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Lien under a Declaration for Water and Sewer Assessments Primes Subsequently Filed Deed of Trusts

In Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, LLC, No. 1911, Sept. Term 2013 (Md. Ct. Spec. App. Aug. 31, 2016), the Court of Special Appeals held that water and sewer assessments in favor of a private utility company created under a declaration on a residential development in Prince George’s County had priority over the lien of a subsequently recorded deed of trust from a homeowner in that development.  The court also decided that the lien of the declaration could be enforced without resorting to the Maryland Contract Lien Act (the “Act”).

Facts of the Case

Saddlebrook West, LLC (“Saddlebrook”) purchased unimproved land in Bowie in 1999 and entered into a memorandum of understanding with the Washington Suburban Sanitary District (WSSD) that authorized Saddlebrook to construct water and sewer extensions within the subdivision planned for the property.  On April 4, 2000 Saddlebrook as Declarant executed a declaration (the “Declaration”) regarding deferred water and sewer charges in favor of Saddlebrook West Utility Company, LLC (“Utility”), its subsidiary.  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 per year for 23 years.

The Declaration stated that it created a lien for repayment of the water and sewer charges, 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 Act.

Saddlebrook caused a contractor to construct water and sewer facilities for the 187 lots in the subdivision.  Then Saddlebrook sold the 187 lots to a builder, which constructed a single-family house on each of them.

Charles Bradley, Jr. purchased one of the houses (the “Property”), but he did not pay the first two annual water and sewer charges.  An agent of Utility recorded statements of lien against the Property under the 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 only searched Bradley and Mitchell, and not the prior owners.  Also, the title search 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 are 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, and it filed a separate declaratory judgment action.  Utility voluntarily dismissed the foreclosure action.

After a hearing, 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. (“Select”).  On appeal, the Court of Special Appeals affirmed the judgment of the circuit court.

Rule Against Perpetuities

Select argued that the Declaration violated the Rule Against Perpetuities because under the terms of the Declaration the lien does not arise until a lot is sold to a homeowner, and such a sale may not occur within a life in being plus 21 years.  The Court of Special Appeals considered prior Maryland cases that involved property interests that did not vest immediately, but the court found that in the present case there was no actual contingency to the vesting of the property interests.  Instead, the sale of homes to individuals was merely the last step in the residential development process.

Covenants Running with the Land

The Court of Special Appeals also rejected Select’s assertion that the charges in the Declaration were not covenants running with the land.  The Court found that all four requirements for a covenant running with the land were present:  (a) the Declaration did “touch and concern” the land; (b) the original parties intended for it to run with the land; (c) there was vertical privity of estate; and (d) the covenant was in writing.  The court also found that the Declaration met another test: it enhanced the value of the Property and made the Property more beneficial to the owner.

Failure to Pay Recordation and Transfer Taxes

Select next contended that the Declaration should be of no force because recordation and transfer taxes were not paid on it when it was recorded.  Select calculated that the unpaid County tax was $42,149.82 and the unpaid State tax was $16,557.75.  The court dismissed this assertion for lack of standing.  It characterized Select’s issue about the failure to pay taxes as a complaint about a “public wrong” because it affects all members of the public equally.  Unfortunately for Select, a complainant seeking to redress a public wrong does not have standing unless the complainant has suffered some special damage that is different in character and kind from that suffered by the general public.  Select could not meet this standard.

Lien Has First Priority

The Court of Special Appeals held that failure to pay assessments under a contract can create liens in either of two separate and distinct ways under the Act, which is found at Subtitle 2 of Title 14 of Maryland Code, Real Property Article (“RP”).  According to the court, a lien may be created either by a contract, under RP §14 202, or by breach of a contract, under RP §14 203.  

The court stated that a lien may be created under RP §14 202 if there is language in the applicable contract so providing.  In the view of the court, if a lien is created under RP §14 202, the lien exists as of the date of the recordation of the contract, and a breach may be enforced without application of the other provisions of the Act.  This includes the provisions relating to the creation of a lien in RP §14-203 – consisting of giving notice, filing a complaint, having a hearing if the landowner files a response, and recording a statement of lien – and the provisions dealing with the enforcement of such a lien in RP §14 204.  Note that if a lien is created under RP §14 203, that statute provides that the lien arises when a statement of lien is recorded in the land records.

The Court of Special Appeals found that the Declaration contained the requisite language to create a lien against the Property for the payment of water and sewer charges.  This interpretation enabled the court to hold that the Declaration had priority over the Deed of Trust, which was recorded after the Declaration was recorded, even though the Deed of Trust was recorded before a fresh statement of lien was recorded.  In the view of the court, Saddlebrook did not need to take any steps to obtain a lien, it did not need to file a statement of lien, and it did not need to enforce the lien under the Act.  Of great significance, the priority of the lien of the Declaration was determined to be the date of the recordation of the Declaration, not the date of default of payment thereunder or the date of the recording of a statement of lien.

NOTES AND COMMENTS: 

1.    Based on Select v. Saddlebrook, lenders need to be very concerned about declarations creating private water and sewer charges that are recorded before the lenders’ deeds of trust or mortgages.  Lenders must be vigilant to be sure that the charges are paid when due because if they are not, the future charges – which may stretch over 20 or more years – may be accelerated.  According to the Court of Special Appeals, these charges will have priority over deeds of trust and mortgages that are recorded after the applicable declarations.  Lenders should consider escrowing funds for these charges so that they can be sure that the charges will be timely paid.

2.    Some counties, such as Baltimore County and Anne Arundel County, have code provisions concerning private water and sewer declarations.  Prince George’s County does not have such provisions.  The Court of Special Appeals reviewed the Baltimore County and Anne Arundel County laws and said that there is no language in them creating a lien or even creating the right to obtain a lien.

3.    As noted above, the court did not say whether recordation and transfer taxes should have been paid when the Declaration was recorded in Prince George’s County.  Alone among Maryland jurisdictions, Prince George’s County imposes a local transfer tax on the recordation of security instruments.

4.    Did the Court of Special Appeals reach the correct result in Select v. Saddlebrook?  The Maryland Contract Lien Act (originally Senate Bill 625, Chapter 736 of the Laws of Maryland of 1985) was drafted after provisions of the Maryland Condominium Act were held to be unconstitutional for failure to comply with due process requirements in Surfside 84 Condominium Council of Unit Owners v. Mullen (No. 495, September Term, 1984) (filed January 28, 1985) (unreported), cert. denied 306 Md. 370 (1986).  The Act replaced those provisions and also allowed for “the creation of a lien on property in general by a recorded land contract, or by a real covenant running with the land, if the contract expressly provides for a lien.”  See Summary of Committee Report of the Senate Judicial Proceedings Committee, 1985; see also Golden Sands Club Condominium, Inc. v. Waller, 313 Md. 484, 491 n.5 (1988).

The drafters of the Act intended to establish a single system for the imposition and enforcement of liens under private contracts other than deeds of trust, mortgages, and land installment contracts.  RP §§14 202 and 14 203 were intended to include the preconditions and steps for the creation and existence of a lien under the Act; they were not intended to be read and applied independently.  

A summary of the decision of Select v. Saddlebrook is set forth in the first sentence of the opinion, which provides in part, “[T]he lien 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.”  However, the Declaration would not have been enforceable to create a lien against the Property without the Act, and so the Act must be read to determine how to create that lien, what its priority is, and how to enforce it.  Once the Act is found to be applicable, all of the provisions of that law must be applied, particularly the ones that provide that there can be no lien unless and until or the landowner has been given a right to a hearing.  To decide otherwise is to ignore the constitutional problem addressed in Surfside 84.  Surfside 84 followed the Court of Appeals’ decision in Barry Properties v. Fick Brothers Roofing Co., 277 Md. 15 (1976), which held that the Maryland Mechanic’s Lien Statute was unconstitutional.

A result in Select v. Saddlebrook consistent with the legislative intent of the Act would have been that Saddlebrook could have availed itself of the benefits of the Act and avoided the necessity of filing a normal lawsuit, but its lien would only be created when a statement of lien was recorded.  That lien would be inferior to a prior deed of trust on the Property. 

For questions, please contact Ed Levin (410) 576-1900.  A version of this article appeared in The Daily Record, Baltimore, Maryland titled “Lenders Beware:  Assessments Have Priority over Mortgages,” at http://thedailyrecord.com/2016/09/19/edward-j-levin-lenders-beware-assessments-have-priority-over-mortgages/ and in the print edition on September 20, 2016.

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Date

09.14.16

Type

Publications

Authors

Levin, Edward J.

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