Property Law Developments—Joseph William Singer

Massachusetts statutes limit covenants to 30 years unless they provide for renewal for new periods of up to 20 years at a time. Mass. Gen. Laws ch. 184, §27. Because the language in the original grant did not provide for the possibility of renewal, the land use restriction in Berger v. 2 Wyndcliff, LLC, 2015 WL 1775527 (Mass. Land Ct. 2015), ceased to exist 30 years after the date of its creation. Although the covenants were amended to allow renewal, the court interpreted  the statute to prevent renewal if it was not provided for in the original document creating the covenant. Mass. Gen. Laws ch. 184, §27(b)(1).

The United States Supreme Court announced its decision in Tex. Dep’t of Hous. & Cmty. Affairs v. Inclusive Communities Project, Inc., 2015 WL 2473449, — U.S. — (2015), upholding disparate impact claims under the Fair Housing Act (FHA), 42 U.S.C. §3601 et seq. The case involved a challenge to criteria used by a state agency on where to give tax credits that subsidize construction of  low-income housing. Plaintiff is a nonprofit organization that promotes housing for low-income families. It claimed that the agency’s formula steered housing to poorer areas and thus perpetuated or aggravated racial segregation in housing. The specific question taken by the Supreme Court was whether disparate impact claims are at all available under the Fair Housing Act. The Court decided that they are but limited them because of constitutional principles.

The Court noted that earlier cases had upheld disparate impact claims in employment discrimination when the statutes focused on consequences of actions rather than just motivation. Those statutes were Title VII of the 1964 Civil Rights Act and the Age Discrimination in Employment Act of 1967. The FHA makes it unlawful to “otherwise make unavailable” housing because of race or other characteristics. 42 U.S.C. §3604(a). That wording refers to consequences and thus supports a disparate impact approach. The mere fact that the statute makes actions illegal if they are undertaken “because of race” does not mean the statute requires a showing of intentional discrimination. Moreover, the 1988 amendments to the Fair Housing Act (which added “handicap” as a protected class among other things) showed that Congress approved of the uniform case law that had interpreted the FHA to include a disparate impact claim. Justice Kennedy’s opinion refers to Congress’s explicit consideration of disparate impact claims by reference to  legislative history and its rejection of a proposed amendment that would have eliminated disparate impact claims. Moreover, the 1988 Act included 3 exemptions from disparate impact claims that would have been superfluous had they not been available. For example, the 1988 amendments provided that “[n]othing in [the FHA] limits the applicability of any reasonable . . . restrictions regarding the maximum number of occupants permitted to occupy a dwelling.” 42 U.S.C. §3607(b)(1).

At the same time, the Court held that the Constitution prohibits enforcing a disparate impact claim based solely on statistical evidence of a disparity; rather, plaintiffs must show that defendant’s policy causes the disparity and that “there is an alternative practice that has less disparate impact and serves the [defendant’s] legitimate needs.” Because actors must be able to achieve legitimate government or private policies, such policies are not contrary to the disparate-impact requirement unless they are “artificial, arbitrary, and unnecessary barriers” to equal access to housing. Mainly because of this limitation on the applicability of disparate impact claims, the Court remanded for consideration of whether the Texas policies met this standard.

Remedial orders must be limited to eliminating the offending practice and should be race-neutral where possible.

The Court’s recognition of disparate impact claims preserves their function in the context of zoning laws. In explaining the “discriminatory practices” the disparate impact claim was intended to eradicate, the Court explained: “These unlawful practices include zoning laws and other housing restrictions that function unfairly to exclude minorities from certain neighborhoods without any sufficient justification. Suits targeting such practices reside at the heartland of disparate-impact liability,” (citing the foundational case of Huntington Branch, NAACP v. Huntington, 844 F. 2d 926, 935–936 (2d Cir 1988), among other cases).

Importantly, the Court clarified that disparate impact claims are available against both private and governmental defendants, rejecting a theory that at least one Circuit had adopted in the past.

It appears that the recent regulations of the Department of Housing and Urban Development that define disparate impact claims are largely consistent with the Supreme Court’s analysis but whether that is actually so may need to await further litigation. Implementation of the Fair Housing Act’s Discriminatory Effects Standard, 78 Fed. Reg. 11460 (2013), 24 C.F.R. §100.500.

The California Supreme Court has upheld the inclusionary zoning ordinance of the City of San Jose against a challenge that it constitutes an illegal exaction and violates the state constitution’s takings clause or the federal constitution’s takings clause. Cal. Bldg. Indus. Ass’n v. City of San Jose, 2015 Cal. LEXIS 3905 (Cal. 2015). The ordinance required all new development projects containing 20 housing units or more to reserve 15 percent for sale at affordable prices to low- or moderate-income families. San Jose Mun. Code, §§ 5.08.010 to 5.08.730. The Court held that the municipal government had the power to enact reasonable land use regulations designed to increase the amount and dispersion of affordable housing and that this ordinance served those ends. Because it regulated land use, it did not constitute an “exaction” or forced donation of land to public use. The Court held that so long as a land use regulation does not deprive the owner of all economically viable use of the property or mandate a forced physical taking, there is no violation of the takings clause when restrictions govern an owner’s use of property. The Court also interpreted the Supreme Court’s requirements in the cases of Dolan v. City of Tigard, 512 U.S. 374 (1994) & Nollan v. Cal. Coastal Comm’n, 483 U.S> 825 (1987), that mitigation fees must bear a reasonable relationship to externalities caused by the development of land did not apply when the law simply regulates the uses to which land can be put.

The Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq., regulates the processes by which debts are collected. The Third Circuit has agreed with other courts in holding that the filing of a foreclosure complaint can subject both the plaintiff bank and the lawyers filing the complaint to liability under the FDCPA. In the case of Kaymark v. Bank of America, N.A., 783 F.3d 168 (3d Cir. 2015), the allegation was that the complaint sought payments that were not yet due — a demand that violated the FDCPA. The Court applied the holding of the Supreme Court case of Heinz v. Jenkins, 514 U.S. 291 (1995) that had established that lawyers are “engage[d] in consumer-debt-collection activity” when they file lawsuits.

The Sixth Circuit has ruled that nonjudicial foreclosure satisfies constitutional due process requirements because the homeowner/borrower was given notice of the foreclosure and notice of who to cure the default or seek a loan modification and how to redeem the property (get it back) after the foreclosure sale during a six-month redemption period. Garcia v. Fed. Nat’l Mortg. Ass’n,  782 F.3d 736 (6th Cir. 2015). These statutory procedures satisfied the constitutional right to notice and an opportunity to be heard before being deprived of a property right.

The District of Columbia  passed legislation designed to prevent a grocery store owner from selling the property with a covenant that would have prevented the property from being used for grocery store purposes because this would deny residents in the neighborhood easy access to a grocery store. read article  The legislation is similar to the ruling of the New Jersey court in Davidson Bros, Inc. v. D. Katz & Sons, Inc., 643 A.2d 642 (N.J. Super. Ct. App. Div. 1994).

The Supreme Court has taken certiorari in a Fifth Circuit case to address the question of whether disparate impact claims are available under the Fair Housing Act (FHA), 42 U.S.C. §§3601 et seq. Tex. Dep’t of Hous. & Comty. Affairs v. The Inclusive Communities Project, Inc., 135 S.Ct. 46 (2014), on appeal from The Inclusive Communities Project, Inc. v. Tex. Dep’t of Hous. & Comty. Affairs, 747 F.3d 275 (5th Cir. 2014). All federal Circuit Courts to address the issue have found such claims to be available and the Department of Housing and Urban Affairs has fairly recently promulgated a regulation defining the test for disparate impact claims under the FHA. 24 Code Fed. Reg. Part 100, §§100.5 to 100.500.

The Vermont Supreme Court has adopted the rule promoted by the Restatement (Third) of Property (Servitudes), §4.8(3), allowing the owner of a servient estate to relocate an easement if this does not reduce the utility of the easement to the owner of the dominant estate. Roy v. Woodstock Cmty. Trust, Inc., 94 A.3d 530 (Vt. 2014). The case concerned an underground easement for water lines.

The court also held that the dominant estate owner was entitled to build a housing complex and that this development did not exceed the scope of a right-of-way easement even though it had been originally used only by a church.

A Hawai`i court has recognized an easement by necessity over government land when the landlocked parcel was separated from land belonging to the state. Malulani Group, Ltd. v. Kaupo Ranch, Ltd. 329 P.3d 330 (Haw. 2014). The court held that the intent of the parties determines whether an easement exists over remaining land of the grantor to ensure access to a public road from an otherwise landlocked parcel. The court also held that no statute of limitations bars assertion of an easement by necessity.

In K.G.M. Custom Homes, Inc. v. Prosky, 10 N.E.3d 117 (Mass. 2014), the Supreme Judicial Court of the Commonwealth of Massachusetts held that a buyer can choose to seek either specific performance or damages when a seller breaches the promise to sell. The issue was hard because Massachusetts allows only specific performance as a remedy for anticipatory breach and the complaint had alleged only anticipatory breach. Because the issue of actual breach was fully litigated and the court found the seller to have committed an actual breach, the judge was justified in giving the plaintiff a choice of remedies. Massachusetts law also provides that a liquidated damages clause does not prevent an aggrieved party from seeking specific performance of a real estate transaction. The court also affirmed the rule that every contract contains an “implied covenant of good faith and fair dealing.” That covenant “exists so that the objectives of the contract may be realized.”

In a classic application of a traditional doctrine of contract law, the Massachusetts Land Court allowed a mortgage document to be reformed because of mutual mistake. Citibank, N.A. v. Heywood, 2014 WL 2158409 (Mass. Land Ct. 2014). While courts are very reluctant to amend written property documents or contracts because of unilateral mistake, it is standard practice to ignore the written terms of the agreement, despite the statute of frauds, when the evidence shows that it does not reflect the intent of both parties. The court noted that [A] court acting under general principles of equity jurisprudence has broad power to reform, rescind, or cancel written instruments, including mortgages, on grounds such as fraud, mistake, accident, or illegality” as long as the mistake was mutual.

The Ninth Circuit held that a mortgage servicer that allegedly engaged in robo-signing may well have violated an Arizona statute, Ariz. Rev. Stat. § 33-420, that criminalizes filing false property title documents with the state recording offices. In re Mortg. Electronic Registrations Systems, Inc (Robinson v. Am. Home Mortg. Serv. Inc.), 2014 WL 2611314, 2 014 U.S. App. LEXIS 10934 (9th Cir. 2014). There was  evidence that trustee’s sale documents were notarized in blank and signed later by a person other than the one who was supposed to sign the document. Such signings were also done in bulk (robo-signing) and because not signed by the correct person were forged. In addition, notaries are supposed to witness the signature not notarize a blank document before any signature appears. The case is notable because the servicer was MERS (Mortgage Electronic Registration Systems, Inc.). Judge William Fletcher engaged in a detailed discussion about the advantages and disadvantages of the MERS system.

The Seventh Circuit found no deceptive conduct within the meaning of the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA) when a condo developer substantially changed the governing documents after the condo sales. Goldberg v. 401 North Wabash Venture LLC, 2014 WL 2579939 (7th Cir. 2014). The case concerned Trump Tower in Chicago which contains hundreds of residential condominium units and hundreds of hotel condominium units as well as substantial retail space and other facilities. The purchase agreement gave TrumpOrg the “right, in its sole and absolute discretion, to modify the Condominium Documents.” Writing for the three-judge panel and applying Illinois law, Judge Posner held that this clause was sufficient to immunize TrumpOrg from any claim of deceptive conduct. Thus the hotel condo owners had no rights when TrumpOrg “greatly curtailed the owners’ rights in the hotel facilities.” Nor did the conduct violate the statute governing condominiums.

The First Circuit reaffirmed its view of the validity of the MERS system under Massachusetts law. Mills v. U.S. Bank, (1st Cir. 2014) (reaffirming Culhane v. Aurora Loan Services of Nebraska, 708 F.3d 282 (1st Cir.2013)). The court explained that there was no conflict between MERS’s role as the “mortgagee” and MERS’s role as the nominee (agent) for the mortgagee (the actual Lender to whom promises were made under the note). Thus the note could be transferred from bank to bank while MERS held “legal title” to the mortgage, giving MERS the power to transfer legal title to the final note holder to allow it to foreclose on the property after default by the mortgagor. According to the court the “MERS framework…separates the legal interest [in the mortgage] from the beneficial interest [in the underlying debt]” and is valid. This separation is valid under Massachusetts law which allows the note to be held by one person and the mortgage (or right to foreclose) held by someone else.

In particular, the court found no contradiction between the mortgage language that described MERS both as the “mortgagee” and the nominee for the lender, rejecting the plaintiff’s argument that one cannot be both the principal and the agent. Rather, the court explained that “MERS validly serves both as the holder of ‘bare legal title as mortgagee of record’ and as ‘nominee for the member-noteholder.'”

One caution is that the First Circuit may or may not be accurately predicting how the Supreme Judicial Court of the Commonwealth of Massachusetts would interpret its mortgage law and foreclosure statutes.

The Supreme Judicial Court of the Commonwealth of Massachusetts has ruled that owners may make affirmative defenses to eviction claims by banks that acquired title to their property through a private or nonjudicial foreclosure. Bank of America v. Rosa, 466 Mass. 613 (2013). Those defenses may challenge the way in which the bank acquired title to the property through the foreclosure process and and power of the bank to foreclose in the first place. They may also include any equitable defenses that would defeat the claim for a right to possession of the property (the right to evict).

A number of recent cases has revealed the persistence of racial discrimination affecting municipal decisions about housing. The Sixth Circuit found, for example, in Hidden Village, LLC v. City of Lakewood, Ohio, 734 F.3d 519 (6th Cir. 2013), that town officials may have engaged in a campaign of harassment designed to induce African American residents to move out of town. The case involved a Lutheran religious organization that helped young people released from foster care or juvenile detention to enter society. The organization found a helpful landlord willing to rent apartments to the organization’s clients. At first the town officials argued that this amounted to an institutional use in violation of the zoning law but the town planning commission found otherwise. At that point, the complaint alleges that town officials began a campaign of police harassment that involved citations for minor offenses and unreasonable searches of apartments.

The Sixth Circuit concluded that the landlord had standing to sue to claim violations of the Civil Rights Act of 1866, 42 U.S.C. §§1981-1982 and the Fair Housing Act, 42 U.S.C. §3601 et seq. The court also held that plaintiffs had presented a viable substantive due process claim. The court noted that the due process clause “protects landlords against irrational restrictions on how they use their property. Rationality may be a low bar. But the government flunks even that test when it tries to prevent a landlord of any race from renting to tenants based on their race.

The court also found a potential violation of §3617 of the Fair Housing Act, 42 U.S.C. §3617 which makes it illegal “to coerce, intimidate, threaten, or interfere with any person in the exercise or enjoyment of, or on account of his having exercised or enjoyed, or on account of his having aided or encouraged any other person in the exercise or enjoyment of any right granted or protected [by the Fair Housing Act].” Although federal courts have been confused on the issue, the Sixth Circuit held that a §3617 violation could be shown even if there was no underlying violation of another section of the Fair Housing Act. In this case, for example, no one denied the youths housing or granted them discriminatory terms. Nonetheless, the facts sufficiently alleged that the town sought to interfere with their enjoyment of the right to obtain housing without regard to race.

In a second case, the Eastern District of New York held that a city violated the Fair Housing Act when it rezoned several parcels to prevent the building of low- and middle-income housing. The court found that the facts supported a finding of liability under both a discriminatory treatment and disparate impact theory. MHANY Mgmt Inc. v. Incorporated Village of Garden City, 2013 WL 6334107 (E.D.N.Y. 2013). read article The court found a discriminatory treatment claim (intentional racial discrimination) because there was sufficient evidence  to conclude that animus because of race was a significant factor in the denial of the housing opportunity. Evidence to that effect was shown by the fact that exclusion of low-income housing would impose a greater impact on African Americans than on whites, there was a history of racial bias in the city, and the sequence of events leading up to the denial of the housing opportunity that suggested a racially discriminatory motive. Although the city gave legitimate nondiscriminatory reasons for the change in the zoning law, the plaintiffs undermined those justifications by showing that the proposed development would not significantly affect traffic and that other reasons given by the city were not supported by the available evidence. The court thus found that the proffered justifications were pretextual.

The court also found a disparate impact claim. Although the city gave legitimate nondiscriminatory reasons for its decision (reducing traffic and providing for townhouse construction), it did not show that these goals could not be achieved in a less discriminatory manner or in a manner that did not perpetuate racial segregation.

Several lawsuits have been in progress arguing that MERS violated state recording statutes by not recording mortgage assignments and thus cheating recording offices out of fees they otherwise would have earned. Interpreting Illinois law, the Seventh Circuit rejected that claim as have other courts that addressed the issue. Union County v. MERSCORP, Inc., 2013 WL 6017394 (7th Cir. 2013) (applying Ill. law). The court explained that Illinois law agrees with almost all other states in providing a voluntary recording system that is intended to protect those who record; that system does not require property transactions to be recorded for them to be valid. It merely protects bona fide purchasers from prior claims against which they had no notice.

New Hampshire law allows tenancies to be created at-will; that means they can be terminated by either party at any time. When the landlord lost the property through foreclosure, the tenancy ended automatically and no new landlord/tenant relationship was established merely because the tenant kept living on the property. Nor did a state statute that specifically prohibited self-help eviction, N.H. Ev. Stat. §540-A, apply in such a case. Nonetheless, the New Hampshire Supreme Court ruled that summary process was available to evict recover possession of the property and that this available procedure impliedly removed the self-help option. Evans v. J Four Realty, LLC, 62 A.3d 869 (N.H. 2013).

The Idaho Supreme Court endorsed the power of MERS (Mortgage Electronic Registration Systems) to initiate nonjudicial foreclosure proceedings. Edwards v. Mortg. Elec. Registration Sys. Inc., 300 P.3d 43 (Idaho 2013).The court held that MERS was an agent (nominee) for the actual lender and holder of the beneficial interest in the deed of trust and could act on behalf of its principal. The original deed of trust named Alliance Title as trustee, Lehman Brothers as the lender, and MERS as the beneficiary as nominee for the lender. After MERS substituted a new trustee, the borrower defaulted and the new trustee filed a notice of default to begin foreclosure proceedings. Although the court held that MERS could not be the beneficiary (since no debt was owed to it), MERS could be an agent for the beneficiary (in this case, Lehman Brothers). As agent for the beneficiary, MERS had legal authority to record the notice of default, appoint a new trustee, and initiate foreclosure proceedings.

The Texas Supreme Court held that a transfer of land to a city with an option to repurchase if the property were ever used for non-park purposes constituted a fee simple subject to condition subsequent and that the right of entry was a property right for purposes of the takings clause and compensable when then city failed to honor the condition. El Dorado Land Co., L.P. v. City of McKinney, 395 S.W.3d 798 (Tex. 2013). The deed provided that the conveyance was “subject to the requirement and restriction that the property shall be used only as a Community Park” and gave the grantor the right to repurchase the property at the price the city paid for it or the current fair market value whichever was less if the property were not used for the designated purpose. Although the repurchase right was called an option to purchase, the Texas Supreme Court interpreted it as a right of entry.  When the city built a library on the property, the grantor sought to exercise the option; when the city did not respond to its demand, the grantor sued claiming the city had taken its right of entry without just compensation, and the high court agreed with its claim. The court remanded to determine whether construction of the library violated the conditions in the grant.

South Carolina joins the growing list of jurisdictions that bans transfer fee covenants. 2012 S.C. Acts 106, codified at S.C. Code §27-1-70.

The traditional rule is that title to real property is determined by the whole law of the situs of the property, meaning both the substantive law of the situs and its choice-of-law rules. Thus title is determined by whatever law would be applied at the situs. This rule has been rejected in some cases in recent years because personal property on death is determined by the law of the domicile of the decedent and if different rules are applied to real property located elsewhere and personal property, the decedent’s wishes may be ignored or perverted. However, many courts adhere to the traditional rules as occurred in In re Estate of Latek, 960 N.E.2d 193 (Ind. Ct. App. 2012), a court at the decedent’s domicile (Illinois) refused to accept a will for failure to comply with Illinois will execution requirements but the court in Indiana (where the property was located) refused to defer automatically to the determination of the Illinois court. The court affirmed what appears to be settled law that the full faith and credit clause does not require one state to defer to judgments of another state that purport to determine title to land outside that court’s jurisdiction. The Indiana court noted that an Indiana statute allowed wills that were proved valid in other states to be admitted in Indiana but in this case the will had not been proved in Illinois.

A deed granting an interest to two siblings (Roger & Dana Waid) “or the survivor” was interpreted as created a tenancy in common rather than a joint tenancy. Young v. Waid, 2012 WL 2947590, (W.Va. 2012). Following the death of Roger, Dana would have had a 100 % interest in the property if they held as joint tenants (because of her right of survivorship) but only a 50 % interest (with 50% held by Roger’s heir or devisees) if they held as tenants in common. Applying an interpretive presumption in favor of tenancies in common, the West Virginia Supreme Court noted that the deed did not use the words “joint tenancy” or “right of survivorship” and that it was possible the words “to the survivor” were mere surplusage. The court found the language not clear enough to constitute an intent to create a right of survivorship, effectively privileging giving each sibling (and his or her descendants) the economic benefit of the property rather than assuming the grantor wanted to consolidate interests in the survivor of the siblings. The case pitted one canon of interpretation (do not interpret conveyances to include language that has no purpose) against another (preferring tenancies in common over joint tenancies). The common approach in the US is to prefer the tenancy in common because it  treats co-owners more equally than the joint tenancy which consolidates interests but disinherits the descendants of one of the owners.

California passed a statute on Jan. 1, 2013 called the California Homeowner Bill of Rights (Assembly Bill 278, ch. 86, adopted July 11, 2012) (effective Jan. 1, 2013). Among other things, it prohibits banks from proceeding with foreclosures if the homeowners is seeking a loan modification and it requires the bank to act on qualified applications for loan modifications. Cal. Civ. §2923.5.It also subjects banks to a penalty for recording unverified documents. Cal. Civ. §2924.17. It also prevents eviction of tenants who have fixed-term leases as long as those leases last even if the landlord loses the property to foreclosure before the end of the lease term and even if the lease was created after the mortgage. Cal. Civ. Proc. §1161b(b).

In 2012, HUD adopt an Equal Access Rule that prohibits lenders from discriminating on the basis of actual or perceived sexual orientation, gender identity or marital status in granting mortgages insured by the Federal Housing Administration (FHA). 24 C.F.R.Parts 5, 200, 203, 236, 400, 570, 574, 882, 8991, 982 (77 Fed. Regis. 5662 (Feb. 3, 2012). The rule applies to all housing programs administered by the department. In January 2013, HUD entered a settlement with Bank of America over a claim that it refused to grant a mortgage to a lesbian couple. See article. It was promulgated under HUD’s general statutory authority to promote the “goal of a decent home and a suitable living environment for every American family,” 42 U.S.C. §1441.