Relating to Real Estate

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Relating to Real Estate - February 2017

In this issue:

Can "Premises" Include Multiple Buildings?

In Kor-Ko Ltd. et al. v. Maryland Department of the Environment, No. 23, September Term, 2016 (Md. Jan. 25, 2017), the Court of Appeals had to decide whether the term "premises," as used in a particular environmental regulation, meant a single building or encompassed an entire commercial park.

The facts are simple if a bit unusual.  Kor-Ko, Ltd. ("Kor-Ko") sought to avoid exposure to what the Court of Appeals referred to as "Dust in the Wind."  For those less musically inclined, the "Dust" references Kerry Livgren's lyrics from Kansas' 1977 "Point of No Return" album: "All we are is dust in the wind."

Kor-Ko objected to the construction of a crematorium based on an argument that the emissions, the "Dust in the Wind," would not merely be unsavory but, in fact, hazardous to health.  Human remains can contain a number of contaminates such as arsenic, chromium, dioxins and mercury.

The regulations of the Maryland Department of the Environment (MDE), like those of all states and the EPA, do not forbid all emissions but, instead, require that concentrations of contaminates fall below certain health thresholds.  The concentrations, of course, decline as the contaminates travel further from the discharge source.  Therefore, the regulations must establish a geographic point at which the concentrations are modeled.

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BMZA May Review City Planning Commission

In John Viles et al. v. Board of Municipal and Zoning Appeals, 230 Md. App. 506 (2016), the Court of Special Appeals held that the Board of Municipal and Zoning Appeals of Baltimore City (BMZA) has the right to review decisions of the Baltimore City Planning Commission notwithstanding language in the Baltimore City Zoning Code that seems to prevent this.

This matter involved a plan to modify a planned unit development (PUD) covering 11 acres in the Remington and Charles Village areas of Baltimore City.  The Planning Commission approved the amendments, but John Viles and others opposed the changes and appealed the Planning Commission's decision to the BMZA.  Both the BMZA and the Circuit Court for Baltimore City thought that the BMZA did not have jurisdiction to review the Planning Commission's order.  Viles appealed to the Court of Special Appeals, which held otherwise.

The court held that the Planning Commission was acting in an administrative capacity when it reviewed the PUD amendments because its decision related only to design changes within a particular property.  Therefore, Land Use Article §10-404(a) authorizes the BMZA to review the decision of the Planning Commission.  The fact that §86 of the Baltimore City Charter on its face specifically prohibits the BMZA from reviewing or altering the decisions of the Planning Commission does not alter this decision because a City Charter provision cannot restrict the power of the General Assembly to pass a public general law that incidentally affects the City.

Therefore, the Court of Special Appeals remanded the case to the BMZA to address the substantive challenges to the PUD amendments that Viles raised.

For questions, please contact Ed Levin (410) 576-1900.

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Bankruptcy Cap Only Applies to Future Rent

If you are a landlord and your tenant files for bankruptcy, based on a December 29, 2016 decision of the Ninth Circuit Court of Appeals, your claim may not be as limited as other courts previously held.

Under Bankruptcy Code §502(b)(6) a landlord's claim arising from rejection of its lease by a trustee or Chapter 11 debtor is limited to the greater of one year's rent or 15%, not to exceed three years, of the remaining lease term, plus unpaid rent due under the lease.  The date as of which unpaid rent is calculated is the earlier of the date of the bankruptcy filing or the date on which the landlord recovered or the tenant surrendered the premises.  The statutory cap is intended to strike a balance between the need to compensate a landlord for its loss and to protect other creditors from having a bankruptcy estate depleted by a single creditor.  While the formula for calculating a landlord's claim in bankruptcy appears straightforward, its application has resulted in varying decisions over what damages other than the loss of future rent are subject to the cap.

In Kupfer et al. v. Salma et al. (In re Kupfer), No. 14-16697, 2016 WL 7473790 (9th Cir. Dec. 29, 2016), the Ninth Circuit Court of Appeals reversed a lower court decision which applied the §502(b)(6) cap to encompass all of a landlord's attorney's fees arising from a pre-bankruptcy arbitration and defense of a counterclaim by the tenant.  The arbitration award included past due rent and the present value of future rent.  On appeal, the Ninth Circuit discussed the divergent decisions concerning application of the cap to damages other than loss of future rent.  It held that because the wording of §502(b)(6) only caps claims resulting from a termination of a lease, it does not limit claims for damages such as attorney's fees incurred in litigating the landlord's claim for past due rent or for defending the tenant's counterclaim.  The court remanded the case to the district court with direction that it apportion the landlord's attorney's fees to past due rent (which will not be subject to the cap) and future rent (which is subject to the cap).

By doing so, the Ninth Circuit stated that the "all or nothing" approach taken by certain courts when applying the cap is incorrect and that the test for applying the cap is whether "assuming that all other conditions remain constant, would the landlord have the same claim against the tenant had the lease not been terminated?"

For questions, please contact Larry Coppel (410) 576-4238.

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Unused 12-Year Old Permit Still Valid for MDE

The Maryland Court of Special Appeals recently affirmed the issuance of a rubble landfill permit over the objection of a local community association, despite the fact that the permit was based upon a 12-year old county approval that had not been updated.  In Piney Orchard Community Association v. Maryland Department of the Environment, 231 Md. App. 80 (2016), the court held that the Maryland Department of the Environment ("MDE") was not required to make an independent determination that the site was in compliance with local zoning and land use requirements at the time of issuance of the permit, but could instead rely on a local approval issued shortly after the permit application was filed 12 years earlier. 

The case arose out of an application filed by Tolson & Associates, LLC ("Tolson") in June 2002 for a refuse disposal permit to operate a rubble landfill at its previously excavated sand and gravel mine in Anne Arundel County.  A rubble landfill is one that accepts only trees, land clearing, construction, or demolition debris.  As part of the permit process, the County evaluated the site and sent MDE a letter in August 2002 stating that the "proposed Rubble Landfill . . . meets all applicable zoning requirements and conforms to the current Solid Waste Management Plan."  

MDE proceeded to process the permit application and held a public informational meeting in July 2004.  MDE and Tolson continued to perform the environmental and engineering studies necessary to ensure the landfill would be constructed in a manner that protects public health and the environment, a long and complex process.  Reports documenting the studies were completed in 2009.  In August 2011, MDE published its tentative determination to issue the permit and held a second informational meeting as well as a public hearing.  MDE received hundreds of oral and written comments from concerned citizens, including Piney Orchard Community Association ("Piney Orchard"), regarding the proposed permit.  MDE prepared a written response to the public comments and made several changes to the permit conditions.  In November 2014, MDE issued its final determination granting Tolson the permit to operate the rubble landfill.

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Rent Escrow Statute: a Sword or a Shield

In Cane v. EZ Rentals, 450 Md. 597 (2016), the Court of Appeals held that Maryland's rent escrow statute may be used to enable a tenant to raise the existence of defects or conditions in a rental unit as an affirmative defense in a summary ejectment proceeding brought by the landlord.  In so doing, the Court of Appeals reversed a decision of the Circuit Court for Calvert County, which held that the tenant needed to bring its claim under the rent escrow statute in a separate proceeding.

Wendy Cane rented the ground floor of a single family house in Lusby, Maryland from Daniel Brown and his partner.  The house had been divided into two residential units.  EZ Rentals leased and rented the units for Mr. Brown.  Ms. Cane started to rent her unit in May 2013, and by January 2015 she fell behind in her rental payments.  That month EZ Rentals filed a summary ejectment action against her in state district court.  The district court entered a judgment in favor of EZ Rentals for $1,150 and granted to EZ Rentals judgment for possession of the property, without the right of redemption.  Ms. Cane appealed to the Circuit Court for Calvert County.

At the trial before the circuit court, Ms. Cane attempted to testify about significant defects in the property including a major water leak for which the water company had threatened to turn off the water and had sent her a $600 bill.  She claimed a right of asked "offset" for these defects.  The circuit court declined to hear testimony on this because, in the words of the court, those issues were "a completely separate landlord/tenant issue."  After finding that a payment of rent had not been made, the circuit court entered a judgment in favor of EZ Rentals for $1,150, ordered the appeal bond that Ms. Cane had posted to take the case to the circuit court released to EZ Rentals, and foreclosed Ms. Cane's right of redemption.

The Court of Appeals granted Ms. Cane's petition for certiorari.

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Tie Votes are a Denial, but Members of the Board of Appeals Must Use the Proper Analysis

As set forth in Forks of the Patuxent Improvement Association, Inc., et al.  v. National Waste Managers/Chesapeake Terrace, 230 Md. App. 349 (2016), National Waste Managers/Chesapeake Terrace ("National") has been trying to construct and operate a rubble landfill on a 481-acre parcel near Odenton in Anne Arundel County since 1991.  National obtained a special exception and variance from the Anne Arundel County Board of Appeals to construct and operate a rubble landfill and a sand and gravel operation on the property in 1993.  The Court of Appeals affirmed the Board's approval in 1995.  National had 18 months to obtain a construction permit for the project after it obtained zoning approval, otherwise the special exception would lapse unless it obtained a variance for an extension of time.

One of the requirements for obtaining a construction permit was the issuance of a solid waste refuse disposal permit by the Maryland Department of the Environment (the "MDE"), and that still has not occurred.  Needless to say, National did not obtain a construction permit for the project within the original time period.

Over the years National obtained extensions of time, but the last extension expired in 2013.  In that year National filed for another extension, which was opposed by Forks of the Patuxent Improvement Association (the "Association") and others.  Upon consideration, the four members of the Board of Appeals divided evenly as to whether another extension should be granted.  National appealed to the Circuit Court for Anne Arundel County, which held that the two-to-two vote had the effect of denying the application, but the circuit court also found that the denying members had used the wrong standards to reach their decisions.  The Association then appealed to the Court of Special Appeals, and National cross-appealed.

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DRRAs Protect Developers from New Laws

In Cleanwater Linganore, Inc. v. Frederick County, Maryland, No. 1917 Sept. Term, 2015 (Md. Ct. Spec. App. Dec. 28, 2016), the Court of Special Appeals endorsed a Development Rights and Responsibilities Agreement ("DRRA") between the County Commissioners of Frederick County and a local property owner over the objections of an environmental group that claimed that the property should be subject to subsequently enacted laws, ordinances, and rules.

Under Maryland case law, the rights of a developer in the development of a property do not vest until visible, lawful construction begins.  Under this holding, local governments could change the permissible land use and rights and obligations of the property owner very late in the process, including after the developer had expended considerable time and money.  In fact, such a change can occur even after a building permit is issued.  Because of this doctrine, a developer would not know the full parameters of the costs and rights of a project until construction was under way.

In order to provide more certainty to developers and to balance their rights with the rights of local government, in 1995 the Maryland General Assembly enacted what is now §7-304 of the Land Use Article of the Maryland Code ("LU"), which permits developers and local governments to enter into DRRAs and provides "the local laws, rules, regulations, and policies governing the use, density, or intensity of the real property subject to [such] an agreement shall be the local laws, rules, regulations, and policies in force at the time the parties execute the agreement."  This has the effect of "freezing" certain local laws so that the applicable rules and costs are locked in and are not subject to change unless necessary to "ensure the public health, safety, or welfare."

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30 Days Means 30 Days

Karen Kunda sold her general store, the property it was on, and the stock of her company to the Morses.  The Morses made two deposits and were to pay the balance to Ms. Kunda over time and with a large payment on a stated date.  The Morses missed a payment, and Ms. Kunda evicted them. She also exercised her rights under a voting trust involving the company stock, to oust the Morses as officers of the corporation.  Ms. Kunda acted before the expiration of the 30-day cure period that was provided for in the agreement of the parties.  Therefore, the Circuit Court for Cecil County awarded damages to the Morses for Ms. Kunda's breach.  Kunda v. Morse, 229 Md. App. 295 (2016).

In its opinion, the Court of Special Appeals noted that the primary income of the store was revenue from slot machines "of questionable legality."  This fact, however, was not relevant to the court's decision.

Practice Note:  Read your documents!  Most of the provisions that govern the relationship of parties to a business transaction are contained in the documents that they sign.  The courts will hold the parties to their agreements, and particularly creditors will not be able to enforce more remedies, or faster, than as set forth in the papers.

For questions, please contact Ed Levin (410) 576-1900.

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Speaking of Real Estate

Honors

Nineteen attorneys with Gordon Feinblatt were named to the 2017 Maryland Super Lawyers list in 24 areas of legal practice, including Real Estate, and four were named by Super Lawyers as 2017 Maryland Rising Stars.  The lawyers from the firm's Real Estate Practice Group named as 2017 Maryland Super Lawyers are Timothy D.A. Chriss, David H. Fishman, Edward J. Levin, Searle E. Mitnick, and Peter B. Rosenwald II.  Additionally, Lawrence D. Coppel, a contributor to this issue of Relating to Real Estate, was named as a 2017 Maryland Super Lawyer.

Presentations

Larry Coppel and Ed Levin were panelists on "Maryland Commercial Receivership Act: Civilizing the Wild Wild West of State Court Insolvency and Receivership Practice," sponsored by the MSBA's Business Law Section and Real Property Section, December 20, 2016. They also presented on "The Proposed Maryland Commercial Receivership Act: Providing Certainty and Uniformity to Receivership Practice in Maryland" at the Commercial Real Estate Discussion Group Lunch of the MSBA Real Property Section on February 14, 2017.

Searle Mitnick and Richard Topaz gave a presentation titled "To the Best of Our Knowledge: Representations and Warranties Concerning Environmental Hazards in Purchase and Sale Agreements" at a seminar on January 25, 2017 at which other Gordon Feinblatt attorneys spoke about methane intrusion, Brownfields property tax credits, and polyaromatic hydrocarbons.

Publication

Ed Levin served as co-editor of Joint Drafting Committee of the Local Counsel Opinion Project of the American Bar Association's (ABA) Section of Real Property, Trust and Estate Law, Committee on Legal Opinions in Real Estate Transactions, American College of Real Estate Lawyer's (ACREL) Attorneys' Opinions Committee, and the American College of Mortgage Attorneys' (ACMA) Opinions Committee, January 2013 to present.  The Committee's report, "Local Counsel Opinion Letters in Real Estate Finance Transactions – A Supplement to the Real Estate Finance Opinion Report of 2012," was published in December in 51 REAL PROP. TR. & EST. L.J. 167 (Fall, 2016).

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