My last post on this blog and on Boston.com on Massachusetts landlord-tenant law spawned many questions on the Massachusetts security deposit law.  So, I decided to go into more detail about the topic.

Massachusetts Security Deposits–An Overview

Last month’s rent and security deposits are one of the most heavily regulated aspects of Massachusetts landlord-tenant law and are fraught with pitfalls and penalties for the unwary, careless landlord. Any misstep, however innocent, under the complex Massachusetts last month’s rent and security deposit law can subject a landlord to far greater liability than the deposit, including penalties up to triple the amount of the deposit and payment of the tenant’s attorneys’ fees. This is why I advise landlords not to require security deposits. If a deposit is necessary, take a last month’s deposit, the requirements of which are less strict than security deposits. If landlords insist on taking a security deposit, they must follow the law to the letter.

Requirements For Holding A Security Deposit

The following steps must be followed when a landlord holds a security deposit:

1. When the deposit is tendered, the landlord must give the tenant a written receipt which provides:
   • the amount of the deposit
   • the name of the landlord/agent
   • the date of receipt
   • the property address.
2. Within 30 days of the money being deposited, the landlord must provide the tenant with a receipt identifying the bank where the deposit is held, the amount and account number.
3. Within 10 days after the tenancy begins, the landlord must provide the tenant with a written “statement of condition” of the premises detailing its condition and any damage with a required disclosure statement;
4. The tenant has an opportunity to note any other damage to the premises, and the landlord must agree or disagree with the final statement of condition and provide it to the tenant.
5. The security deposit must be held in a separate interest bearing account in a Massachusetts  financial institution protected from the landlord’s creditors.
6. The landlord must pay the tenant interest on the security deposit annually if held for more than one year.
7. The security deposit may only be used to reimburse the landlord for unpaid rent, reasonable damage to the unit or unpaid tax increases if part of the lease. Security deposits cannot be used for general eviction costs or attorneys’ fees. Within 30 days of the tenant’s leaving, the landlord must return the deposit plus any unpaid interest or provide a sworn, itemized list of deductions for damage with estimates for the work. Only then can the landlord retain the security deposit.

What Do I Do If The Landlord Mishandles My Security Deposit?

First, talk with the landlord about the situation and respectfully remind him or her of the law’s requirements. Many landlords will balk at the potential penalties for a security deposit violation, and most issues can be resolved amicably, usually with the return of the deposit with interest. If that doesn’t work, send the landlord a certified demand letter under the Massachusetts Consumer Protection Act, Chapter 93A. If that fails, take the landlord to Small Claims Court (the limit for these type of claims involving triple damages is $6,000) or contact an attorney.

With the impending influx of renters and students invading the Greater Boston area soon, let’s review some often asked questions concerning Massachusetts landlord tenant law to assist landlords in navigating the rental process.

Screening Prospective Tenants: What You Can and Cannot Ask?

Landlords can legally ask about a tenant’s income, current employment, prior landlord references, credit history, and criminal history. Your rental application should include a full release of all credit history and CORI (Criminal Offender Registry Information).  Use CORI information with a great deal of caution, however, and offer the tenant an opportunity to explain any issues. Landlords should also check the Sex Offender Registry as they can be held liable for renting to a known offender. Use the rental application and other forms from the Greater Boston Real Estate Board.

Under Massachusetts discrimination laws, a landlord cannot refuse to rent to a tenant on the basis of the tenant’s race, color, national origin, ancestry, gender, sexual orientation, age, marital status, religion, military/veteran status, disability, receipt of public assistance, and children. It’s best to stay away from asking about these topics.

Students, especially undergraduates, often create problems for landlords. Meet with students personally before signing the lease and firmly explain a “no tolerance” policy against excessive noise, parties and misbehavior.

Careful screening of tenants is far less expensive than the cost of evicting a problem tenant.

Security And Last Month’s Rent Deposits:  Should I Take One?

I advise landlords not to take security deposits because any misstep, however innocent, under the complex Massachusetts security deposit law can subject the landlord to far greater liability than the deposit. Among other requirements, the security deposit law provides:

• a landlord must give the tenant a written receipt with information as to where the deposit is being held;
• a landlord must hold a security deposit in a separate interest bearing account, and pay interest to the tenant yearly;
• at the beginning of the tenancy, a landlord must provide the tenant with a written “statement of condition” of the rental unit detailing its condition and any damage;
• the tenant may note any damage on the statement of condition
• At the end of the tenancy, if the landlord desires to deduct repair costs from the security deposit, it must provide the tenant with written notification and copies of all estimates within 30 days of the tenant’s move-out.

Under the law, any slip-up on these requirements can subject the landlord to liability for 3 times the deposit plus the tenant’s attorneys’ fees. That’s why I advise my landlord clients that security deposits aren’t worth the money. If you need a deposit, take a last month’s deposit, the requirements of which can be found here in the Massachusetts last month’s deposit law.

Due to the high interest in security deposits, I wrote a full post on the topic.  Click on Massachusetts Security Deposits to view the article.

My Property Has Lead Paint, What Do I Do?

Under the Massachusetts Lead Paint Law, landlords (and real estate agents) must disclose to tenants the presence of known lead paint for property built before 1978. The property must be de-leaded if a child under 6 will live there. That means if a young couple moves into a unit, then has a baby, the landlord must de-lead the property. There is no way around de-leading other than risking a discrimination claim for not renting to families with small children which is illegal. (Of course, many landlords unlawfully reject families with children). Exposing children to lead paint puts a landlord at huge legal risk.  Financial aid and tax credits for de-leading are available to qualified property owners. For all Massachusetts rental property built before 1978, landlords must provide all tenants regardless of family composition with a Massachusetts Tenant Notification and Certification form, and all lead inspection reports and testing information, if available.

Can I Take A Finder’s Fee?

Only a licensed real estate broker can lawfully collect a finder’s fee for bringing together a landlord and a tenant.  Landlords who don’t work with brokers cannot charge a finder’s fee.

For more information, I recommend reading the Landlord’s Guide To the Law by the Massachusetts Attorney General’s Office.

Beginning with my introduction today by real estate broker extraordinare and Boston.com blogger, Rona Fischman, I will be guest blogging on Boston.com’s Real Estate Blog.

I will be answering questions on timely topics affecting Massachusetts real estate law, including home improvement projects, condominiums, landlord-tenant issues, and more.  I am thrilled for the opportunity.  Stay tuned for more.

Rich

link

Recent Fannie Mae (FNMA) condominium lending regulations are beginning to live up to the hype as having an onerous impact on condominium sales and project development. The changes, made in January 2009, were part of an effort by mortgage giants Fannie Mae and Freddie Mac to limit risky lending in a segment of the housing market particularly hard hit by foreclosures in recent years.

Here is a brief overview of the Fannie Mae condo guideline changes:

• For new construction and newly converted condominium developments, 70% of the units must be pre-sold (closed or under contract). This guideline is being increased from 51%.  This is the real Catch-22.  Fannie Mae won’t approve condominium mortgages unless 70% of the units are sold, but a developer cannot sell 70% of the units without buyers being able to obtain conventional Fannie Mae compliant mortgages. Buyers who run into problems here are being forced to get loans from small local banks who hold their own mortgages and are not bound by the FNMA guidelines.
• No more than 15% of condominium units within a single project can be more than 30 days delinquent on condo fees. This is an existing guideline that is now being applied to new condominium projects. The requirement was also changed from being 15% of the total fee payments to 15% of total units.
• Fidelity insurance will be required for condominiums with 20 or more units, ensuring that homeowner association funds are protected. Presently, this requirement applies to new projects and is now being extended to include established condominiums.
• Borrowers must now obtain an HO-6 condominium unit owners insurance policy unless the condominium master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condominium owners policy, known as an HO-6 policy, typically covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider. Click here for a more extensive post on HO-6 policies.
• No more than 10% of a project can be owned by a single entity. Apparently, this was to keep the so-called “vulture buyers” from taking over project.
• No more than 20% of a project can consist of non-residential space. The new guidelines therefore severely impact most mixed commercial-residential use projects, a highly popular development scheme.
• The condominium/homeowners association must have at least 10% of its budgeted income designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible. Many older condominium associations keep woefully inadequate reserves and operating budgets, so they are non-compliant.
• No pending litigation involving the structural soundness, safety or habitability of the condominium project. Fannie Mae underwriters will reject financing if the condominium association is involved in litigation over the construction of the project. I’ve written about this more extensively here. Borrowers may ask for a waiver if they can establish adequate insurance coverage for the litigation or otherwise little or no risk of loss to the association.
• Fannie Mae and Freddie Mac have also boosted fees on mortgages for condominium units. Buyers without a minimum 25% down payment have to pay closing-cost fees equal to 0.75% of their loan, regardless of their credit score, under new rules that took effect in April. Fannie Mae has said it will drop that fee in August for cooperative apartments and detached condos.

According to a Fannie Mae, the guidelines can be modified for condominium projects on a case-by-case basis.  Therefore, these guidelines may not apply to all condo projects.

Click here for the guidelines.

What’s the impact of the changes?

Certainly, the revised guidelines are negatively affecting condominium buyers’ ability to obtain conventional loans for either a new or established condominium if the project does not conform. Most notably, the changes are dramatically affecting new developments, especially in hard hit areas such as Florida and California.

Fannie Mae has already approved a number of projects. Click here for the full list of FNMA approved projects.

Through discussions with some fellow Massachusetts real estate professionals, the impact here in the Bay State is not as bad as some of the harder hit states, but it’s proving to be a major thorn in many transactions. Real estate attorneys on both sides of the table are working hard to get existing condominium developments in compliance with the new regulations.

Rep. Barney Frank (D-Mass.), who ironically spent the last year lambasting Fannie Mae for its questionable lending practices, is now calling for Fannie Mae to relax these guidelines. We’ll see what happens in D.C., and keep you posted on any changes coming down the pipeline.

Update:  Since I posted this article, I’ve been retained several times to issue attorney opinion letters certifying to a lender that a particular condominium project is in compliance with the new FNMA regulations. If you are in need of such an opinion letter, please contact Richard Vetstein at rvetstein@vetsteinlawgroup.com.

According to the Globe, there were 582 foreclosure deeds recorded in May, a 58.6 percent decrease from 1,405 during the same month in 2008, and a 24.3 percent drop from April.

Others attribute the drop to the so-called Ibanez decision by the Massachusetts Land Court in late March that invalidated two foreclosures because the lenders failed to show proof they held titles to the properties. The Ibanez decision is a product of the Massachusetts conveyancing practice struggling to keep up with modern mortgage lending practices. The ownership of a loan may be divided and freely transferred numerous times on the lenders’ books, but the documentation (i.e., the assignments) actually on file at the Registry of Deeds often lags far behind. The Land Court ruled that foreclosures were invalid when the lender brought the ownership documentation (the assignments) up-to-date after the foreclosure sale had already taken place — even if the effective date of the assignment was before the first foreclosure notice. The ruling, which is ultimately expected to head to the Massachusetts Supreme Judicial Court, has prompted concern throughout the conveyancing and mortgage industry, and is stalling sales of foreclosed properties, real estate specialists say.

Based on discussions I have had with other real estate attorneys, up to 20% of all foreclosure titles in Massachusetts may be affected by the Ibanez decision.

This is causing so much angst in the industry that title insurers are refusing to insure foreclosure titles affected by the problem. That means in cases where this issue is present, the lender cannot foreclosure, and the real estate sits barren for the indefinite future. This is bad for the lender who is trying to get rid of a non-performing asset, for the potential buyers interested in purchasing foreclosed properties, and certainly for the neighborhoods affected by blighted foreclosed properties.

Here is a copy of a portion of a memo sent by Stewart Title Company to its local title agents suspending authorizations to issue title insurance over titles derived from foreclosures which are affected by this problem:

Date:	April 22, 2009
To:	All Massachusetts Issuing Offices
RE:	Recent Land Court Decisions Requiring Suspension of Authorization to Insure Massachusetts Titles Based on Foreclosures with Post-Foreclosure Assignments

Dear Associates:

As you may be aware, the Land Court issued two recent decisions that call into question the validity of several titles coming out of foreclosure.

The result of these two decisions is that titles based on foreclosures by an Assignee lender are potentially fatal unless the Assignment in question was executed and held by the foreclosing lender prior to the commencement of foreclosure under M.G.L. c. 244, §14. Foreclosures based on Assignments that were dated after the foreclosure sale were deemed invalid even if the Assignments were “backdated” (i.e., contained an “effective date”) prior to the first c. 244, §14 notices.

Accordingly, subject to certain exceptions discussed later in this Bulletin, until further developments in these cases and the law upon which these cases were decided, Stewart Title Guaranty Company is suspending authorization to insure titles derived from foreclosures where the recorded Assignment into the foreclosing Lender is not dated prior to the date of the first publication under c. 244, §14.

I will be monitoring the Land Court decision through what will surely be an appeal to the Supreme Judicial Court, the highest appellate court in Massachusetts.

Update (Aug. 27, 2009):  I have been informed by attorneys involved in the Ibanez case that the lenders have filed a motion to reconsider the Land Court’s ruling. Also, the Real Estate Bar Association of Massachusetts has taken the unusual step of filing a “friend of the court” brief, urging the Land Court to reconsider its decision. The National Consumer Law Center and well known consumer class action attorney Gary Klein has also joined the fray. As of now, Judge Long of the Land Court has not made a final decision. I will update you when the ruling comes down. Either way, this case is going up to the Supreme Judicial Court, and probably on direct appellate review.