The Massachusetts Court of Appeals recently held that a foreclosing lender must use reasonable efforts to get the best price and, when those efforts reveal the potential to develop the property to increase the sale price, the lender should take such potential into account and share it with prospective bidders.

Don’t get nervous lenders. The decision does not mean the minimum value at a foreclosure is the value that could be achieved through developing the property. The decision in Property Acquisition Group v. Ivester, of course, is more nuanced because it’s driven by the facts of the case. The Court did not decide whether the lender violated its duty of good faith and reasonable diligence in conducting the foreclosure, so the case is ongoing.

However, this decision is noteworthy for two reasons. First, it is a wake-up call for lenders to make sure they take reasonable actions to get the best price. Second, it reminds us of the rules of the game in Massachusetts foreclosures, including the grey areas where lenders can get tripped up trying to realize on their collateral.

Duty to Act Reasonably to Get the Best Price

The Court stated that the duty of the lender is to do what a reasonable person would do to achieve the highest price possible to protect the interests of the borrower.

“When reasonable efforts to value the property reveal potential for development that could enhance the price of the property, the mortgagee should consider that potential and share it with prospective bidders.”

Whoa, slippery slope alert!  That could be interpreted as turning conventional wisdom on its head.

Does that mean you have to value the property based on what could reasonably be developed instead of what currently exists? The Court seemed to soften this “potential development” angle by acknowledging that “undeveloped properties are not to be valued as if the reasonably likely future uses already exist.” The Court also noted that “potential uses must be reasonably likely to be considered” and the potential price could be discounted “for the likelihood of their being realized.”

The Court reasoned that having some awareness of the fair market value of the property helps the lender determine the opening bid and whether to postpone the auction to protect the borrower’s interests. The lender in this case admitted in discovery it took no steps to determine the fair market value of the property before the auction. Say what? This is not a good fact for the lender. The Court’s comment on it was “no diligence is not reasonable diligence.”

So what is a lender supposed to do? The Court didn’t say you need to obtain an appraisal. The decision provided that the lender must in some way ascertain fair market value in order to satisfy its duty of good faith and reasonable diligence in selling the property. That could mean obtain an appraisal, contact a broker for a valuation or market information, or something similar.

Background of the Case

A borrower defaulted on its residential mortgage loan and the lender, Fannie Mae, sold the property to a third party at a foreclosure auction. The opening bid price at the auction was $329,000.  The winning bid was $355,000.  The assessed value was $361,900.

The borrower filed suit, claiming the lender did not satisfy its duty to exercise good faith and reasonable diligence in conducting the foreclosure sale. During the trial after the auction, the borrower’s expert appraised the property at $975,000, and the buyer’s expert at $385,000. All valuations concluded that the highest and best use of the property was as vacant land, developable into as many as four single family homes.

The trial court dismissed the case on a summary judgement motion. The trial court concluded that the borrower did not have enough evidence to prove the lender breached its duty. The judge reasoned that the lender had no obligation “to consider anything other than the value of the property as it was presently zoned and used.”

The Appeals Court instead found that the borrower had raised material disputes of fact as to whether the lender complied with its duty. The record showed that evidence exists of an inadequate price and other evidence that the lender:

  1. failed to take any steps to determine the current fair market value of the property before the auction sale;
  2. did not consider the development potential of the property or share that potential with potential bidders or in advertising; and
  3. did not take any steps other than compliance with statutory mandates.

Foreclosure Standards

The Appeals Court gave us a primer on the standards applicable to Massachusetts foreclosures:

  • The power of sale in a foreclosure permits a lender to foreclose without judicial oversight.
  • A foreclosing lender must exercise good faith and use reasonable diligence to protect the interests of the borrower.
  • The duty of good faith and reasonable diligence is not satisfied merely by following statutory requirements.
  • A lender must get for the property as much as it can reasonably, and do what a reasonable person would be expected to do to accomplish that result.
  • The mere inadequacy of a foreclosure sale price, alone, does not necessarily prove an absence of good faith or reasonable diligence; however, inadequacy of price may be considered with other evidence to support a finding of fraud or lack of reasonable diligence.

If you plan to rent your house this summer, be prepared for a change in the State Law effective July 1, 2019.  On December 28, 2018, Governor Baker signed An Act Regulating and Insuring Short-Term Rentals which sets forth a comprehensive framework for the regulation of short-term rentals.  The new law has several new requirements including registration, the payment of both State and local taxes, payment of fees and insurance.

A short-term rental includes an apartment, house, cottage and condominium rental where at least one room or unit is rented out by an operator through the use of advanced reservations.  The Act includes regulation of online rental companies such as Airbnb, Flipkey and VRBO. Hotels, motels, lodging houses and bed and breakfast establishments are not considered short-term rentals.

All short-term rental operators will be required to register with the Massachusetts Department of Revenue (“DOR”). Operators may then choose to allow an intermediary or other agent to handle the rental of their property who can register and submit returns and taxes due to DOR on their behalf.  The State will maintain a short-term rental registry that will be accessible to the public.

The new law imposes State and local excise taxes on short-term rentals that are rented for more than fourteen days in a calendar year starting on July 1, 2019.  This taxation will apply to any rental contract entered into on or after January 1, 2019. Short-term rentals will be required to pay the 5.7% State excise tax rate to the DOR and additionally, communities can add local taxes of up to 6.0%, and 6.5% in Boston.

There are also new insurance requirements under the Act.  Operators of short-term rentals are required to maintain liability insurance of not less than $1,000,000 to cover each short-term rental, unless such short-term rental is offered through a hosting platform that maintains such coverage.

Finally, local municipalities may charge an additional community impact fee of up to 3% on certain short-term rentals. There are some other fees that are permitted by certain municipalities and these fees, unlike the taxes, are paid directly to the municipality. The law also allows for local regulation and fines for violations of local laws.  If you have any questions regarding local fees or regulations, it is strongly advised that you speak with your local municipality.

When the Conservation Commission refused to permit the construction of a house on her residential lot in a Falmouth subdivision, Janice Smyth decided to take action and sought damages for a regulatory taking of her land under the U.S. Constitution and the Massachusetts Declaration of Rights.  She was successful initially, recovering damages of $640,000.  But, in Smyth v. Conservation Commission of Falmouth, the Appeals Court reversed the lower court’s decision.

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The Boston Redevelopment Authority d/b/a Boston Planning and Development Agency has the right to challenge a foreclosure that purportedly terminated a covenant restricting the use of property to affordable housing.

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In a satisfying win for Rackemann, the Appeals Court today upheld a Land Court decision that inland lot owners hold no easement rights over our clients’ waterfront property.

Loiselle v. Hickey concerns a large subdivision in Dennis with a number of ways leading to Cape Cod Bay.  An earlier case between many of the same parties established that the inland lot owners had easement rights in all of those ways.  In Loiselle, many of the same the inland lot owners argued that they also had the right to use the private beach between those ways for recreational purposes.

The Appeals Court rejected that claim.  While the decision does not break new legal ground, it does serve as a helpful review of the basic legal principles governing waterfront land.

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Unable to leave well enough alone, the Supreme Judicial Court used a series of wooden puns in deciding not to change the longstanding rule that a landowner cannot hold a neighbor responsible for damage caused by that neighbor’s healthy tree.  Shiel v. Rowell addressed Shiel’s nuisance and trespass claims that algae on her roof was caused by the Rowells’ overhanging tree.

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Massachusetts is unusual in that an owner of waterfront property typically holds title to the low water mark.  However, the area between the low and the high water marks normally remains subject to the rights of the public to fish, fowl (hunt birds) and navigate.

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Section 7 of Chapter 40A contains a statute of limitations for actions by individuals and municipalities to compel the removal, alteration, or relocation of any structure due to a zoning violation.  In Bruno v. Zoning Board of Appeals of Tisbury, the Appeals Court considered when the statute of limitations commences based on a zoning violation arising from an ANR (Approval Not Required) subdivision of land.

The Goethals owned a large lot with a single family home and guesthouse.  In 2001, the local planning board endorsed the Goethals’ plan to subdivide that lot into two parcels and, for a time, the Goethals retained both Lots.   Their guesthouse was on Lot 1 and a single family home was on Lot 2.  Lot 1 is about 12,000 square feet, whereas zoning requires a minimum lot size of 25,000 square feet for a single family home.

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