District Court Allows Discrimination Suit to Proceed
By Christopher R. Vaccaro
Special to Banker & Tradesman

Last month the U.S. District Court of Massachusetts fired a warning shot to­ward tenant-screening firms, in Louis v. Saf­eRent Solutions LLC.

Mary Louis and Mon­ica Douglas are self-de­scribed Black women. They both hold Sec­tion 8 housing vouchers guaranteeing most of their rent payments. Louis applied to Metropolitan Management Group LLC for an apartment at Granada Highlands in Mal­den. Douglas applied to a different prop­erty manager for an apartment at Millside at Heritage Park in Canton. Their applica­tions were forwarded to SafeRent Solu­tions LLC, a Texas-based firm offering ten­ant-screening services to landlords and real estate professionals nationwide.

SafeRent applies a proprietary algorithm to rental applications, using credit histo­ries, bankruptcy records, past due ac­counts, payment performance and eviction histories. The algorithm generates a “Saf­eRent Score” that is intended to assess the likelihood of an applicant’s lease default. The SafeRent Score disregards the benefits of tenant housing vouchers.

Metropolitan rejected Louis’s applica­tion based on her SafeRent Score. Louis challenged the rejection, offering employ­ment and landlord references, but without success. Douglas’s application was initially rejected because her SafeRent Score re­flected credit history and landlord-tenant problems, but it was later accepted after she appealed with assistance from a hous­ing advocacy group.

Louis and Douglas filed a putative class action lawsuit in federal court against Saf­eRent and Metropolitan for violations of federal and state antidiscrimination laws. They alleged that SafeRent’s algorithm gen­erated lower scores for Blacks, Hispanics and voucher-holders, who often have less income and poorer credit histories, result­ing in denials of rental housing applica­tions based on race and use of vouchers. They also sued SafeRent for unfair and de­ceptive practices in violation of Massachu­setts General Laws Chapter 93A. Commu­nity Action Agency of Somerville Inc. (CAA), which provides housing services to underprivileged individuals, joined the suit as a plaintiff.

SafeRent and Metropolitan moved to dis­miss the lawsuit, arguing that Louis and CAA lacked standing, and that the plain­tiffs failed to state actionable claims against them. Defendants often file  mo­tions to dismiss early in litigation, but the tactic rarely succeeds, because judges hearing those motions must assume, for purposes of the motion, that the plaintiffs’ factual allegations – but not legal conclu­sions – are true.

Court Finds Disparate Impacts

Federal and state laws prohibit discrimi­nation in the sale and rental of housing be­cause of race, color, religion, sex, familial status, and national origin. Massachusetts law also prohibits discrimination against voucher holders. The court easily found that Louis had standing to file suit, because she alleged that the defendants’ actions caused her application to be wrongfully de­nied, requiring her to accept costlier but less desirable housing in a neighborhood with a higher crime rate. The case for CAA’s standing was trickier because CAA itself was not denied housing by the defen­dants. Nonetheless, the court ruled that CAA had standing because SafeRent’s prac­tices, if found to illegally discriminate, im­paired CAA’s efforts to fulfill its mission of locating housing for its clients.

SafeRent also argued that antidiscrimi­nation laws do not apply to it in this case, because SafeRent is not a landlord and it does not ultimately decide whether to ac­cept or deny rental housing applications. The court disagreed, noting that SafeRent’s screening service influences housing deci­sions and, according to the plaintiffs’ com­plaint, causes prohibited discrimination.

The court next discussed disparate im­pact claims under anti-discrimination laws. Such claims are actionable under federal and Massachusetts law, when directed at practices that have disproportionately ad­verse effects on protected classes, without legitimate rationales. The court summa­rized the plaintiffs’ allegations that SafeR­ent’s reliance on credit history is misplaced, has a disparate negative impact on Blacks, Hispanics and voucher-holders, and limits their housing opportunities. The court ruled that these allegations were sufficient for the plaintiffs to proceed with their hous­ing discrimination claims against the defen­dants. However, the court dismissed the plaintiffs’ Chapter 93A claims, ruling that their allegations did not suggest that SafeR­ent’s conduct was egregious enough to sup­port a claim under that statute.

The court denied the defendants’ mo­tions to dismiss the housing discrimination claims, but there is no certainty that judg­ment will someday be entered against Saf­eRent and Metropolitan. There remains much work to do. The plaintiffs must prove that SafeRent’s algorithm employs data with little relevance to whether applicants are worthy tenants, causing impermissible discriminatory impacts. SafeRent and Met­ropolitan will strive to prove that SafeR­ent’s algorithm reliably and fairly predicts whether applicants are likely to default, without significant adverse impacts on pro­tected minorities.

While the parties gather data for their experts, SafeRent might want to revisit its methodology.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.

Shrewsbury Tenant Argued “Frustration of Purpose” Doctrine
By Christopher R. Vaccaro
Special to Banker & Tradesman

Many disrup­tions from the COVID pan­demic are now behind us, but litigation related to those disruptions continues to work its way through Massachu­setts courts.

Last month, the Appeals Court decided Inland Commercial Real Estate Services, LLC v. ASA EWC, LLC, involving a commer­cial tenant’s failure to pay rent. The tenant signed a 10-year lease in 2016, to operate a “European Wax Center” in Shrewsbury. Three years later, in March 2020, Gov. Char­lie Baker issued COVID-19 Order No. 13, re­quiring non-essential businesses, including the wax center, to close. The tenant com­plied with the order and did not reopen until July 2020, after the governor issued a new order ending the shutdown.

After the tenant failed to pay rent and water charges for March through Septem­ber 2020, the landlord sent it a notice to quit, claiming over $55,000 in delinquent rent, some of which accrued during the three-month shutdown period. The tenant made a partial payment, but did not bring the rent current. The landlord terminated the lease and filed suit in superior court to evict the tenant.

In contesting the eviction, the tenant ar­gued that it should not have to pay rent for the three-month period when the COVID shutdown order prohibited it from doing business. The tenant supported this argu­ment with the often-invoked, but rarely suc­cessful, frustration of purpose doctrine.

The Supreme Judicial Court summarized the frustration of purpose doctrine in a 1991 decision, as follows: “Where, after a con­tract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occur­rence of which was a basic assumption on which the contract was made, his remaining duties to render performance are dis­charged, unless the language or the circum­stances indicate the contrary.” When con­sidering this defense, courts look at whether unforeseen circumstances effec­tively negated the value of the contract to the party who invoked the defense.

Unforeseen Circumstances Can Negate Contracts

In the case of the Shrewsbury wax cen­ter, the Superior Court judge rejected the tenant’s frustration of purpose defense, and entered judgment awarding the landlord possession of the leased premises and $86,841 in damages. The tenant appealed, and the Appeals Court offered a useful anal­ysis of the doctrine, before affirming the Su­perior Court’s judgment.

The Appeals Court noted that the frustra­tion of purpose doctrine excuses a party from performing its contractual obligations “where unanticipated supervening events require it.” For the doctrine to apply, the purpose that is frustrated must be so intrin­sic to the reason for the contract, that the contract makes little sense without it. Courts are generally reluctant to apply the doctrine, preferring instead to preserve the certainty of contracts.

The Appeals Court also noted that most courts decline to apply the doctrine to tem­porary business closures caused by govern­ment shutdown orders. When evaluating frustration of purpose defenses in govern­ment shutdown cases, courts consider the duration of the forced closures, the length of the lease term, how far into the lease term the closure occurred, whether tenants could reopen after restrictions were lifted, whether tenants remained in possession of the prem­ises during the shutdown and whether ten­ants could use their premises for purposes not barred by the shutdown order.

Temporary Shutdown Not a Dealbreaker

Taking these factors into account, the Ap­peals Court found the tenant’s frustration of purpose argument unpersuasive. It noted that the tenant did not show that its tempo­rary closure substantially frustrated the pur­pose of the lease. The tenant was already three years into its lease when the shutdown occurred, the three-month shutdown was relatively short compared to the 10-year lease term, the tenant remained in posses­sion of the premises during the shutdown and could sell goods from the premises, and the tenant was able to resume its business after the shutdown was lifted.

The Appeals Court also rejected the ten­ant’s argument that a temporary frustration of purpose should excuse the tenant from paying rent during the shutdown period. The court found that the doctrine provides relief to parties who see the anticipated benefits of their bargains destroyed by un­foreseen events, not merely interrupted on a temporary basis.

The Appeals Court went on to state that even if the doctrine were available on a temporary basis, the tenant’s obligation to pay rent during the shutdown period would only be suspended, not discharged alto­gether. The court affirmed the Superior Court’s judgment.

This decision shows that the tenants who invoke the frustration of purpose doctrine to avoid rent payments will most likely be frustrated by unfavorable court rulings.

Download the article as seen in  Banker & Tradesman on June 26, 2023. Learn more about Christopher R. Vaccaro.