against the bill.

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Mass. Lawmakers: Tax and Regulate Airbnb Rentals

by Rich Vetstein on June 27, 2017

Proposal: 5%-10% Tax, Plus Comprehensive Regulations

Like Uber and Lyft, is the law finally catching up with the new economy-disrupting technologies for the real estate industry like Airbnb? The answer is yes if Massachusetts legislators have their way. Today, Massachusetts House legislators are holding a hearing on a new bill which would tax and regulate Airbnb and other short term rentals. The proposal is House Bill 3454 (click to read). The proposal would impose a new excise tax between 5% – 10% on short term rentals, depending on whether the host rents his/her own residence, is a “commercial host,” or the rental is professionally managed.

According to a recent Boston Globe article, Airbnb, the largest of such rental sites, reports that it logged about 592,000 guests in Massachusetts last year. Had those stays been subject to the state’s hotel tax rate of 5.7%, that would have added an estimated $15 million to the Commonwealth’s coffers. The availability of such easy tax revenue may be too much for legislators to pass up this year, although a similar effort failed at the last minute last year.

Airbnb is happily sharing these calculations because it wants to be taxed, and this week it’s airing a new TV commercialabout the issue. Now don’t think for a second that this is some kind of benevolent new-economy thing. Guests, not Airbnb, pay the tax! Taxation is also a form of legitimization for these online portals.

The House proposal would also establish a comprehensive regulatory and safety scheme on Airbnb rentals, similar to that imposed on bed and breakfasts and other small local lodging facilities. Local towns and cities would be permitted to restrict certain types of short term rentals, the number of rental days allowed, require business licenses and a housing registry, and make the host obtain liability insurance of at least $1M in coverage. Violations of the new law carry a stiff fine of up to $1000/day for the illegal rental period.

The proposal has received much attention in recent months as hearings have been held across the state. The Massachusetts Association of Realtors has come out in opposition to the bill, as with many Airbnb hosts who rely on this source of additional income.

I will keep up with developments, so check back here from time to time.

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A Step Back To Rent Control Or Solution To The Affordable Housing Crisis?

Citing skyrocketing rents and lack of affordable housing — and over the vociferous objections of property owners — Boston Mayor Marty Walsh has sided with pro-tenant groups and has formally submitted a home-rule petition to the Boston City Council to create wide-ranging “just cause” eviction protections for all Boston tenants. Harking back to the days of rent control, the petition, named the Jim Brooks Community Stabilization Act after a recently deceased Roxbury housing advocate, prohibits virtually all no-fault evictions in favor of evictions only for certain enumerated “just cause” grounds. The law also requires landlords to file a notice of termination with the newly formed Office of Housing Stability prior to starting an eviction. In a state which is already extremely pro-tenant, this new law will make evicting tenants even more difficult and cost prohibitive, and may also affect owners’ rights to raise rents and sell rental property in the City of Boston.

“Just Cause” Grounds for Eviction

The petition (embedded below) provides that landlords may only evict tenants for nine (9) specified reasons:

  • Non-payment of rent.
  • Violations of lease provisions
  • Nuisance/damage to unit
  • Illegal activity such as drug use
  • Refusal to agree to lease extension or renewal
  • Failure to provide access.
  • Subtenant not approved by landlord
  • Landlord requires premises for housing for family member
  • Post-foreclosure and occupant refuses to pay fair market rent

Middle Ground?

It’s not all bad news for property owners, however. The Walsh bill is a compromise from what tenant groups had pressed for. They wanted to require landlords to submit to mediation for rent hikes of more than 5%, but were not able to get support for it among city council members. Tenant groups also pushed for prohibitions on evicting elderly or disabled tenants and long term renters with children in the school system. The Mayor rejected those ideas as well.

Additionally, not all landlords are covered by the new law. Exempt are owners of 6 or fewer residential rental units, owner-occupants of multi-family dwellings, and Section 8/federally subsidized housing.

Landlord groups, meanwhile, remain skeptical of Walsh’s proposal. State law already has strong tenant protections, Greg Vasil, chief executive of the Greater Boston Real Estate Board told the Boston Globe. Adding more will only subject building owners to even-more-drawn-out legal fights with tenants, he said. And, Vasil added, Walsh’s restrictions may deter developers from building more apartments in Boston, which has been a top priority for the mayor, who has pledged to add 53,000 units by 2030 and combat high housing costs. “This would make it more difficult to develop housing for the middle of the market,” Vasil said. “We’ve been making good progress and I’d hate to see anything happen to that.”

Because the bill is a Home Rule Petition, it must be approved by the City Council then the entire State Legislature. The bill may also face court challenges because it fundamentally alters existing private contracts and the very nature of a tenancy at will relationship. If the petition becomes law, evictions in Boston will become even harder and more expensive.

Readers, what are your thoughts on this important development? Post below in the comments.

Boston Just Cause Eviction Home Rule Petition by Richard Vetstein on Scribd

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Rule Prohibits No More Than 4 Undergraduate Students Per Rental Unit

With thousands of college students set to invade Boston in the next week, the Chief of Boston’s Inspectional Services Department is letting local landlords know that he intends to enforce an eight year old ordinance barring no more than four undergraduate students from living together in off-campus apartments and houses.

Feeling pressure from local residents and in reaction to the tragic death of 22-year-old Boston University senior Binland Lee, who got trapped in an overcrowded Allston apartment house, ISD Chief William Christopher has had enough, saying “we’ve found a way to make this punitive, and we think this will take it to another level.” City officials want landlords to report the number of undergraduates living in each unit. Landlords would report that information when they register each unit annually, which is a requirement the city established in 2013.

Mr. Christopher and I discussed the “No More Than 4” rule on the WHGH-PBS Greater Boston show this week. The video of the show can be seen below. I have always had major problems with this rule, both its legality and on a public policy level. The state sanitary and building codes provide maximum occupancy levels based on the square footage of the unit, as the Supreme Judicial Court held a few years ago striking down a similar action by Worcester Housing officials. The city should enforce the rules already on the books rather than painting all undergraduate students as potential troublemakers or artificially creating more demand which increases rents. If ISD starts fining landlords, look for the no more than 4 rule to face a legal challenge which could be successful.

 

 

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Landlords, Don’t Get Into Hot Water With Your Tenant!

by Rich Vetstein on March 23, 2016

meter-reader-660x370Massachusetts Water/Sewer Sub-Metering Law 

Many Massachusetts landlords are unaware that before charging tenants for hot water and sewer service, they must comply with the numerous and onerous requirements of the Massachusetts Water Sewer Sub-Metering Law, General Laws chapter 186, chapter 22. These requirements include having separate water meters for each unit, installation of low flow faucets and toilets by a licensed plumber, and certification with the local health board, among other requirements outlined below. Non-compliance with this law may result in a three month rent penalty to the landlord plus payment of the tenant’s attorneys fees.

A landlord can only charge a tenant for water/sewer service under the following conditions:

1. The tenant’s unit must be separately submetered by a separate water meter installed by a licensed plumber. A separate water meter measures the amount of water supplied to a particular unit, and enables the landlord to charge the tenant for the tenant’s own water usage. So, for example, if a building contains 4 dwelling units and a basement where water is utilized for the entire building, a landlord would need to have 5 submeters installed in addition to the primary meter that measures the building’s water use in its entirety. If the building does not have separate meters for each unit, the tenant may not be charged for water service.

2. The tenant’s obligation to pay for water usage must be contained in a signed lease, in an obvious place, and not in the fine print. Each bill for submetered water usage must clearly set forth all charges and all other relevant information, including the current and immediately preceding submeter readings and the date of each such reading, the amount of water consumed since the last reading, the charge per unit of water, the total charge and the payment due date. If the landlord bills the tenant on a monthly basis, payment of the bill by the tenant must be due 15 days after the date the bill is mailed to the tenant, but if the landlord bills the tenant at intervals greater than 1 month, payment of the bill by the tenant is due 30 days after the date the bill is mailed to the tenant.

3. A landlord may not charge the tenant for water supplied through a submeter unless the a licensed plumber has installed fully functional water conservation devices for all faucets, showerheads and water closets/bathrooms in the unit (low-flow shower heads and faucets and low-flush toilets)

4. The landlord must provide a certification under the penalties of perjury, with the board of health or health department, that the appropriate submeters and water conservation devices were installed by a licensed plumber.

5. A landlord cannot charge a tenant for water/sewer service mid-way through a tenancy or lease. A landlord can only charge a tenant for water/sewer upon the start of a new tenancy in the unit; and only if the unit is being occupied for the first time, or if the previous tenant left voluntarily, or was evicted for non-payment of rent or other breach of the lease.

6.  A landlord who engages in self-help by willfully failing to furnish water or directly or indirectly interfering with the furnishing by another of water, or transferring responsibility for payment for water to the tenant without their knowledge or consent, is punishable by a fine of not less than $25.00 nor more than $300.00 , or by imprisonment for not more than 6 months and is liable for actual and consequential damages or 3 month’s rent, whichever is greater, and the costs of the action, including a reasonable attorney’s fee.

Given these onerous requirements, my advice to landlords is to never charge the tenant for water/sewer! Just pay the bill and make it “hot water included” in the rent.

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Owens_Pinto-780x439Hundreds Cram Into City Council To Debate Controversial Petition

Hundreds of tenant activists, small property owners and landlords packed City Hall and poured over into overflow rooms last night as the Boston City Council held its first public hearing on the need for “just cause” eviction legislation, to stem the city’s skyrocketing rents. Harking back to the days of rent control, the proposal would prohibit a landlord from evicting any tenant except for certain “just cause” grounds. These grounds and their related procedural impediments to eviction, would in my opinion, make it nearly impossible (or cost prohibitive) to evict tenants, raise rents and sell occupied rental property in the City of Boston. For more specifics of the proposal, please see my prior post, Boston Tenant Activists Pushing Just Cause Eviction Proposal.

The City Council, led by Councilor Josh Zakim, heard four hours of impassioned testimony from both sides of the issue. Renters say it would create safeguards against eviction; landlords say it would slap them with thinly disguised rent controls.

“Any way you look at it, this is rent control,” Skip Schloming, of the Small Properties Owners Association, said in an interview just before the hearing started.

Lisa Owens Pinto, executive director of City Life/Vida Urbana, for the tenant side told news outlets that “this proposal would just require property owners to provide a good reason to evict someone.” Ms. Owens Pinto said her organization’s measure has three central provisions – landlords must provide a reason for an eviction; if a rent increase is sought, a landlord must first notify the city; once notified, the city must use its resources to contact and advise the affected tenant.

Gilbert Winn, chief executive of Boston-based developer Winn Companies, told the council that a new set of regulations isn’t needed and warned that any changes may have an adverse effect on housing. “You can’t attack the very thing you are trying to protect, which is the rental economy,” Winn said. His company is a major developer of affordable housing projects. Winn, the son of Winn founder Arthur Winn, also claimed the proposal would provide tenants with a potential avenue to avoid living up to their rental agreements. “If a contract between a willing renter and a willing owner cannot be adhered to, and only one party has to adhere to it, then the whole system falls apart,” Winn said.

The proposal has been a moving target. A revised draft of the group’s proposal, originally submitted as a home-rule petition, wasn’t available at the hearing, leaving several councilors perplexed as to why it hadn’t been officially filed. “We’re talking about a specific proposal and I’m finding it hard to follow because we don’t have the draft in front of us,” City Councilor Josh Zakim said about halfway through the four-hour hearing.

Prior to the hearing, tenant advocates agreed to drop one of their most controversial requests: a mandate that rent increases of 5 percent or more be subject to nonbinding mediation. Instead, they are pushing for a rule that would require landlords to notify the city of rent hikes that result in eviction, known as a no-fault notice to quit.

Mayor Marty Walsh had initially signaled support for the measure, but wanted to see how the details would be fleshed out. As they say, the devil is in the details and it’s quite possible this proposal will get significantly watered down during the legislative process, if it survives at all.

The hearing was videotaped and can be viewed on the City’s website here.

Photo credit: New Boston Post photo by Evan Lips

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ls.jpgI will be speaking about Rental Legal Trends and Security Deposits at the monthly Boston Real Estate Investors Association meeting on November 3, 2015 at the Hilton Hotel – Dedham, 25 Allied Drive, Dedham, MA. Time:  5:30PM-9PM.

Agenda below. It is FREE for anyone who mentions my name!

5:30 PM –  “Meeting Before The Meeting” – Multifamily Investing with Charles Dobens

6:30 PM – Registration & Vendor Area Open

7:00 – 7:30 pm – Announcements, Deal Making, Speed Networking

7:30 – 8:00 pm –  What You Need To Know BEFORE Placing An Offer. Lee Abdella of Walsh Home Inspections will address what you should look for before putting an offer in on a house or before waiting your home inspection!

8:00 – 9:00 pm  – Mass Security Deposit and Rental Law with Richard D. Vetstein Esq.

Boston Real Estate Investors Association on Facebook

I look forward to seeing you next week!

-Rich

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Landlord Not Liable For Shooting Death At Rental Property

by Rich Vetstein on September 16, 2015

Copyright Josh Reynolds 2010

Landlord Sued for Wrongful Death After Assailant Shoots Four Guests At House Party, Killing One

A landlord’s worst nightmare is someone getting hurt, or worse, shot and killed on their rental property, and then getting sued for wrongful death. This was the situation facing a property owner in Dorchester in the recent case of Belizaire v. Furr, (Appeals Court 13-P-1908 Sept. 11, 2015). Fortunately for the landlord, the Court ultimately concluded that she was not legally responsible for the shooting because there was no reason to predict it would happen. Had the facts been different in this case, the landlord would not have been so luck to escape liability. After discussing this important case, I’ll talk about some ways that landlords can manage their risk.

Shooting at House Party, 5-7 Edson Street, Dorchester

The landlord owned a two-family in Dorchester which she rented out to several individuals. The landlord was fairly lax with written lease agreements, with some of the tenants having leases, but others not. On the night in question, the landlord’s son and one of the occupants (who were friends) hosted a party with a DJ, alcohol and dancing. Carl Belizaire attended the party as a guest. Late at night, an unknown assailant shot up the room, killing Belizaire and injuring three other guest. The assailant was never found or charged. There was no prior history of violence at the property.

Landlord Sued For Wrongful Death

Belizaire’s estate sued the landlord for wrongful death, alleging that she failed to keep the property safe. The Court first analyzed whether there was a tenancy or lease in place, because that would minimize the landlord’s liability and control over injuries occurring on rental property. The landlord’s failure to secure leases with the tenants at the property, particularly the tenant who threw the party, resulted in the court concluding that there was insufficient evidence to rule that there was a valid tenancy in place to shield the landlord from liability.

The Court, however, ultimately ruled that the landlord was not liable for the shooting because there was no evidence of prior shootings or similar violent incidents on the property. Although there was evidence of prior drug activity at the property, the court found this insufficient to support a finding of liability. There was no evidence of other large parties with uninvited guests similar to the one in question taking place on the property. Nor was there any evidence that the landlord was affiliated in any way with, or knowledgeable about, the assailant or any dispute that the assailant may have had with the victim. The evidence submitted suggests that the victim’s death was tied to events beyond the party at the rental property. As a general rule, a landowner does not owe a duty to take affirmative steps to protect against dangerous or unlawful acts of third persons. In certain exceptional circumstances, landlords may be liable for ignoring criminal activities that occur on their premises and were known or should have been known to them. That was not the case here.

Managing The Risks Of Property Ownership: Use Strong Leases and Set Up LLC’s to Hold Title

Many of my landlord clients often worry about liability issues at their rental property. They often ask me whether they can get sued over someone getting hurt on their rental property and what they can do to minimize their risk.

The landlord in this case made some catastrophic mistakes which, had the facts been different, could have resulted in a multi-million dollar liability. The first mistake she made was not securing written leases for all tenants and occupants at the rental property. The form lease that I have drafted contains a unique indemnification clause which would have help shield the landlord for liability for injuries caused by the tenants. The second major mistake made by the landlord was holding title to the rental property in her individual name, thereby exposing her personal assets to a lien or judgment. Although not always appropriate for every landlord, it’s a prudent idea to hold rental property in a limited liability company which would shield the landlord’s personal assets from liability. There is expense to set up the LLC and there is a $500 annual fee, but in my opinion, it’s well worth it relative to the risk of getting sued for wrongful death.

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100316_photo_vetstein-2.pngIf you are a rental property owner and would like advice concerning your leases or would like to discuss setting up an LLC, please contact me at [email protected]wgroup.com or 508-620-5352. I would be happy to help you in any way.

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Legislators Take Up Rent Escrow Bills Once Again

by Rich Vetstein on May 7, 2015

cls-6State House Hearing Set For May 12, 1pm, Joint Committee for Judiciary Hearing Room A-2 

For the last decade, Massachusetts landlords have been lobbying for a tenant rent escrow bill which would prevent tenants from using the infamous “free rent trick” in evictions. The free rent trick works like this:  Tenant stops paying rent for various reasons, such as economic hardship or by design. After receiving a 14 day notice to quit for non-payment of rent, the tenant will immediately call the board of health to get the owner cited for minor or cosmetic code violations such as a hole in a window screen. Under current Massachusetts law, any code violation cited, however minor, allows the tenant to withhold rent until the eviction case is resolved. What usually happens is that the tenant skips out of town or agrees to a move out but never pays the months of accrued unpaid rent, leaving the landlord stuck with thousands of lost income to pay their mortgage and expenses.

Even the liberal Boston Globe recently published a compelling piece on how the Massachusetts legal system unfairly penalizes small landlords in these situations.

Unlike most other states, there is no requirement in Massachusetts that the tenant post the withheld rent into some form of escrow account. There have been many instances where tenants have intentionally inflicted property damage to claim code violations or just made them up altogether.

Bill Would Level Playing Field Between Small Landlords and Tenants

Hopefully, this will finally be the year that the Legislature passes this much needed reform to curb tenant abuses of the eviction process. Three bills will be discussed, H.B. 1654H.B. 1663 and H.B. 1664. Landlords are urged to come and testify before the committee and otherwise support the bill by contacting their local representatives and senators.

A mandatory rent escrow law would require any tenant who exercises their right of rent withholding to pay the withheld rent into an escrow account until the unsafe conditions or code violations are repaired. After repairs are done, either the landlord and tenant agree on how the escrowed rent should be divided, or a judge orders a fair settlement. In most cases, the owner will get back most of the withheld escrowed rent. But the most important impact of a mandatory rent escrow law is that those nonpaying tenants who do not escrow can be promptly evicted for nonpayment of rent. Although nonpayment evictions will still take on average three months to resolve, much-longer-delayed evictions and the free rent trick will be stopped.

The bills will most benefit small landlords and owners-occupants of multi-family residences who rent out apartments. These property owners are typically on strict budgets, and any lost rent and attorneys’  fees will prevent them from paying their mortgages, real estate taxes and property expenses, potentially leading to default and foreclosure.

For more information on how you can support these bills, please contact the Massachusetts Rental Housing Association and the Massachusetts Small Property Owner’s Association.

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100316_photo_vetstein (2)-1Richard D. Vetstein, Esq. is a vocal advocate for Massachusetts landlord rights and can be reached at [email protected] or 508-620-5352.

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Superman's_classic_poseLike Superman, A Use and Occupancy Agreement Can Save the Day, But Be Aware of the Risks!

Tom and Mary Ryan, and their two little kids, Abigail and Jake, are relocating from California to the Boston area so Tom can take a job with a local tech company in Burlington. They have already sold their California home, and have been living in a cramped rented condominium in Santa Monica for two months already. Their loan has hit some snags because Tom was out of work for half of 2013, and had some IRS issues, although he is on solid footing now with his new job. The closing is scheduled for the end of this week and they have their cross country movers booked and scheduled and their life is now packed in boxes. Just when they finish packing their last box, their loan officer calls with somber news. “Tom, unfortunately, our underwriting department is dealing with delays getting your tax transcripts from the IRS. We are going to have to push back the closing for about a week. I’m so sorry.” Canceling the movers will cost several thousand dollars, and they will have to cancel furniture shipments as well. To make matters worse, new tenants are supposed to move into Tom’s rented condo unit right after they leave.

While all characters appearing in this work are fictitious, and any resemblance to real persons, living or dead, is purely coincidental, Tom and Mary are in trouble. With the prevalence of back-to-back closings and unforeseen underwriting issues and title defects, these situations are not uncommon. And with new TRID closing disclosure rules coming online in August, which are bound to cause even more loan approval delays, we may be seeing more of these situations in the months to come.

Fortunately, there is a solution to this situation. The sellers are willing to let the Tom, Mary and family move into the home prior to the closing under a Use and Occupancy Agreement. This will enable the buyers to complete their move, move into the house, but before the actual closing. A use and occupancy agreement, however, is not without its risks and downside, which I will discuss below.

One of the most important aspects of a Use and Occupancy Agreement is what it is versus what it is not. The agreement should specify that it creates a mere license to occupy the premises, not a tenancy or a landlord-tenant relationship. This will make it easier to remove/evict the occupants if something goes wrong. In any event, if the sellers are forced to remove the occupants, they will still have to resort to judicial eviction proceedings, which in Massachusetts can potentially take several months. This alone is the biggest drawback of a Use and Occupancy Agreement. The seller should always put language in the agreement that the buyers will be responsible for all attorneys’ fees and costs in case of an eviction.

The parties have to agree on a rental rate, typically based on the fair market rent for the premises or the mortgage and carrying costs. Websites such as www.rentometer.com can give you an idea of what a fair rental rate should be. Your Realtor should give you guidance as well. The rent should be divided by 30 for a per diem basis. You can also charge penalty rent if the term is extended past the original deadline.

The sellers should also include general indemnification language providing that “during the period of occupancy, Buyers shall maintain the Premises in good, clean condition and shall not make nor suffer any strip or waste to the Premises, nor make nor suffer any unlawful or improper use of the Premises and Buyers agree to indemnify Sellers and save them harmless from all liability, loss or any damage arising from such additions, alterations, strip, waste or unlawful or improper use, any nuisance made or suffered on the Premises by Buyers, including their family, friends, relatives, invitees, visitors, agents, or servants, or from any carelessness, negligence or improper conduct of any person.”

Lastly, the buyers should do their pre-closing walk through before they move in under a Use and Occupancy, because once they move in, the home will be a mess for awhile. That way, everyone will be on the same page as far as the property condition goes on the date of move in.

Many attorneys advise clients never to agree to Use and Occupancy Agreements. I am not one of those attorneys. With any risk, it depends on the situation. The sellers need to be comfortable that any delays will be resolved favorably and quickly. Sellers also need to appreciate that despite any language in the agreement, it could take months to remove an occupant if things so south. As long as everyone understands the risks, a Use and Occupancy Agreement can be a life saver.

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