Tenant Right of First Refusal: An Essay on the Merits and Shortcomings as Public Policy

For background on the tenant right of first refusal being considered, see other articles in this April 2018 edition.

To grant tenancy for life, regardless of ability to keep up with repair costs, is to invite disrepair. Old apartment interior CC-BY-SA 2 by Adam Jones.

Key Assumptions in the Right of First Refusal

For the sake of argument, let us assume that displacement is a serious and legitimate problem. Let us assume that the intended beneficiaries of a right of first refusal could not, without the right of first refusal, live anywhere close to their current premises.

For example, let’s propose a long-term renter in Cambridge who lives in a small, “Class C” space that complies with all facets of code but is very dated. Perhaps it has original 120-year old cabinets, doors, etc. The rental agreement has not kept pace with the recent, rapid rise in market rents. There has not been a similarly affordable apartment listed on the market for many years. The renter cannot afford to pay any additional rent.

Let us further assume, for the sake of argument, that for various social, medical, or economic reasons, the best thing for this renter and for the public would be if the renter continued living in their premises for the foreseeable future. You can easily imagine an elderly senior citizen whose only remaining social network is in that neighborhood. If they continue to reside there, they will brighten many lives for many years yet. If they move, they will fade quickly, alone.

In our example, if this building is sold, the new investor will almost certainly seek to update the unit and get market rents for that apartment. Let us assume for the sake of argument that we know the new investor intends to do this and has asked the seller to deliver the unit vacant, as often happens.

• Assumption One: Sales of buildings displace people from where the public would have them.

Let us assume, as well, that no re-interpretation of the 13^th amendment to the Constitution can force the seller into continued, involuntary servitude, and that it is politically impossible to have displacement made a crime.

• Assumption Two: You cannot stop a seller from selling.

Let us further assume in this example that all parties are acting in good faith and perfect social harmony, like age-old friends (an assumption far from certain!).

• Assumption Three: Everyone is acting with the public interest foremost.

We will examine these assumptions in detail soon. For now, if we take these assumptions as true, the only question is, to whom should the building be sold?

If We Sell to the Renter

As a replacement buyer, the renter has several advantages. They are intimately familiar with the property. They are tolerant of its many defects. They would obviously not resell the property: our example requires that they have not accumulated enough wealth to reside elsewhere, meaning that their ownership will be highly leveraged and any resale would be fruitless. Selling to the renter aligns ownership with the desire to stay.

On the other hand, the renter has several disadvantages.

The renter may be qualified to carry out the repair and maintenance of buildings, and physically capable, but this is not necessarily true. Especially in the case of our elderly resident, renters may be unqualified and/or physically incapable. In this case, they would have to exercise their right of first refusal planning to later hire out for needed repairs.

Under current proposals being considered, it is recognized that renters do not have access to capital to purchase. A housing trust fund would be created. The current versions of right of first refusal make none of this fund available for ongoing maintenance. Without this provision, our elderly renter cannot plan to hire out. The only plan in this scenario is to transfer the rights to a better capitalized third party.

We conclude, therefore, that assigning the right of first refusal to the renter does not help all elderly, infirm, disabled, or untrained continue to reside in the premises. Such renters must assign their rights to a third party.

If we Sell to a Third Party

Under current proposals, there are three kinds of transfers to a third party.

The first transfer is when renters may sell their right to anyone. This applies to TOPA. The I-Team reported last year that amounts between $10,000 and $100,000 have been offered for rights. These are windfall amounts. One buyer offered to let the tenant stay, but the tenant refused to stay and wanted the cash to leave. Windfalls drive bad decisions, and for 70% of recipients, windfalls have no lasting positive impact, as measured three years from date of award (TIME Magazine). Sale of rights TOPA-style is therefore not consistent with long-term residential occupancy.

The second transfer is when renters may assign their right to an organization they participate in or partially influence. This applies to the Massachusetts proposals. The list of valid transferees includes cooperatives, land trusts, and CDC’s. Ultimately, however, these entities are not required under the law to provide housing to the renter who first assigned the right. They may provide housing, but they may also choose, through their governance mechanisms, to displace the renter and renovate the building. Transfer of rights non-profit-style is therefore not consistent with long-term residential occupancy.

The third transfer is when renters sell or assign their right subject to restrictions on the purchaser. For instance, a renter could assign their right to a newly created tenant cooperative, or to a private landlord, but this assignment would have a string attached: the third-party buyer would be obligated to continue renting to that renter for the remainder of their life, subject to restrictions. Transfer of rights with restrictions is consistent with long-term residential occupancy. It is the only kind of transfer that is.

Sale or Transfer with Restrictions as “Life Estate”

Transfer of ownership rights subject to restrictions is called a “life estate” in real estate terms. It is an accepted mechanism for an elderly or terminally ill owner to continue living in their home without any legal title to it.

As commonly practiced in Massachusetts, a life estate obligates the tenant to maintain the premises and pay all essential expenses, including the mortgage, taxes, and insurance. In actual practice, the heirs of the estate have an incentive to maintain the property. Not only do they wish to care for their aged family, but also they wish to preserve the asset they will eventually inherit.

Life estates are initiated by the largess of an owner willingly gifting their property to their heirs. The restraints imposed on the new owners are imposed by the grantor, without such restraints there would be no grant. Life estates are consistent with a commonly accepted principle of ownership: restrictions on ownership must be voluntarily.

In the case of a tenant without ownership, granting transfer subject to restriction is to enact “just cause eviction.” The concept behind “just cause eviction” is that a renter is entitled to remain in a rented premises so long as there is no “good reason” to get rid of them. The good reasons are spelled out in the law.

For instance, under “just cause eviction,” a tenant may be evicted if they disrupt their neighbors, or cannot pay base rent. The list of good reasons imposes a higher hurdle than the market. In the case of our elderly resident, the list of good reasons would not include an owner’s desire to renovate. Usually, the list of good reasons also excludes a tenant’s inability to pay an unfair rent increase. Thus as the renter declines with years, so too their apartment, until finally port-mortem the unit de-regulates and is renovated.

“Life estates for renters” or “just cause eviction” have various economic and political problems discussed elsewhere. The most significant problem is that they are unlike “life estates” in a fundamental way. The restraints imposed on the new owner are not imposed by the grantor. Private landlords purchased their property in the past, under conditions that no such restraints be imposed. To impose them now is inconsistent with commonly accepted principles of ownership: “just cause” restrictions on ownership would be involuntary.

“Just Cause Eviction at Sale”

The proposed tenant right of first refusal does not meet the goal of continued residence. Only transfer to a third party with restriction can serve their target demographic. The solution ought to be called “just cause eviction at sale.”

Consider how “just cause eviction at sale” might work if it were a collaborative process:

Municipalities would enact the ordinance or legislation. It would not change the existing relationship between any owners or renters.

Certain target renters would be eligible for admission to a new protected class, “Vulnerable to displacement.” Probably this would include only the very elderly and the least financially secure. Privacy concerns would require their willing entry into this class.

For-profit and non-profit buyers in regulated municipalities would receive pre-sale disclosures about the “vulnerable to displacement” residing therein and willingly identified. Buyers willing to accept “just cause eviction” conditions on those specific individuals could make an offer. Uninterested buyers could shop elsewhere.

In terms of the closing process, no additional delay or expense would be incurred in brokerage or lawyering. There would be no delays or notice requirements beyond the pre-sale disclosure.

Expense would be incurred in identifying the willingly protected residents. Arguably, this expense is already baked into the transaction of a multifamily. either the new tenants are screened by the buyer, or they are removed by the seller. In terms of economic transaction costs, there may be no new burden.

After closing, just cause eviction would be enforced between the eligible, willing, and disclosed residents and their willing, agreeing buyer. When the residents die or move out, the restriction would die as well. It would not be a restriction for the unit but rather for the individual.

“Just cause eviction at sale” as outlined above could have the elements of a consensus solution.

Unanswered Questions with Just Cause Eviction At Sale

The loss of resale value for properties with eligible and willing tenants would likely be real. It is conceivable that a pro-rata real estate tax abatement could compensate owners for the city’s imposed loss of resale value. The mechanism for this is conceptually already available under MGL Chapter 40P. Municipalities should be brought into the drafting process on a new, parallel law.

The question of “bright finish lines” would also be real. For instance, if “vulnerable to displacement” had a minimum age set at age 70, then age 69 could become “the age of eviction,” as mean-spirited owners sought to preempt eligibility. Great care should be taken to prevent sharp divisions.

If these and other questions are to be answered, tenant advocates will need to sit at the table with owner advocates, municipalities, and actual owners and renters.

What if Our Assumptions are Untrue?

As shown above, the tenant right of first refusal being discussed in Massachusetts cannot guarantee continued residence for all renters, even under the favorable assumptions listed above. What if the assumptions are untrue? How much worse does the current proposal become?

Do sales of buildings displace people from where the public would have them?

Massachusetts remains one of the most desirable places to live and work, and our high housing prices are an economic indication of inadequate supply. It’s not the sale of buildings driving displacement from neighborhoods, it’s tight zoning regulations that prevent or slow the creation of supply to meet demand.

The report of the 2016 Senate Special Commission on Housing said, “Massachusetts needs a revolution in housing production to keep up with the demand for new housing statewide.” The Metropolitan Area Planning Council cited in the report said that Metro Boston alone will need 435,000 homes by 2040.

The report went on further to assign blame: “207 of our 351 cities and towns have permitted no multifamily housing with more than 5 units in over a decade and over a third of our communities have permitted only single family housing.”

Deregulation of zoning would likely go a lot further than increased regulation of real estate transfers. As hard as zoning may be, zoning is the root cause, not sale of real estate.

Can you stop a seller from selling?

Perhaps this is a good assumption, perhaps a seller cannot be stopped. One idea merits consideration.

Usually housing subsidies like Section 8 focus on the demand-side, where renters are given money to purchase housing. Project-based vouchers focus on the supply side, staying with the unit so long as the owner rents to certain target renters. Project-based funds can be used to make renovations. If inability to renovate a place is causing an owner to exit the business, a project-based voucher might make a difference. Similar renovation grants offered for deleading and energy efficiency can make a difference between lossy and profitable operation.

Is everyone is acting with the public interest foremost?

Sadly, not always. Non-profits are not, in general, immune to human frailty. The Roxbury Tenants Association was fined $60,000 for discriminating against one of their own.

The Southern Middlesex Opportunity Council litigated against the then Town of Framingham.

Non-profits, like all associations of human beings for common purposes, are more concerned with the furtherance of their specific purposes than with the public good. Some owners derisively refer to housing advocates as the “poverty industry,” an appropriated reference to the 2016 book of the same name alleging that business owners make money off the poor. The same is true of nonprofits, with operating budgets that exceed $10 million annually (MetroHousing Boston), and Executive Director compensation in excess of $200,000 (SMOC).

The tenant right of first refusal, which is assignable to a nonprofit, could therefore be viewed skeptically as a form of “empire building,” where the emperors may not be shareholders but nonetheless command large salaries, perquisites, and social rank.

Right of First Refusal Conclusion

The right of first refusal proposed in H.3017 and being discussed in Cambridge, Somerville, and perhaps elsewhere is flawed as anti-displacement policy. The closest policy that would prevent displacement, “just cause eviction at sale,” may provide a politically palatable way forward, but ultimately pales in comparison to zoning reform as an anti-displacement measure, particularly in the cities most concerned with displacement.
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