The Court of Appeals held on August 16, 2017 that a recorded declaration that established water and sewer assessments on lots in a residential development did not by itself create a lien on the property. Instead, a lien can only be created after following the procedures of the Maryland Contract Lien Act, Real Property Article (“RP”) §14-201 et seq. Therefore, a mortgage has priority if it is recorded after the recording of the declaration but before the completion of the steps mandated by the Contract Lien Act.
In Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, LLC, 2017 WL 3498164 (Md. Ct. App. Aug. 16, 2017), the Court of Appeals reversed last year’s decision by the Court of Special Appeals of the same name, published at 229 Md. App. 241 (2016), which held that assessments have lien priority from the date of recording the declaration. That decision caused considerable concern among lenders because under it mortgage holders would have been subordinate to thousands of dollars for charges for installation of water and sewer lines in many residential communities. See “Lien under a Declaration for Water and Sewer Assessments Primes Subsequently Filed Deed of Trust” in Relating to Real Estate, September 2016 and Edward J. Levin, “Lenders Beware: Assessments Have Priority over Mortgages,” in the online and print editions of The Daily Record on September 20, 2016.
The background of this case relates to the obligation to construct and pay for new water and sewer facilities in a private residential development. The Washington Suburban Sanitary Commission (“WSSC”) was formed to construct and operate water supply, sewage, and storm water management systems in Montgomery and Prince George’s Counties. A 1998 law shifted this burden to developers. In 1999, Saddlebrook West, LLC (“Saddlebrook”) purchased unimproved land in Bowie, Prince George’s County, and later that year it entered into a memorandum of understanding with the WSSC that authorized Saddlebrook to construct water and sewer extensions within the subdivision planned for the development, subject to approval by the WSSC.
On April 4, 2000 Saddlebrook recorded a document entitled “Declaration” in the land records of Prince George’s County that stated the cost of creating the water and sewer infrastructure would be the obligation of future homeowners, payable by annual assessments in favor of Saddlebrook’s subsidiary, Saddlebrook West Utility Company, LLC (“Utility”). The Declaration imposed an obligation on the owner of each lot in the subdivision to pay an annual water and sewer charge to Utility of $700 for 23 years. The Declaration further provided that the liability of each homeowner would be secured by a lien on the homeowner’s property and that the lien had priority over any subsequent deed of trust, mortgage, or lien encumbering the lots. The Declaration provided that if an owner failed to pay a water and sewer charge, the charges could be accelerated, the lien could be foreclosed like deeds of trust and mortgages, and the lien could be foreclosed under the Contract Lien Act.
Charles Bradley, Jr. purchased one of the houses (the “Property”) subject to the Declaration on April 1, 2002. Bradley did not pay the first two annual water and sewer charges on the Property, and Utility recorded against the Property statements of lien under the Contract Lien Act on March 1, 2004 and November 17, 2004. On January 6, 2005 Bradley conveyed the Property to Sherylyn Mitchell. Later in 2005 Mitchell refinanced her original loan with a loan from Long Beach Mortgage Company secured by a deed of trust (the “Deed of Trust”). The title company for the new lender did not find the recorded statements of lien. Mitchell’s new lender sold the loan to JPMorgan Chase Bank, N.A. (“Chase”).
Because under the Act statements of lien were effective for only three years, the statements of lien that were filed against the Property expired in 2007. On October 7, 2010 Utility filed a foreclosure action in the Circuit Court for Prince George’s County for non-payment of the water and sewer charges under the Declaration. Chase filed a motion to stay and dismiss the foreclosure proceedings, and it filed a separate declaratory judgment action. Utility voluntarily dismissed the foreclosure action.
The circuit court held that the Declaration “is a valid enforceable first-priority lien encumbering the [P]roperty.” Chase appealed and then it sold its loan to Select Portfolio Servicing, Inc. On appeal, the Court of Special Appeals affirmed the judgment of the circuit court. Thereafter, the Court of Appeals issued a writ of certiorari.
The Maryland General Assembly enacted the Contract Lien Act in 1985 shortly after the Court of Special Appeals held in Surfside 84 Condominium Council of Unit Owners v. Mullen, No. 495, September Term 1984 (Ct. Spec. App. January 28, 1985), cert. denied, 306 Md. 370 (1986), that a part of the Maryland Condominium Act was unconstitutional. The problematic provision provided that unpaid assessments were a lien on units. The infirmity was that the owners were not afforded due process protections, such as notice and an opportunity to challenge the assertion of a delinquency. Ten years earlier the Court of Appeals had announced that owners of property are entitled to due process rights before a lien may be placed against them. See Barry Properties v. Fick Brothers Roofing Co., 277 Md. 15 (1976), which held that the Maryland mechanics’ lien law was unconstitutional. The legislative response to these cases was the Contract Lien Act, a statute which reached to all contracts that are real covenants running with the land and that expressly provide for creation of a lien when charges or assessments are not made.
In its decision in Select Portfolio, the Court of Special Appeals held that “the lien [of the Declaration] could be enforced under the terms of the Declaration, without resort to the Maryland Contract Lien Act; and the lien has priority over a later recorded refinance deed of trust . . . against the property.” To support this, the court relied on RP §14-202, but not on the other provisions of the Contract Lien Act. If only RP §14-202 were applicable, the provisions of RP §14-203 including giving notice, filing a complaint, having a hearing if the landowner files a response, and recording a statement of lien would not have to be followed.
In contrast, the Court of Appeals in its decision found that the entirety of the Contract Lien Act must read together so that it “provides a coherent framework for the establishment and enforcement of liens that addresses the problem the statute was designed to remedy.” All of the provisions of the Contract Lien Act must be followed to create a lien under private contracts that qualifies for the provisions of the Contract Lien Act.
The Court of Special Appeals was misled when it read the Contract Lien Act as presented by the editors of the Maryland Code. The headings in the annotated versions of RP §14-202 (Creation of lien by contract) and RP §14-203 (Creation of lien as result of breach of contract) would seem to indicate that these sections refer to separate paths to obtain liens. However, headings are not part of the laws enacted by the General Assembly, they are not part of the legislative history, and they are not necessarily reflective of legislative intent.
The decision by the Court of Appeals in Select Properties means that lenders taking mortgages on real property in Maryland which is subject to contracts or declarations will have priority over the charges assessed under the other instruments, so long as statements of liens have not been recorded before the mortgages. Lenders, therefore, will not have to worry that liens from the other instruments will prime their mortgages, and they will not need to create escrow accounts or take other steps to assure themselves of the priority that they expect.
For questions, please contact Ed Levin (410) 576-1900. A version of this article appeared in The Daily Record, Baltimore, Maryland titled “Lenders Relax: Mortgages Have Priority over Declarations,” published in The Daily Record, Baltimore, Maryland online and print editions on September 18, 2017.