Apartment Holdings -April 2012

 

APRIL 2012 FEATURED STORY

NAA Files Amicus Brief in Source of Income Case

By Scot Haislip, Senior Director Government Affairs

“Source of income” litigation has once again become an issue, this time in the state of Maine. The Appellate brief for Dussault v. RRE Coach Lantern Holdings, LLC et. al was filed in Maine Supreme Judicial Court on Feb. 8, 2012. 

Maine is one of 14 states that have enacted laws prohibiting rental property owners from refusing to rent to potential residents based on their sources of income. Most commonly, these laws cover recipients of public housing assistance, in particular voucher holders participating in the federal Section 8 housing program.

Specifically, 5 M.R.S. § 4582 states “[f]or any person furnishing rental premises or public accommodations to refuse to rent or impose different terms of tenancy to any individual who is a recipient of federal, state or local public assistance, including…housing subsidies primarily because of the individual’s status as recipient…” However, the Maine statute also permits landlords to deny residency of public assistance recipients due to a business necessity. Read More.

 

 

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New Cell
WASHINGTON AIMS UPDATE

DOJ Extends Deadlines for Existing Pools to Comply with New Accessibility Requirements
On March 15, the date pools open to the public (including apartment pools where memberships are sold to those beyond the resident community and some properties that receive federal funding) were scheduled to comply with new federal accessibility requirements, DOJ issued a news release extending the compliance date for 60 days—to May 15—for existing pools. Read More.

HUD Issues Voluntary Guidance for Housing Ex-Offenders
On March 14, HUD issued a letter to owners of HUD-assisted properties encouraging them to develop policies and procedures to allow ex-offenders to rejoin the community and reunite with families already living in HUD-subsidized housing. The letter reviews HUD’s admission and termination policy criteria for those on the sex offender registry and for those involved in illegal criminal activity. Read More.

NAA/NMHC Submit Brief in Case that Turns Non-Recourse Loan into Recourse Loan
NAA/NMHC and a coalition of trade groups have filed a “friend of the court” brief in an important case pending before the Michigan Supreme Court that could have a chilling effect on conduit borrowers, including apartment firms, by converting non-recourse loans into recourse loans (Wells Fargo Bank, N.A. v. Cherryland Mall Limited Partnership et al., 2011 WL 6785393 (Mich. App. Dec. 27, 2011)). Read More.

 

 

Preparing For A New Cyber Reality

By Brian Finch*

It might be tempting to take the recent influx of reports regarding data losses due to cyber attacks with a grain of salt. It seems as though each week—if not each day—another report of a serious cyber attack is detailed. A wide range of information, everything from personally identifiable information to intellectual property, is apparently being stolen. Could these fears about cyber-losses be the “flavor of the day,” or is there something more sinister afoot, requiring serious attention from all businesses including those in the multifamily housing industry?

Unfortunately, the emerging facts indicate that the threats associated with cyber theft and attacks are not only real but also cause for serious concern. Y2K and “another 9/11” concerns seem to have fallen more in the “if” category, while cyber attacks are not so much a “when” but a “how often” and perhaps even “when did it start?” The list of companies acknowledging material breaches has exploded in the past six to 12 months, with everyone from video game networks to defense contractors and even companies at the core of operating the Internet admitting that they have suffered significant and sustained cyber attacks.

Assuming for a moment then that the threat is real, the next question is whether this is relevant to multifamily housing industry. After all, what could cyber thieves gain from hacking that market? Simply put, the threat is relevant because multifamily housing providers and their vendors possess tremendous amounts of “personally identifiable information” that cyber thieves want. As defined by the U.S. Office of Management and Budget, personally identifiable information includes:

Information which can be used to distinguish or trace an individual's identity, such as their name, social security number, biometric records, etc. alone, or when combined with other personal or identifying information which is linked or linkable to a specific individual, such as date and place of birth, mother’s maiden name, etc.

Such information is certainly in the possession of multifamily housing owners, managers, developers, and suppliers in one way or another, and the potential costs associated with having that information stolen are significant. The regulatory costs alone associated with reporting such a breach to various state attorneys general could be massive, for instance.

Perhaps even more significant is the fact that there are now serious federal implications associated with the cyber threats and thefts. In fall 2011, the Securities and Exchange Commission (SEC) released staff guidance on disclosure obligations relating to cyber security risks and cyber incidents. This guidance noted that no existing disclosure requirement explicitly refers to cyber incidents, but a number of disclosure requirements may impose an obligation to disclose them. Thus, as with other risks, companies should review on an ongoing basis the adequacy of their disclosure relating to cyber security risks and cyber incidents.

The SEC staff provided an overview of specific disclosure obligations that may require a discussion of cyber security risks and cyber incidents, including:

  • Companies should disclose the risk of cyber incidents if these issues are among the most significant factors that make an investment in the company speculative or risky. As part of this, companies are expected to evaluate their cyber security risks, including prior cyber incidents and the severity and frequency of those incidents. Companies should also consider the probability of cyber incidents occurring and the magnitude of those risks. Finally, companies should also consider the adequacy of preventative actions taken to reduce cyber security risks.
  • Cyber security risk disclosures must adequately describe the nature of the material risks and specify how each risk affects the registrant, and also provide a description of relevant insurance coverage.
  • A company may need to disclose known or threatened cyber incidents to place the discussion of cyber security risks in context.
  • Companies must provide certain disclosures of losses that are at least reasonably possible as a result of a cyber incident.

So what does all this mean? Simply put, companies cannot afford to ignore the possibility that they could suffer a cyber attack or—worse yet—that such an attack may already be under way. Any company in electronic possession of personally identifiable information or other valuable data must examine their cyber security measures, have plans in place should a theft or breach occur, and examine their liability mitigation strategies—such as insurance coverage.

The reality is that a cyber loss is imminent, and companies must be prepared for the day that event occurs.

*Brian Finch, a partner in Dickstein Shapiro LLP’s Washington, D.C. office, is head of the firm’s Homeland Security Practice.

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Non-Refundable Fee Litigation Attacked in Massachusetts

By Michael Semko, Vice President and Counsel

Add another state to the list of places where plaintiffs’ attorneys have attacked non-refundable fees.  At issue in Hermida v. Archstone was an “amenity use fee” paid by tenants to cover their use of the exercise facility, pool and an outdoor grill.  Despite the facts that the owner disclosed the fee to the tenant and the tenant was aware of it when completing the rental application, and willingly paid it, the court found the lease provision to be prohibited under Massachusetts General Law, chapter 186, section 15B(1)(b).  Construing the security deposit statute very narrowly, the district court judge held that upon move-in, owners may charge a resident only: 1) the first and last month’s rent, 2) a security deposit and 3) a key installation fee—other mandatory payments are illegal.  In addition to finding for the Hermidas, the court approved the case for class action status.  The decision could be overturned on appeal.

In states outside of Massachusetts, attorneys for residents have had very little success arguing that security deposit laws preclude other non-refundable fees upon lease signing.  For example, in 2008 the 11th Circuit Court of Appeals affirmed a district court’s ruling that “redecoration fees” were not security deposits and therefore were not governed by the Georgia security deposit laws.  Scott v. ING Clarion Partners, LLC, 262 Fed. Appx. 983 (2008).  

The Scott case mentioned above follows similar rulings by courts around the country.  In Ritter v. Fairway Park Properties, L.L.C., C.A. No. 21509, 2004 Ohio App. LEXIS 2240, the Ohio court validated maintenance and pet fees because they were not being used as “security deposits.”  Similarly, a New Jersey court held that refurbishing fees to paint and restore the premises are not governed by the state’s security deposit statute because the term “security” is defined as “something given, deposited, or pledged to make certain the fulfillment of an obligation.”  Durante v. Gadino, 157 N.J.Super. 132, 136, 384 A.2d 575 (1978). 

In Texas, an appellate court held that painting and cleaning fees are not security deposits under the state’s security deposit statute, which provided that no security deposit may be accepted to cover normal wear and tear, in part, because the “intent of the security deposit act was to curb abuses in regard to the retention of security deposits after termination of the lease.”  Holmes v. Canlen Management Corporation, 542 S.W.2d 199, 201 (Tex. Civ. App. 1976). Should owners in Massachusetts stop charging non-refundable fees?  In light of the district court’s ruling, owners and managers in Massachusetts charging non-refundable fees upon lease execution should consult with counsel in the Bay State to ensure compliance with section 15B.  One strategy might be to make amenities such as the gym or pool optional.   Residents would pay only if they elect to use the facilities. 

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Sackett v. EPA Reversed and Remanded by Supreme Court

By Lauren Kelly, Paralegal/Research Analyst Government Affairs/National Lease Program

In September 2011, the National Apartment Association, the National Association of Home Builders and the Real Estate Roundtable filed an Amicus Brief to support Petitioners Chantell and Michael Sackett in their U.S. Supreme Court case against the Environmental Protection Agency (EPA).  The Amicus Brief urged the Supreme Court to “review the constitutionality of the process afforded to the Sacketts” whether under the Administrative Procedure Act (APA) or through judicial review.  On March 21, the Supreme Court’s decision Ordered a reversal and remand to the 9th U.S. Circuit Court of Appeals.

EPA originally issued the Sacketts a compliance order declaring their construction project a violation of the Clean Water Act (CWA) because their residential lot contained a navigable waterway.  In fact, the land only partially contained freshwater wetlands.  The 9th U.S. Circuit Court of Appeals and the U.S. District Court for Idaho concluded that the CWA did not allow for judicial review of the order. 

The Court’s opinion states “the Government’s litigating position exposes the Sacketts to double penalties in future enforcement proceedings.  It also severely limits the Sacketts’ ability to obtain a permit for their fill from the Army Corps of Engineers.”  According to the CWA, when EPA prevails in a civil action, it may enforce a civil penalty.  Without judicial intervention, EPA could assess up to a $75,000 per violation per day penalty for the Sacketts’ failure to remove dirt and rock fill from a portion of their residential lot.

The underlying dispute involves the term “navigable waters,” which according to United States v. Riverside Bayview Homes, Inc. includes “freshwater wetlands.”  Whether wetlands not adjacent to a navigable waterway should be categorized as such became the topic of debate in Rapanos V. United States where the Supreme Court ruled they do not fall under the scope of the CWA.  Despite these findings, EPA’s order required the Sacketts restore the land and allow EPA access to the property and all relevant personal records related to it.
 
Judicial review remains the only remedy, but as noted by the Supreme Court, “the Sacketts cannot initiate that process, and each day they wait for the agency to drop the hammer, they accrue, by the Government’s telling, an additional $75,000 in liability.” 

The Court further opined, “The APA’s presumption of judicial review is a repudiation of the principle that efficiency of regulation conquers all.  And there is no reason to think that the Clean Water Act was uniquely designed to enable the strong arming of regulated parties into ‘voluntary compliance’ without the opportunity for judicial review—even judicial review of the question whether the regulated party is within the EPA’s jurisdiction.  Compliance orders will remain an effective means of securing prompt voluntary compliance in those many cases where there is no substantial basis to question their validity.”

For more detailed information, please refer to the Supreme Court opinion: Chantell Sackett, et vir Petitioners v. Environmental Protection Agency, et. al, 2012 U.S. Lexis 2320 (2012).

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NAA Files Amicus Brief in Source of Income Case Continued...

Nicole Dussault filed her case after Coach Lantern Holdings declined to attach a mandatory Section 8 lease addendum, a HUD requirement and a condition of granting Dussault residency, to its standard leasing documents. It was stated in the briefs that Coach Lantern declined to attach the lease addendum because of the associated onerous legal and financial burdens.  Dussault’s complaint claimed that refusing to incorporate the Section 8 lease addendum is the functional equivalent of denying her housing based on her status as a recipient of public housing assistance.

On Motion for Summary Judgment, the trial judge found for Coach Lantern, holding that the burdens of participating in the Section 8 program are sufficient to justify a business necessity. Plaintiff’s counsel, Pine Tree Legal Assistance, LLC, filed an appeal in an effort to overturn the trial decision and precedent at the state level.

Due to the importance to the apartment industry of the source of income protection issue, NAA has filed an Amicus Brief with the Maine Supreme Judicial Court explaining the industry’s position regarding state and local source of income laws. The industry’s longstanding position is that Congress created the program with the intention that participation remain voluntary and that state and local governments be cognizant of participants’ legal and financial burdens by not implementing policies changing its voluntary nature.

NAA’s brief further states that companies that plan to enter the Section 8 program anticipate and plan for these additional burdens in advance. The brief details the major financial issues that apartment firms may bear if forced to participate in the program without previously engaging in planning the proper business model.

For more information on this case or source of income protections in general, please contact the NAA government affairs or legal staff.

Event Highlights

NAA Releases 2014 Survey of Operating Income & Expenses

NAA Releases 2014 Survey of Operating Income & Expenses  

NAA President and CEO Doug Culkin shares highlights from this year's Survey of Operating Income & Expenses in Rental Apartment Communities. Check out the report today.

 

APTly Spoken Blog