I’ve recently become aware that some Massachusetts landlords are requiring that tenants procure their own policy of renter’s insurance as a condition of leasing. In fact, MSN Real Estate did a nice write up about the practice here. But I am also hearing about a dark side to this practice where some landlords have a kickback arrangement with the insurance provider where the landlord receives compensation for any policy taken out by a tenant.
Renter’s insurance is almost always a good idea, but under Massachusetts law, can a landlord require that a tenant get a policy (if the tenant doesn’t want one) and must it disclose a referral relationship with the insurance provider?
Landlords Should Be Careful About Renter’s Insurance Requirement
In light of recent court decisions, landlords should re-examine the legality of a mandatory renter’s insurance policy requirement. In the recent Hermida v. Archstone class action ruling, which considered amenity fees under the Massachusetts security deposit statute, the court held that landlords can only charge first and last month’s rent, a security deposit, and a lost key fee at the beginning of a tenancy, and no other types of fees. Any other type of fee or financial obligation required to be paid by the tenant at the beginning of the lease could be deemed illegal under the Mass. Security Deposit law, Mass. Gen. Laws ch. 186, sec. 15B. Accordingly, landlord must be very careful about what and how much they charge tenants at the inception of leases, over and above the standard rent deposits and new key fee. At the very least, renter’s insurance should be optional, and any affiliate or kickback arrangement should be fully disclosed to the tenant. This still may not prevent a landlord from getting sued over a mandatory renter’s insurance requirement.
Renter’s Insurance Still Smart Choice
That said, I always recommend that tenants get their own renter’s insurance policy. It’s fairly inexpensive and provides protection to your personal belongings. Massachusetts law does provide for a minimum of $750 per unit for tenant relocation assistance due to fire displacement. However, that is not nearly enough for the average renter.
Has your landlord required that you purchase renter’s insurance? Have they disclosed any referral relationship? I’d like to hear from you. The practice may well be illegal.
Another Expansion Of Massachusetts Landlord Liability
In yet another case demonstrating Massachusetts’ inhospitable legal environment towards residential landlords, Northeast Housing Court Judge David Kerman has ruled that an owner of a mixed used residential – commercial building is “strictly liable” for a drunk tenant’s fall through a defective porch guardrail. The 17-page ruling is Sheehan v. Weaver, and is embedded below. The imposition of strict liability, sometimes called absolute or no-fault liability, makes landlords 100% liable for the injuries of tenants where there is a building code violation, regardless of whether the tenant was equally at fault for the accident. This is a troubling ruling and another reason supporting the notion that Massachusetts is landlord unfriendly!
Faulty Porch Guardrail
The landlord, David Weaver, owned a building with three residential apartments located above a commercial establishment. None of the apartments were owner-occupied. One of Weaver’s residential tenants, William Sheehan, fell through a porch guardrail, several stories onto the asphalt pavement below, suffering serious injuries. There was evidence that Sheehan was intoxicated, however, the connection of the guardrail to its post gave way because it was defective and in violation of the Building Code.
After a four-day trial in the Housing Court, a jury found for the tenant on the negligence claim, awarding approximately $145,000 after a 40% reduction for the plaintiff’s own negligence. The jury also found the landlord strictly liable, assessing $242,000 in damages.
Building Code Violation At Issue
The Massachusetts State Building Code provides for strict (100%) liability for any personal injuries caused by any building code violation at any “place of assembly, theatre, special hall, public hall, factory, workshop, manufacturing establishment or building.” The landlord argued that the primarily residential structure was not sufficiently commercial to be considered a “building” within the meaning of the Building Code’s strict liability provision. But Judge David D. Kerman disagreed:
“[T]he structure in this case may well be at the outer margin of the class of structures that fall within the ambit of the term ‘building’ in the strict liability law,” wrote Kerman. “However, it is my opinion that the mixed residential-commercial four-unit non-owner-occupied structure in this case is ‘commercial’ and ‘public’ enough to fit within the term ‘building’ in section 51.”
The imposition of strict liability resulted in the landlord being hit with the full amount of the $242,000 judgment with no reduction for the tenant’s comparative negligence due to his intoxication. Ouch.
Commentary: Bad Decision
As I stated to Massachusetts Lawyers Weekly, this is a troubling ruling. The Building Code provision, passed in the late 1800’s, was clearly intended to cover structures with a distinctively commercial nature, i.e., “public hall, factory, workshop, manufacturing establishing or building.” The law was not intended to cover a predominantly residential apartment building with commercial/retail on the ground floor, in my opinion.
This ruling will now expand liability for residential developers who have built quite a number of mixed-use residential projects in the last few years. This decision can be read as providing strict liability for anyone injured due to any type of building code violation, however minor. Property managers and commercial insurers should be aware of this ruling, and ensure that there are no building code issues which could cause harm to tenants.
Given the concerning expansion of liability in this case, look for this ruling to get appealed. Judge Kerman is a well-respected judge, and this decision is a close call, but I think he went a bit too far outside the legislative intent behind the law.
Commercial Landlord Must Wait Out 12 Year Lease Term To Recover For Tenant’s Early Termination
In a decision which underscores the importance of careful commercial lease drafting, the Massachusetts Appeals Court has ruled that under a standard form default indemnity provision in a commercial lease, a commercial landlord must wait out the end of a 12 year lease term to recover unpaid rent from a tenant who abandoned the premises in Year 2 of the lease. The practice pointer here is to always have a current acceleration/liquidated damages clause in your commercial lease. See below for some form language.
The case is 275 Washington Street Corp.. vs. Hudson River Int’l, LLC (Mass. Appeals Court March 9, 2012), and is embedded below.
Dental Practice Goes South Quickly
The landlord and tenant entered into a 12-year lease beginning April 13, 2006, and ending April 16, 2018. The premises, located at 221-227 Washington Street in downtown Boston, were intended for use as a dental practice. Within a year of the lease commencement, the dental practice went under and closed. In May 2008, the dentist told the landlord that he would not be making any further lease payments.
Fortunately, the landlord found a new tenant. A new 10 year lease was signed, covering the remainder of the dentist’s term, but at a lower rent. The landlord sued the tenant for the rent differential.
Standard Indemnification Clause
The lease contained a standard default indemnification clause found in many older standard lease forms such as this:
The LESSEE shall indemnify the LESSOR against all loss of rent and other payments which the LESSOR may incur by reason of such termination during the residue of the term. If the LESSEE shall default, after reasonable notice thereof, in the observance or performance of any conditions or covenant on LESSEE’s part to be observed or performed under or by virtue of any of the provisions in any article of this lease, the LESSOR, without being under any obligation to do so and without thereby waiving such default, may remedy such default for the account and at the expense of the LESSEE.
Indemnity Provision Lacking
The problem is that under Massachusetts law, recovery under an indemnity clause of a lease cannot be had until the specified term of the lease has ended. The reasoning underlying this legal tenet is that such liability is ultimately “contingent upon events thereafter occurring, because the full amount which the lessee eventually must pay for the remainder of the term cannot be wholly ascertained until the period ends.” Although somewhat reluctant, the Court was bound to follow the law in this instance:
We are cognizant of the concerns raised by this long-established rule barring recovery until the end of the original lease, given the possible intervention of factors, presently unknown, that make the determination of damages uncertain at the present. We also recognize the possibility that this rule, which forces this landlord to wait until 2018 to determine post-termination damages, may in effect make it impossible for the landlord to recover its true damages from this corporate tenant or guarantor, because of the protections afforded by legal processes, such as dissolution or bankruptcy. However, given the present state of the law and the specific terms of the contract to which parties of equal bargaining power agreed, we are constrained, nonetheless, to deny recovery to the landlord under the indemnification clause of this lease.
Time To Change The Old Law?
The Appeals Court, especially the concurring opinion of Justice Kantrowitz, suggested that the time may be ripe for the Supreme Judicial Court to re-examine and modernize the law in this area. So look for this case to possibly go up on appeal.
Solution: Acceleration/Liquidated Damages Clause
The lease in this case did not contain the more current acceleration/liquidated damage clause which provides that upon a rent default, all unpaid rent is automatically due through the end of the lease term as liquidated damages. I recommend language such as this to prevent what happened to the landlord in this case:
If LESSEE shall default in the payment of the security deposit, rent, taxes, substantial invoice from LESSOR or LESSOR’s agent for goods and/or services or other sum herein specified, and such default shall continue for ten (10) days after written notice hereof, and, because both parties agree that nonpayment of said sums when due is a substantial breach of the lease, and, because the payment of rent in monthly installments is for the sole benefit and convenience of LESSEE, then in addition to the foregoing remedies the entire balance of rent which is due hereunder shall become immediately due and payable as liquidated damages. The Parties acknowledge and agree that (i) the liquidated damages hereunder is the best estimate of such damages which would accrue to Lessor in the event of Lessee’s default hereunder; (ii) said deposit represents damages and not a penalty against Lessee.
In a decision which could impact foreclosure cases involving missing or lost loan documents, the Appeals Court held that a mortgage is unenforceable and must be discharged where the underlying promissory note securing the mortgage could not be found.
Seller Second Mortgage Financing
This case involved an unconventional second mortgage for approximately $15,000 taken back from a private seller. The homeowner subsequently refinanced the first mortgage several times, but the refinancing lenders’ attorneys never obtained a subordination from the second lien-holder. That was a mistake. The first mortgage wound up in Wells Fargo’s hands which realized that due to the lack of recorded subordination, the second mortgage was senior to its first mortgage.
Alas, a title claim arose and the title insurance company had to step in and file an “equitable subrogation” action. In this type of legal action, a first mortgage holder asks the court to rearrange the priorities of mortgages due to mistake, inadvertence or to prevent injustice.
Where’s The Note?
The second mortgage holder had lost the promissory note which secured its mortgage, and notably, could not locate a copy of it. The mortgage itself referenced the amount of the loan and the interest rate but was silent on everything else, including the payment term, maturity date, and whether it was under seal. The second mortgage holder argued that enough of the terms of the missing note could be “imported” from the mortgage, but the Appeals Court disagreed, reasoning that there wasn’t enough specificity on key terms to enforce the mortgage.
Lesson One: Safeguard Original Loan Docs
This decision underscores the importance of safeguarding original promissory notes and other debt instruments, or at a minimum keeping photocopies so that if enforcement is required, the material terms of the original can be proved to the satisfaction of the court. With all the paperwork irregularities endemic with securitized mortgages these days, missing or lost promissory notes and loan documents have become more prevalent. This decision is potentially problematic for those foreclosures where the original promissory note is lost. The standard Fannie Mae form mortgage does not spell out the loan terms with specificity, instead, it references the promissory note. Indeed, the Fannie Mae mortgage does not even reference the interest rate. Based on this decision, a mortgage without sufficient evidence of a promissory note could be rendered unenforceable and un-forecloseable.
(a) A person not in possession of an instrument is entitled to enforce the instrument if (i) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred, (ii) the loss of possession was not the result of a transfer by the person or a lawful seizure, and (iii) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process. (b) A person seeking enforcement of an instrument under subsection (a) must prove the terms of the instrument and the person’s right to enforce the instrument. If that proof is made, section 3-308 applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.
Lesson Two: Get Subordinations For Junior Liens
This decision also underscores the importance of getting a subordination agreement for second mortgages and other junior lien-holders when closing refinances. A subordination agreement is a contract whereby a junior lien-holder agrees to remain in junior position to a first mortgage or other senior lien-holder during a refinancing transaction. Otherwise, the first in time rule of recording would elevate a junior lien-holder to first, priority position after a refinance. If a subordination was obtained and recorded here, this case would not have occurred.
Disclaimer: I drafted the original complaint in this case while working at my previous law firm. I had long since left when the case was decided at the Appeals Court.
Massachusetts Senate Bill 830 Addresses Toxic Foreclosure Titles
Finally, Massachusetts lawmakers have taken action to help innocent purchasers of foreclosed properties in the aftermath of the U.S. Bank v. Ibanez and Bevilacqua v. Rodriguez decisions, which resulted in widespread title defects for previously foreclosed properties. The legislation, Senate Bill 830, An Act Clearing Titles To Foreclosed Properties, is sponsored by Shrewsbury State Senator Michael Moore and the Massachusetts Land Title Association. Full text is embedded below.
The bill, if approved, will amend the state foreclosure laws to validate a foreclosure, even if it’s technically deficient under the Ibanez ruling, so long as the previously foreclosed owner does not file a legal challenge to the validity of the foreclosure within 90 days of the foreclosure auction.
The bill has support from both the community/housing sector and the real estate industry. Indeed, the left-leaning Citizens’ Housing and Planning Association (CHAPA), non-profit umbrella organization for affordable housing and community development activities in Massachusetts, has filed written testimony in support of the bill.
Properties afflicted with Ibanez title defects, in worst cases, cannot be sold or refinanced. Homeowners without title insurance are compelled to spend thousands in legal fees to clear their titles. Allowing such foreclosed properties to sit and languish in title purgatory is a huge drain on individual, innocent home purchasers and the housing market itself.
A recent case in point: I was recently contacted by a nice couple who bought a Metrowest condominium in 2008 after it had been foreclosed. Little did they know that the foreclosure suffered from an “Ibanez” title defect. Unfortunately, the lawyer who handled the closing did not recommend they buy owner’s title insurance. They have been unable to track down the prior owner who went back to his home country of Brazil, and now they are stuck without many options, unable to refinance or sell their unit. This bill will help people like this who have helped the housing market by purchasing foreclosed properties, and improving them.
Final product will be a combination of both the final Truth in Lending (TIL) form and the HUD-1 Settlement Statement — a dramatic change from the existing forms.
For the second time in as many years, the federal government is substantially overhauling two of the most important disclosures given to mortgage borrowers, the Truth in Lending Disclosure and the HUD-1 Settlement Statement. The revisions are mandated by the Dodd-Frank Act. The new Consumer Financial Protection Bureau is in charge of re-designing and testing the new forms.
Most real estate industry professionals are unaware that these new changes are on the horizon. The new forms are expected to be implemented in 2013 after rule-making and industry comments are completed.
If you want to track the CFPB’s activity on these forms, I highly recommend the CFPB Monitor. The CFPB’s “Know Before You Owe” website also has updates and is pretty good for a government site.
Here is the new prototype HUD-1 Settlement Statement:
What do you think about the new forms? At first, glance it is easier to read, understand and explain to borrowers. We’ll keep track of this important issue.
After a 16 year long saga, wealthy Marblehead mansion owner Wayne Johnson’s battle to save his house from a court-ordered wrecking ball has come to an end. The underlying legal saga is convoluted and complicated, but the end result was swift and destructive — the million dollar mansion is now rubble.
Johnson’s battle started in 1995 when he recorded a plan dividing his land into two lots. One lot contained an existing single-family dwelling. The second lot contained a garage. The house lot complied with all zoning dimensional requirements, but the garage lot didn’t comply with lot width requirements. The Building Inspector incorrectly determined that the garage lot complied with all applicable zoning requirements.
Johnson’s neighbors appealed the Building Inspector’s decision, arguing that the new house would greatly diminish their valuable ocean views. The local zoning board allowed the issuance of a building permit. After the building permit issued, the plaintiffs filed an appeal in Land Court and asked for an injunction to prevent construction on the garage lot. The Land Court judge warned Johnson that proceeding with construction was at his peril. In a decision by another judge in May, 2000, the court ordered the building permit to be revoked. However, the court ruled that the house could remain in place while Johnson attempted to obtain appropriate zoning relief.
Johnson, however, was unable to obtain zoning relief. After several unsuccessful appeals, the Land Court ordered Johnson to remove the house by October 4, 2010. Johnson failed to comply with that order, and the neighbors attempted to hold Johnson in contempt. With the threat of contempt and possible jail looming, Johnson finally threw in the towel.
The Land Court ruling can be read here: Schey v. Johnson and is embedded below.
Using best practices to screen and select good tenants is the most important thing a Massachusetts landlord can do to avoid costly non-payment and eviction problems down the road, as I have posted about on this Blog. As the saying goes, an ounce of prevention is worth a pound of cure.
In my 14 years of practice, I have come across a sub-set of tenants which are extremely dangerous to Massachusetts landlords. They should be avoided like the Plague. I like to call them Professional Tenants.
Let me give you the profile of a typical Professional Tenant. (This is a generalization based on my personal experience, but it’s fairly accurate).
History of eviction history and/or delinquency with prior landlords
Surprising (and dangerous) knowledge of Massachusetts landlord-tenant law
Background in real estate, engineering, contracting
Marginal to bad credit: prior history of nonpayment collections, judgments or bankruptcies
Gaps in rental history
Non-existent or incomplete prior landlord references
The Professional Tenant’s Scheme
Shortly after moving in, they will start to complain about small issues with the rental property. Some will complain to the local board of health to have the landlord cited for code violations. (The state Sanitary Code can trip up even the most conscientious landlord.) Then the Professional Tenant will stop paying rent, claiming they are “withholding rent” due to bad property conditions. Of course, these tenants completely ignore the smart practice that any withheld rent be placed in an escrow account. Then the Professional Tenant will assert the landlord violated the last month rent and security deposit law, and ask for their deposit back, trying to set up the landlord for a triple damage claim.
In the meantime, months go by and the Professional Tenant has failed to pay any rent and the minor code violations, if any, are repaired. The landlord is forced to start eviction proceedings, only to be met with a slew of counterclaims and defenses from the Professional Tenant. The Professional Tenant then sends the landlord a myriad of document requests and interrogatories which automatically delays the eviction hearing by 2 weeks. If the Professional Tenant is really savvy, they will demand a jury trial, which in most small District Courts can delay the eviction by weeks and typically months. Meanwhile, the entire time, the Professional Tenant has still not paid any rent.
Months and thousands of dollars in attorneys’ fees later, the landlord finally gets his day in court. And the Professional Tenant doesn’t show up, leaving the landlord with a worthless judgment for thousands in unpaid rent and a trashed apartment.
Screen and Screen Again
The sad thing is that because Massachusetts landlord-tenant law is so tenant friendly, there is not much a landlord can do to avoid this situation, other than not rent to the Professional Tenant in the first place! Once a landlord has signed a lease with a Professional Tenant, they are stuck until the tenant violates the lease. My advice to landlords is to make screening the most important thing you do as a landlord, and do the following:
Invest in good credit history checks.
Follow up with landlord references
Check employment info
Check prior bankruptcies
If someone seems fishy, they probably are
If you find yourself stuck with a Professional Tenant, give me a call. There are certain things an experienced eviction attorney can do to prevent or minimize these shenanigans. At least you will be fighting back against what I perceive as scam artists.
In yet another move evidencing the Supreme Judicial Court’s ongoing concern over the impact of the foreclosure crisis in Massachusetts, the SJC is soliciting friend-of-the-court briefs in the next important foreclosure case, HSBC Bank v. JodiMatt.
As we wrote about in our prior post here, the SJC is considering whether a lender holding a securitized mortgage has standing to even begin a foreclosure action in the Land Court under the Servicemembers Civil Relief Act–one of the first steps in the Massachusetts foreclosure process. The SJC will ostensibly decide whether lenders holding mortgages held in a securitized pool, with questions whether they in fact were validly assigned those mortgages, can start foreclosures in Massachusetts. The lower court Land Court opinion can be read here.
The text of the Court’s announcement is as follows:
February 17, 2012 – ANNOUNCEMENT: The Justices are soliciting amicus briefs. Whether the Land Court judge correctly concluded that a bank had standing to commence an action to determine whether the defendant (alleged to be in breach of her mortgage obligations) was entitled to the benefits of the Servicemembers Civil Relief Act, on the ground that the bank had a contractual right to become the holder of the note and mortgage. The case is tentatively scheduled for argument in May.
For more information about how to submit a friend of the court brief, go to the SJC Website.
Banker and Tradesman is reporting that Bristol, Plymouth and Norfolk County Registrars of Deeds plan to file a class action suit against Mortgage Electronic Registration System (MERS), aiming to recoup land recording fees they believe they are owed. B&T reporter Colleen Sullivan reports that:
The counties are being represented by Bernstein Liebhard LLP, a New York firm specializing in class actions which has already brought a similar suit on behalf of all the counties of Ohio. John Mitchell, a Bristol County commissioner, said the board considered pursuing a claim last year, but decided to hold off until the national mortgage settlement between the banks and the states’ attorneys general was resolved. But as it became clear that the vast bulk of the funds in that settlement would go towards foreclosures and loan modifications, he said the county decided to pursue the matter. Bristol County officials estimate the county may have lost out on millions of dollars in fees over the past decade because of the alleged use of MERS as a kind of private registry among large banks. A rough calculation prepared by county officials last year came up with a figure of between $3.1 million and $6.5 million lost, using a conservative estimate of one or two additional non-recorded assignments per MERS- registered property.
“Over the last month, we were approached by [Bernstein Liebhard] and other firms….they already had Norfolk and Plymouth, and we thought it made sense to get as many counties together,” Mitchell told Banker & Tradesman. Mitchell said he wasn’t sure if the remaining Massachusetts counties with county-level governance would join the suit. The relatively small size of counties like Nantucket and Dukes would mean far smaller sums at stake.
County-level governance was abolished in Massachusetts in eight of the state’s 14 counties around the turn of the century. Only Barnstable, Bristol, Norfolk, Plymouth, and Dukes retain county boards; Nantucket has a combined city-county government. The remaining boards retain the right to bring independent actions in court.
“We’re familiar with their claims, and there’s no merit to them,” said Janis Smith, spokeswoman for MERS. Smith said that by registering under the MERS name, banks fulfill the purpose of having a registry, that is, alerting the public of any existing leins on a property. “MERS does not eliminate or replace county records, and the recording fees are paid,” she said. “The MERS business model is legal in all 50 states and has been affirmed by Massachusetts courts.”
“I commend the counties,” said John O’Brien, the registrar of deeds in Essex County, who has been an active critic of MERS for the past two years. O’Brien was the first public official in Massachusetts to calculate how much the MERS system may have cost the state in allegedly lost recording fees, coming up with a figure of $22 million for his county alone. “If I had the authority, I would have filed this suit two years ago.”
The other registries fall under Secretary of State William Galvin’s jurisdiction. O’Brien said he plans to petition the legislature to recover his ability to bring suit on behalf of Essex County as one of its elected officials.
The Registrars are reportedly incensed that the MERS private recording system has deprived them of millions of recording fees. We will keep tabs on this important case.
Six Year Litigation Odyssey Ends With $872,000 Payout
After six years of litigation over a deceptive bait-and-switch condominium purchase scheme, a Cambridge couple has forced the listing broker in the deal to pay them $872,000 in compensation. The case isOleg Batishchev v. Brenda Cote and others (click to download).
The case started in 2005, after the first time home buyers paid $683,385 for a condominium unit from Perception Ventures LLC. The couple believed they were buying a newly renovated unit on the right side of the building. Victimized by what the trial judge called a “preposterous fraud,” the developer, the listing broker and the seller’s attorney tricked them into buying a unit on the left side of the building which was beset with such substantial and egregious workmanship defects as to render it virtually uninhabitable.
After a two week jury trial by Attorneys John Miller and Jonathan W. Fitch of the Boston firm Sally & Fitch, the developer and his agents were held liable under the Massachusetts Consumer Protection Act, Chapter 93A. The case dragged on through two appeals, and was finally concluded with the payment of $872,000 from the listing broker.
The couple had previously settled with the sellers’ lawyers for $150,000 and, following a one week jury trial on damages, had also received a damage award of more than $425,000 against their own closing attorney for her malpractice.
What troubles me most about this case is that the attorneys got caught up in this scheme, either intentionally (in the case of the seller’s attorney) or by failing to recognize the shenanigans going on (in the case of the buyers’ attorney). The lesson to be learned is that if there’s smoke, there’s usually fire.
For more information about the case, read Sally & Fitch’s press release here.
Federal Judge Rules $475 Apartment Amenity Use Fee Violates Massachusetts Security Deposit Law
Some large apartment owners, such as Archstone Properties, have been charging tenants a separate “amenity use fee” for use of the community pool, workout room, media center and other amenities, or a separate “move-in” fee or pet fee. The fees can be rather hefty; several hundred dollars in many cases. Well, a federal judge recently struck down these fees as illegal under the Massachusetts Security Deposit Law. What’s more, the judge has allowed a class action to proceed against Archstone Reading apartment complex which may be on the hook for thousands if not millions in refunds to tenants. Other apartment complexes may have legal exposure if they used similar amenity use fees.
Massachusetts Amenity Fee Class Action
The case is Hermida v. Archstone Properties (D. Mass. Nov. 29, 2011). The case arose out of a $475 amenity use fee charged by Archstone Properties in their Reading, Massachusetts apartment complex. The judge ruled that under Massachusetts law, landlords can only charge tenants for: (1) first month’s rent, (2) last month’s rent, (3) a security deposit, and (4) a key installation fee. The additional amenity use fee is illegal, Judge Young ruled, if it is required, not optional, and charged up front, i.e, a condition to renting. Judge Young also approved the case for class action status.
The class action attorney handling the case, Matthew Fogelman, Esq., is also investigating whether other apartment complexes and landlords have charged similar amenity use fees, move in fees and/or pet fees, for potential class actions against those apartment complexes. If you were ever charged a separate amenity use fee, move-in fee, or pet fee as part of your rental lease, please email me at [email protected] and I will put you in contact with the case attorney. You could be entitled to a refund of several hundred dollars and possibly additional compensation.
Alert: Property managers are asking tenants to sign releases to get a refund of their amenity use fees. DO NOT SIGN ANY RELEASE OR WAIVER FORM UNTIL YOU HAVE CONSULTED WITH AN ATTORNEY. YOU COULD BE WAIVING YOUR RIGHT TO COLLECT THE MAXIMUM AMOUNT OF COMPENSATION.
Short Sales Remain A Good Bargain For Educated Buyers
I was shocked to see this headline today in Banker and Tradesman: Buyers’ Agents Caution: Stay Away From Short Sales, If You Can. Behind this sensationalist headline is the Massachusetts Association of Buyer’s Agents (MABA) which is “warning buyers to say away from short sales.” Say what?!
Sam Schneiderman, the President of MABA states in the article that:
“But even though short sales are taking up a greater share of the market, many buyers aren’t fully aware of the trials and tribulations involved in the transactions. Buyers are thinking short sales are great deals – but it hangs you up for two months, three months, six months,” he said. “Whatever your timetable is, it’s bound to not co-operate. . . Even though banks have made efforts to speed up shorts in recent months, Schneiderman says such problems are endemic to the short sale process, with the buyer almost always left hanging while the bank frets and bickers with the seller and any second or third lien holders. “
Perhaps the MABA’s press release got “lost in translation” and Banker & Tradesman ran with a provocative headline, as Mr. Schneiderman suggests in his comment below. The article certainly spawned a fair amount of negative commentary.
The one thing we can all agree on is that potential short sale buyers must be educated on all of the risks and possible delays inherent with a short sale. The same is true for buyers’ agents who are likewise inexperienced with short sales. Short sales are growing segment of the Massachusetts market, and are predicted to be even hotter in 2012 with lenders trying to unload a stagnant inventory of distressed real estate. Scaring potential buyers (and inexperienced agents) with short sale war stories isn’t going to help anyone.
“As somebody who exclusively negotiates Massachusetts short sales, this article is precisely the reason why agents need to be educated further if they plan on taking short sale listings or showing a short sale listing to a potential buyer. If not, they are doing their client a disservice. Short sales require much more work than a traditional sale, but commissions are typically the same, and in some cases less, therefore not all agents are willing to invest the extra time and effort needed to obtain short sale approval. A majority of agents undertake these transactions before fully understanding the lenders’ specific requirements and procedures. The problem is not short sales, but rather the number of inexperienced agents attempting to handle these types of transactions.
As someone with an extremely high short sale success rate, I do my homework upfront to make certain that the seller first qualifies for the short sale. I also make certain to give both the buyer and seller a reasonable time frame in which to expect to receive short sale approval. That way, everyone is on the same page and you avoid having the buyer walk away prior to giving the lender a reasonable opportunity to receive all necessary approvals from underlying investors. My company has helped hundreds of real estate agents get their short sales closed. Depending on the lender, and the amount of lien holders, we can typically get a short sale approved in the first sixty (60) days. If the buyer is not willing to remain a party to the transaction for the requisite sixty days, they are not the “highest and best offer” and their offer should never be presented to the lender.”
Andrew is spot on. By definition, short sales are a unique type of transaction and riskier than normal transactions. That is why the purchase price is usually discounted. Sometimes, short sales are not approved. But most often they are. Agents have to educate buyers about the time process inherent with a short sale. You are not going to close a short sale in 30 days. There could be, and often are, some delays.
I recently authored a post on how to properly write up sales contracts for short sales which was re-published by Banker and Tradesman. The risks can be properly managed. I, and the experienced short sale agents with whom I work, have successfully closed hundreds of short sales, with minimal delay.
I hope the next press release issued by MABA on short sales is more positive.
__________________________________________
Richard Vetstein, Esq. is an experienced Massachusetts short sale attorney. For more information, please contact him at info@vetsteinlawgroup or 508-620-5352.
For interested legal observers of the foreclosure crisis, it really doesn’t get any better than this.
Supplemental and amicus curie legal briefs have been filed in much awaited case of Eaton v. Federal National Mortgage Ass’n, and they make for great reading. The briefs were filed in response to the SJC’s concern, mid-appeal, over whether an adverse ruling against foreclosing lenders will have a disastrous impact on foreclosure titles and, if so, whether its ruling should be applied prospectively rather than retroactively. Click here for our past posts on the case.
Notably, the Federal Housing Finance Association, the congressional conservator of the bailed out Fannie Mae and Freddie Mac, filed a rare amicus brief and laid a shot across the SJC’s bow. It suggested that the congressional bailout law would trump an adverse decision by the SJC to the extent that it interfered with Fannie and Freddie’s mission to secure the health of U.S. secondary mortgage market. This is the first time that I’m aware of the federal agency intervening in a particular foreclosure case.
Not surprisingly, Fannie Mae, FHFA, and REBA (Real Estate Bar Ass’n) and the other industry groups argue against a retroactive application of an adverse ruling, claiming that it would have a disastrous effect on homeowners with foreclosures in their titles.
Eaton (which cited this Blog), the legal services groups and foreclosure defense groups say that the sky will not fall down if the unity rule is applied retroactively; indeed, foreclosures in Mass. have increased post-Ibanez. They also argue that the law is the law, and it’s the lenders fault for creating a securitization scheme in violation of the law, so they should have to deal with the repercussions.
I have also attached REBA’s and Attorney Glenn Russell’s (lead counsel in U.S. Bank v. Ibanez) submissions on the recent Land Court ruling in Wells Fargo v. McKenna where the Land Court Judge Gordon Piper held that Massachusetts does not require the unity rule.
A final decision is expected in February or March.
I recently came across a very interesting and scary case from the Appeals Court, Survillo v. McDonough No. 11–P–290. Dec. 2, 2011. (It’s technically an “unpublished” opinion but it’s available to the public). The case underscores how carefully attorneys must craft the mortgage contingency to protect the buyer’s deposit in case financing is approved with adverse conditions.
“Prevailing Rates, Terms and Conditions”
The buyers, Mr. and Mrs. Survillo, submitted the standard Offer To Purchase the sellers’ home in Walpole. The offer provided it was “Not subject to the Sale of any other home.” The sellers accepted the offer. The buyers received a conditional pre-approval from a local bank for a first mortgage in the amount of $492,000. The pre-approval also stated that anticipated loan was “[n]ot based on sale of any residence.”
The parties then entered into the standard form purchase and sale agreement (P & S), with the typical mortgage contingency provision for a $429,000 mortgage loan:
“In order to help finance the acquisition of said premises, the [buyers] shall apply for a conventional bank or other institutional mortgage loan of $492,000.00 at prevailing rates, terms and conditions. If despite the [buyers] diligent efforts a commitment for such loan cannot be obtained on or before October 5, 2009, the [buyers] may terminate this agreement by written notice to the [sellers] and/or the Broker(s), as agent(s) for the [sellers], prior to the expiration of such time, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto “
Change In Circumstances: Lender Requires Piggyback Loan & Buyers List Their Residence
Due to the buyers’ debt to income ratios, the lender required that the loan be structured as a “piggyback” — a first mortgage of $417,000 and second mortgage of $73,400, and with the condition that the buyers listing their primary residence for sale prior to the loan closing. The buyers absolutely did not want to list and seller their residence, so they wanted out of the deal.
On the last day of the extended financing deadline, the buyers timely notified the sellers that they had “not received a loan commitment with acceptable conditions,” and attempted to back out of the agreement under the mortgage contingency provision. Ultimately, with the buyers refusing to sell their home, the bank denied the buyer’s the mortgage application based on the fact that the “borrower would be carrying three mortgage payments and the debt to income is too high.”
Focus On “Prevailing Terms” Language
The sellers refused to return the deposit, and litigation over the deposit ensued.
The Court framed the case as follows: “Before the extended mortgage contingency deadline of October 21, the buyers received a commitment from the bank for two mortgages totaling $492,000. The P & S’s mortgage contingency was accordingly satisfied unless the bank’s requirement that the buyers list their home for sale was not a “prevailing” term or condition.”
The court started with the assumption that “the typical loan condition for most borrowers is to require them to sell an existing home before the new loan closes. The condition here required only that the buyers list, not sell, their home and it was accordingly not a typical condition.” The buyers argued that because the condition was unusual, it was not a “prevailing” condition within the meaning of the contingency clause of the P & S, despite the fact that the condition was more favorable to them than the standard condition. The court flat out rejected that argument, citing prior rulings that terms of a mortgage contingency presuppose that the buyers will accept commercially reasonable loan terms. If less is required, the condition becomes an option. The court also noted that the buyers failed to notified the sellers that they were unwilling to list or sell their existing home, nor did they insert a proviso to that effect into the mortgage contingency clause. Subsequent events suggested that if the buyers had timely disclosed their intentions to the bank, the loan would have been disapproved, which may well have given the buyers the shelter they sought under the mortgage contingency clause.
The court ruled against the buyers who had to forfeit their $31,000 deposit.
An Ounce of Prevention Is Worth A Pound of Cure
I’m not sure who is to blame here, the buyer’s attorney or the buyers themselves. Probably both.
From a legal drafting approach and as the court pointed out, the buyer’s attorney could have insisted on language into the mortgage contingency provision that the buyers’ financing could not be conditioned on the listing or sale of the buyers’ present residence. After all, the language was in the Offer, so it could have easily been carried over into the P&S. There was no indication from the decision that this was raised or negotiated.
It also seems apparent that the buyers were not particularly up front with anyone on their insistence that they would not list and sell their current residence. If they had been more forthcoming about that, perhaps they could have avoided this situation.
A commenter on Boston.com also places some blame on the loan officer: “Not all pre-approvals are created equal. For a few minutes of work and adherance to a common standard of practice by the mortgage professional, a true pre-approval is supported by a credit report, the main criteria for ability to qualify for a mortgage. This is generated in a few seconds, and the pre-approval letter usually states subject to verification of income, assets, and property appraisal. Had this been done, THE DEBT TO INCOME RATIO ISSUE WOULD HAVE SURFACED EARLY.”
Based on the loan amount, this mistake or gamble cost the buyers around $31,000 plus legal fees. Ouch!
The Offer to Purchase Has Become Much More Important
With a glut of distressed property still on the market and lenders realizing foreclosures aren’t very cost-effective, analysts are predicting a healthy spike in short sales for 2012. Short sales are quite unique in terms of deal dynamics, and should be handled differently than the typical transaction.
Massachusetts real estate attorneys and Realtors, however, are set in their ways when it comes to real estate contracts. For decades, we’ve been using the standard form Offer to Purchase and Purchase and Sale Agreement from the Greater Boston Real Estate Board or some variation thereof. We have also developed a predictable process in which the parties sign the Offer, conduct property inspections, sign the Purchase and Sale Agreement, obtain financing, order title, and get to closing.
With the recent proliferation of short sales, we have had to … yes, that dreaded word, CHANGE, the way we do things. Some agents and attorneys still do things the “old way” for short sale transactions, but they are doing themselves and their clients a disservice by doing so.
In this post, I will outline — and explain — the “newer and better” way of handling the legal contracts in a Massachusetts short sale transaction.
The Offer to Purchase: Now The Operative Contract Document
We are seeing a shift to making the offer the operative contract in a Massachusetts short sale transaction. And for good reason. A short sale, by definition, is subject to a critical contingency: obtaining short sale approval from the seller’s lender(s). No short sale approval, no deal. Experienced short sale attorneys and real estate agents (and their clients) don’t want to spend the time and incur the expense of drafting a comprehensive (and contingent) purchase and sale contract when there is no guaranty of getting short sale approval. Furthermore, short sale lenders will accept a signed offer from the buyer during the approval process.
When we were first doing short sales, there were several instances where we drafted up purchase and sale agreements and then the short sale approval fell through. We had to charge the client for the drafting work or eat the cost. No one was happy.
The better way has proven to be the following:
Build all contingencies into the Offer to Purchase, namely, Short Sale Approval and Financing (we’ll talk about home inspections later)
Use a standard rider with short sale contingency language, with a deficiency waiver
Seller to use best efforts in obtaining short sale approval
Buyer agrees to be bound for set approval period (60-90 days) in exchange for seller taking property off the market and not accepting back up offers. Negotiate deposit amount, usually 1% of purchase price. Buyer will obtain his financing and loan commitment during this approval period.
Negotiate extension rights, with corresponding protection for Buyer’s financing/rate lock
Upon short sale approval, purchase and sale agreement is signed within 5-7 days and full 5% deposit made
Closing within 30 days of short sale approval. (Most short sale approvals are only good for 30 days)
Waiver of home inspection or inspection prior to offer acceptance. Sellers should never agree to allow a home inspection contingency giving the Buyer a right to terminate. If the buyer doesn’t want to pay for an inspection up front, he is not a serious short sale buyer.
Change Is Hard…
I recognize that this is a departure from the “normal” way we document residential real estate contracts, but trust me, it’s a better way, and will actually decrease the time it will take to obtain short sale approval, because the parties are not waiting around for the P&S to be negotiated and signed and the buyer (and his attorney) don’t have to do unnecessary work.
Another important piece here is that the Buyer must get his financing in order, ready to go by the time short sale approval comes through. Lenders must recognize the unique short sale process and work with borrowers to get a firm loan commitment issued timely. Also, there’s no need for a lender to insist that the borrower have a signed purchase and sale agreement for underwriting approval. Under the process that I’ve outlined and under established Massachusetts case-law (McCarthy v. Tobin), the Offer is a legal and binding contract for the sale of the subject property and is sufficient for underwriting purposes. If it’s ok for the short sale lender, it should be ok for the buyer’s lender.
Help Is An Email Away
If you are a Realtor and need some guidance on the new Short Sale Offer, email me here and I will send you the form Rider. Also, if you need a referral for an excellent short sale negotiator, I highly recommend Andrew Coppo at Greater Boston Short Sales LLC.
Richard Vetstein, Esq. is an experienced Massachusetts short sale attorney. For more information, please contact him at info@vetsteinlawgroup or 508-620-5352.
I just wanted to pass along a neat story from a colleague evidencing the growing trend of judges turning to law blogs in their research of opinions. Federal Judge William Young spoke yesterday at a real estate bar association meeting about his recent and somewhat controversial opinion in Culhane v. Aurora Loan Servicers which considered the very complex maze that is Mortgage Electronic Registration System (MERS). I covered the case in this blog post.
Judge Young discussed the process by which he and his law clerks “learned the law,” and said it included tuning into “the blogs,” mentioning this blog by name. (My colleagues at Rackemann Sawyer’s Land Use Monitor should also be included). Judge Young also apparently read my post dissecting his ruling, stating that “he calls them the way he sees them,” and “everyone is entitled to their opinion.” I’m flattered that Judge Young would even consider reading this blog, and for lack of a better phrase, I think it’s pretty cool!
With blogs providing timely legal analysis so much faster than the traditional law reviews published by law schools, it’s not surprising that judges such as Judge Young are turning to them as a resource. Kevin O’Keefe of legal blog publisher LexBlog has been tracking such instances for awhile now, and it’s widespread throughout the country, with judges even citing law blogs in written opinions. Lawyers should take note of this when preparing their cases.
I’m happy to be a resource for Massachusetts real estate law. If I can contribute in the slightest way to the administration of justice and the development of our jurisprudence, I am very grateful.
Under a new Massachusetts oil heating law which went into effect on September 30, 2011, every homeowner with an oil heating system is required to install an oil safety valve or an oil supply line with protective sleeve in their system. The cost is approximately $150 to $350 depending on the system. The required upgrade is to prevent leaks from tanks and pipes that connect to your furnace. The upgrade will reduce the risk of an oil leak so by making a relatively small expenditure now, you can prevent a much greater expense in the future.
Who Must Upgrade?
Owners of 1- to 4-unit residences that are heated with oil must already have or install an oil safety valve or an oil supply line with a protective sleeve. Installation of these devices must be performed by a licensed oil burner technician. Technicians are employed by companies that deliver home heating oil or are self-employed. It is important to note that heating oil systems installed on or after January 1, 1990 most likely are already in compliance because state fire codes implemented these requirements on new installations at that time.
Who Is Exempt?
Homeowners are exempt from taking these leak prevention steps if:
the oil burner is located above the oil storage tank and the entire oil supply line is connected to and above the top of the tank OR
an oil safety valve or oil supply line with protective sleeve was installed on or after January 1, 1990, AND
those changes are in compliance with the oil burning equipment regulations; a copy of the oil burner permit from the local fire department may be used to demonstrate compliance.
Why Comply?
Not only is complying with the new law required, it makes good financial and environmental sense. Homeowners who take these preventive measures can avoid the disruption and expense that can be caused by heating oil leaks. A leak may result in exposure to petroleum vapors in your home. If the leak reaches the soil or groundwater beneath your house, then a cleanup must be performed to restore your property to state environmental standards. Such a leak can cost many thousands to clean up. Leaks that affect another property or impact drinking water supply wells can complicate the cleanup and increase the expense. Each year, several hundred Massachusetts families experience some kind of leak.
What will an upgrade cost?
The typical cost of installing either an oil safety valve or oil supply line with a protective sleeve ranges from $150 – $350 (including labor, parts, and local permit fees).
The home inspection is one of the most critical aspects of every Massachusetts real estate transaction. Virtually every buyer in a standard purchase transaction (meaning not a short sale, foreclosure, or bank-owned property) will opt to perform a home inspection, and for good reason. You need to know whether there are any serious structural, mechanical or other defective conditions in the home before you close.
As always, I’m going to focus on the legal aspects of the home inspection as it impacts the overall transaction.
Buyer Beware
Let’s start out with the legal framework for what, if anything, a seller and his real estate agent are required to disclose to a prospective buyer. Surprisingly to most buyers, a private seller has no legal duty in Massachusetts to disclose any type of information, good or bad, about the property (except for the presence of lead paint). This is called caveat emptor, or buyer beware. Real estate agents stand on a heightened legal footing. Under Massachusetts consumer protection regulations governing real estate brokers, a broker must disclose to a buyer “any fact, the disclosure of which may have influenced the buyer or prospective buyer not to enter into the transaction.”
Nevertheless, I always advise buyers not to rely or trust anything the seller or his/her agent says about the property. This is exactly the reason why most buyers will choose to get an independent home inspection.
Inspection Contingencies
The standard form Offer to Purchase (click for form) will include several inspection related contingencies: the general home inspection contingency, radon, lead paint, and pest contingencies. The buyer typically has between 5 and 10 days to complete these inspections. If the inspections reveals any problems requiring repair or remediation, the parties will negotiate repairs during this inspection period, and the agreement will be reflected in the standard purchase and sale agreement or sometimes a separate repair agreement which is signed around 14 days after the accepted offer. Typically, the Realtors do the heavy lifting on home inspection negotiations, and by the time it gets to the attorneys, there is an agreement in place.
The attorneys can craft the language for repairs. I always insist that repairs are performed by licensed contractors with evidence of completion provided prior to or at closing. Also, buyers should know that repairs provided in the purchase and sale agreement may trigger a second property inspection by the lender’s underwriters which could add another layer of oversight into the deal.
If the problems are so serious that the buyer wants to walk away from the deal, there is a mechanism for where the buyer provides notice to the seller and a copy of the inspection report. It’s very important to provide proper notice in order to get the buyer’s deposit returned. An attorney should be consulted for this situation.
Buyers should recognize the limits of the home inspection. The state regulations requires inspection of “readily accessible” components of a dwelling. Most modestly priced inspections are visual inspections of the property. The inspector is trained to identify defects in the systems of a house but cannot be expected to have x-ray vision. Moreover, property inspectors are not generally trained civil engineers. Structural defects and weaknesses may not be readily apparent, and may require follow up by a licensed structural engineer. In many cases, however, evidence of inappropriate settling or structural failure can be observed during a visual inspection. An experienced inspector will summarize the “big picture,” but inspectors are not required to identify the exact nature and extent of structural deficiencies. Regulations specifying the elements of a dwelling to be observed and reported on by the home inspector may be found here at 266 C.M.R. § 6.00.
Condominiums
When you buy a condo, you not only buy the unit, but the common areas such as the common roof, mechanical and HVAC systems, grounds, etc. Good home inspectors will ensure that the inspection of a condominium includes the common areas as well as the unit itself. The common area inspection may reveal deferred maintenance needs and inadequately performed repairs that may result in increased condominium fees and special assessments.
Radon
The Environmental Protection Agency (EPA) has established an “action level” of 4.0 pico-curies per liter (4.0 pCi/l) of radon present in indoor air. Although not established as an unsafe level, this figure has been established as the point at which protective measures are recommended. Prospective purchasers and home inspectors frequently use commercially available canisters to collect radon data. This method is cost-effective but may not give accurate results. The canisters are ordinarily placed for twenty-four to forty-eight hours in the basement and on the first floor of the dwelling. The canisters must be placed away from drafts and should not be disturbed. After the test period, the canisters are sealed and forwarded to a testing laboratory. Sometimes, the radon results are not ready by the time the purchase and sale agreement has to be signed. In this situation, the parties can either agree to extend the deadline or agree to a radon contingency.
If the radon results come back over 4.0 pCi/l, depending on the language of the radon contingency, the buyer can typically opt out of the deal altogether or require the seller to install a radon remediation system. Often the sellers will attempt to cap the cost of the system.
Pests
Most home inspectors are also qualified to perform inspections for wood-boring insects, such as termites, powder post beetles, and carpenter ants. All properties should be inspected for such pests. Properties financed by certain government-sponsored loan programs, such as the Federal Housing Authority, require a pest inspection as a condition of obtaining a loan. It’s a good idea to ask the sellers if they have an existing pest control contract that can be transferred to the new buyers.
Lead Paint
The Massachusetts Lead Law requires the buyer to be given the opportunity to inspect for lead paint. The seller or broker is required to provide potential purchasers of homes built before 1978 with the notification package prepared by the Massachusetts Department of Public Health.
Sellers and real estate agents are required by law to disclose any information about known lead paint hazards in their properties, and to provide copies of any documentation relating to the lead paint status of the properties (i.e., a lead inspection report or risk assessment report). The seller must grant a ten-day contingency period from the date the buyer receives the property transfer notification to conduct a lead paint inspection. If the buyer discovers lead paint in the dwelling during the inspection period, the contingency required by the statute permits the buyer to withdraw from the agreement without further obligation.
Although a seller is under no obligation to actually abate the lead paint, a lead-free house may be more valuable and marketable. This is particularly true for multi-family properties where tenants with children under six years of age may trigger the abatement requirements of the law. Sellers are required to provide any documentation they have of the estimated costs to abate the lead paint. Should a seller refuse to make a price concession based on the presence of a lead paint hazard, a buyer could argue that any subsequent buyer also should be made aware of the hazards and related costs. As a result, the availability of a lead paint inspection and cost estimate can become a powerful negotiating tool for the buyer.
Lead paint testing is typically not done as part of a standard home inspection, and must be separately arranged by a certified lead paint assessor.
Mold and Mildew
Mold and mildew are tricky subjects for home inspectors. The presence of excessive amounts of mold spores has been linked to asthma and other respiratory ailments and is claimed to cause permanent injuries. Mold grows in warm, moist environments and can be present behind walls and ceilings, in heating and cooling ducts, and in other difficult-to-inspect parts of a house or condominium building. As noted, although a building inspector cannot peer behind walls, a thorough inspection can detect water penetration, which is the precursor and necessary condition for a mold problem. Where mold is suspected, a buyer can always request that his home inspector be allowed to drill small exploratory holes to test for the presence of mold/mildew.
The Supreme Judicial Court has just issued an unusual order in the very important Eaton v. Federal National Mortgage Association case, indicating its deep concern over whether an adverse ruling against foreclosing lenders will have a disastrous impact on foreclosure titles and, if so, whether its ruling should be applied prospectively rather than retroactively. The Court is seeking supplemental briefing and friend-of-the-court briefs on these decisive issues. A final decision is expected in February or March.
As outlined in my prior post on the case, the Court is considering the controversial question of whether a foreclosing lender must possess both the promissory note and the mortgage in order to foreclose. This is the essence of the “produce the note” defense. In a securitized mortgage pool, in which over 60% of all U.S. mortgage are part, the note and mortgage are separated between securitized trusts, mortgage services or Mortgage Electronic Registration System (MERS).
If the SJC rules against lenders, it could render the vast majority of securitized mortgage foreclosures defective, thereby creating mass chaos in the Massachusetts land recording and title community. If you thought U.S. Bank v. Ibanez was bad, Eaton v. FNMA could be the Nuclear Option.
The text of the order is as follows:
ORDER :Having heard oral argument and considered the written submissions of the parties and the various amici curiae, the court hereby invites supplemental briefing on the points described below. Supplemental briefs shall not exceed fifteen pages and shall be filed on or before January 23, 2012. 1. It has been claimed that requiring a unity of the mortgage and the underlying promissory note, in order for there to be a valid foreclosure, would cloud any title that has a foreclosure in the chain of title, regardless of how long ago the foreclosure occurred. The parties are invited to address whether they believe that such a requirement would have such an effect, and if so, what legal or practical measures exist that might limit the consequences of such a requirement. 2. It also has been suggested that, if the court were to hold that unity of the mortgage and note is required under existing law, the court’s holding should be applied prospectively only. The parties are invited to indicate on what authority they believe (or do not believe) the court could make such a holding prospective only.
Reading into this order, perhaps a majority of the justices are already leaning towards ruling against the lenders and want to limit the potentially disastrous effect it could have on existing titles and pending and future foreclosures. Interestingly, lenders in the U.S. Bank v. Ibanez case asked the SJC to apply its ruling prospectively, but it declined, thereby leaving hundreds to thousands of property owners and title insurers to clean up toxic foreclosure titles.
In my opinion, an adverse ruling against lenders in Eaton could be the apocalyptic scenario, rendering open to challenge any title with a previous foreclosure in it and inserting a fatal wedge into the current securitized mortgage system. Hopefully this time around the Court is more sensitive to how its ruling will impact the real estate community. It will be interesting to see how this case continues to develop. We will continue to monitor it.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
Renter’s Insurance Policy Raises Questions
Richard D. Vetstein, Esq. is an experienced Massachusetts Real Estate Landlord Attorney. For further information you can contact him at [email protected].
In yet another move evidencing the Supreme Judicial Court’s ongoing concern over the impact of the foreclosure crisis in Massachusetts, the SJC is soliciting friend-of-the-court briefs in the next important foreclosure case, HSBC Bank v. Jodi Matt.
Standard Mortgage Contingency Language At Issue
