Maryland Ground Rent Lease Safeguards Begin to Come Undone
By: Ed Lee
In 2007, Maryland enacted a series of laws intended to protect residential ground tenants from the loss of their homes as a result of failing to pay ground rent and, further, to facilitate the extinguishment and redemption of residential ground rent leases. An impetus for the legislation was provided by a series of articles appearing in the Baltimore Sun in 2006 highlighting extreme ground rent lawsuits and seemingly inequitable ejectments of residents by ground rent owners. On October 25, 2011, the Court of Appeals in Muskin v. State Department of Assessments and Taxation, struck down part of one of those laws with respect to the extinguishment of ground rent leases not registered with the Maryland State Department of Assessments and Taxation (“SDAT”) by September 30, 2010.
By way of background, ground rents, generally found in Maryland only in Baltimore City and Anne Arundel County, are characterized by the separation of ownership of the real estate by a ground landlord from ownership and occupancy of the improvements on the land by the ground tenant. The ground tenant is permitted to use and occupy the land pursuant to a long term ground rent lease in exchange for which ground rent is paid to the ground landlord annually or semi-annually. The typical ground rent lease has a term of 99 years, renewable forever. The amount of the ground rent is relatively nominal with most ground rents totaling less than $50 annually. Ground rents may be redeemable, i.e. subject to buy-out and redemption by the ground tenant pursuant to a formula, or irredeemable, in which case the ground tenant does not have the right to buy out the ground rent lease. Identifying the ground landlord for a property and confirming that all ground rent has been paid can be challenging, and the penalty for failing to pay ground rent when due, at least prior to 2007, could be severe, resulting in the ejectment of the ground tenant from the property. By some estimates, there are more than 100,000 ground rent leases in Baltimore City and Anne Arundel County.
The changes passed by the General Assembly in 2007 substantially revised the legal framework for ground rent leases and included the following modifications:
a. All ground rent leases to be registered by September 30, 2010, failing which the ground lease could be extinguished by SDAT and fee title to the real estate transferred to the ground tenant ;
b. Elimination of ejectment of the ground tenant as an available remedy for failure to pay ground rent;
c. Imposition of 60 day notice and cure period;
d. As to previously irredeemable ground rent leases, notice of intent to preserve irredeemability to be filed, failing which, such ground leases to become redeemable; and
e. Creation of three (3) year limitations period.
In Muskin, the petitioner, trustee of a trust owning numerous ground rent leases, filed a constitutional challenge as to the requirement for all ground rent leases to be registered by September 30, 2010, failing which the ground lease could be extinguished and fee title to the real estate transferred in the ground tenant. The applicable provisions of the law may be found in §8-703 (registration) and §8-708 (extinguishment and transfer) of the Maryland Real Property Code. The Court of Appeals held the extinguishment and transfer provisions of the statute to be unconstitutional on the grounds that vested property rights were abrogated without due process or just compensation and, further, that the statute impermissibly transferred property without just compensation. In response to this decision, SDAT has posted the following statement on its website acknowledging the ruling and confirming that any ground leases previously extinguished under the statute, are and remain valid.
The Maryland Court of Appeals has ruled that the extinguishment of ground rents for failure to register them with the State is unconstitutional. All ground rents that would have been extinguished for failure to register them are as valid as they were before the registration deadline. Any Certificate of Extinguishment issued by this Department is void and has no effect.
Notably, the Court left in place the registration requirement under §8-703. However, pending further action by the General Assembly, currently no penalty exists for failure to register. Moreover, the Court provided guidance as to how the statute might be revised to satisfy constitutional requirements. In its initial incarnation, the penalty for failure to register was found to be excessive. Alternative approaches noted by the court as likely to pass constitutional muster for failure to register would include interim consequences short of extinguishment, such as prohibiting the collection of rents or denying access to the courts for enforcement absent lease registration. Such an approach would still permit the General Assembly to achieve its initially stated goal of protecting ground rent tenants while simultaneously preserving the underlying ground rent lease.
Next to be seen -- whether the General Assembly will act in response to this decision. Also still to be resolved is a separate class action lawsuit certified last year in Anne Arundel County claiming that the legislative reforms made the ground rent leases worthless, amounting to an unconstitutional seizure of private property for public use without compensation. In addition to seeking payment from the state, the lawsuit argues that the laws are unconstitutional.