Relating to Real Estate

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Relating to Real Estate January 2013

In this Issue:

 

TAX COURT DECISION - LENDERS ARE NOT LIABLE TO PAY RECORDATION TAXES ON INDEMNITY DEEDS OF TRUST

When the recordation tax becomes due on an indemnity mortgage or an indemnity deed of trust (IDOT), the only person with the obligation to pay the tax is the landowner which guaranteed the loan, according to the Maryland Tax Court in Atapco Howard Square I Business Trust v. Howard County Department of Finance, decided on August 28, 2012.

IDOTs are financing devices that have been used in Maryland for decades. In general, an IDOT transaction involves a loan made by a lender to a person or an entity (the borrower) and the guaranty of that loan by a different person or entity (the guarantor). In order to secure the guaranty, the guarantor grants to the lender the IDOT on property that it owns. Significantly for the IDOT structure, the guarantor is not primarily liable on the loan from the lender to the borrower when the IDOT is recorded. Instead, when the IDOT is recorded the guaranty is contingent on the occurrence of an event, such as a default under the loan to the borrower.

IDOTs securing any amounts recorded before July 1, 2012 enjoyed a recordation tax advantage. Pursuant to §12-105(f)(1) of the Tax-Property Article of the Maryland Code (TP), “if the total amount of secured debt has not been incurred at the time of recording or filing the instrument of writing, the recordation tax applies only to the principal amount of the debt incurred at that time.” The Maryland Attorney General and Maryland courts have interpreted this language to mean that prior to July 1, 2012, no recordation tax was due upon the recordation of an IDOT because as to the guarantor, which is the owner of the property encumbered by the IDOT, the “secured debt has not [then] been incurred.” However, the recordation tax becomes due when the borrower defaults and the guarantor becomes primarily liable.

The Atapco case involved seven separate matters in which defaults occurred under IDOTs and recordation taxes came due on them. Howard County did not collect the recordation taxes that were due from the guarantors, most likely because the only assets the guarantors owned were the properties subject to the IDOTs and those properties were worth less than the debt on them at the time of default under the loans.

In most of the matters that the Tax Court considered, the lenders foreclosed the IDOTs, and the purchasers at the foreclosure sales then tried to record their deeds among the land records of Howard County. The parties recording the deeds tendered the applicable amounts of the taxes due on the deeds, but Howard County refused to permit the recordings until the outstanding recordation taxes on the IDOTs were first paid. In some of these matters the foreclosing lenders paid the recordation taxes on the IDOTs; in others, the taxes were paid by the purchasers. In another of the matters, the owner of the property that was subject to an IDOT filed for bankruptcy, and an agreement was reached to enable the property to be transferred to a third party. That third party paid the recordation tax on the IDOT in order to enable its deed to be recorded. In the last matter, a bank reached an agreement with its borrowers and the guarantors of a group of loans after the loans went into default. Howard County threatened to charge the bank with a misdemeanor under TP §14-1011 if the bank did not pay the recordation tax that was due, so the bank paid the tax.

The Tax Court rejected all of the contentions raised by Howard County. Howard County claimed that §3-104(b) of the Real Property Article of the Maryland Code (RP) enables the County to prohibit the recordation of a deed conveying property that had been subject to an IDOT on which recordation taxes had not been paid. Instead, the Tax Court found that RP §3-104(b) applies only if there are taxes, assessments, or charges currently owed on the property. Because the recordation tax is an excise tax, which is imposed on the privilege of recording documents in the land records, it is not a tax on any real property. Therefore, RP §3-104(b) was not applicable to the subject case.

The Tax Court also held that “there is no provision in the Maryland Code in which an unpaid recordation tax constitutes a lien upon any real property merely as a result of the non payment of that tax."

The Tax Court found that TP §12-105(f)(6) was not applicable to the subject case. That provision, on its face, is applicable only to construction loans for over $100,000 for which the total amount of secured debt has not been incurred at the time of recording the instrument of writing.

Therefore, the Tax Court reversed the decision of the Howard County Department of Finance which had denied the petitioners' claims for refunds. Accordingly, the Tax Court ordered the refund of the amounts of recordation taxes that the petitioners paid (approximately $500,000), together with interest at the rate of 6 percent per annum from when paid.

As suggested above, the law regarding the taxation of IDOTs changed as of July 1, 2012. Senate Bill 1302, Chapter 2 of the First Special Session of the General Assembly of 2012, added TP §12-105(f)(7), which now requires that recordation taxes be paid on the recordation of IDOTs that secure loans in the amount of $1,000,000 or more. Because SB 1302 did not affect IDOTs that were of record on July 1, 2012, and because under SB 1302 IDOTs involved in loans for less than $1,000,000 may be recorded without payment of the recordation tax, the holding in Atapco will be applicable in these situations. However, the holding in Atapco will not be applicable to any IDOT on which the recordation tax has been paid when the IDOT was recorded.

Ed Levin at (410) 576-1900 and George Ritchie at (410) 576-4131 represent the petitioners in Atapco Howard Square I Business Trust v. Howard County Department of Finance.

 

ARE YOU PAYING TOO MUCH IN REAL PROPERTY TAXES?

Every three years, the State of Maryland reassesses the value of real estate. The “assessed value” of a property is its market value as of January 1, and that value is the basis for imposition of property taxes for the next three years. Assessment notices were mailed by the State Department of Assessments and Taxation in late December 2012. Check your Assessment Notice.

Is the “New Market Value” stated in the notice higher than you believe your property is worth? If so, you should consider appealing the assessment. An appeal of an assessment must be filed timely within 45 days of the notice. The last date for filing an appeal is stated on the assessment notice, usually about February 11, 2013.

If you would like to discuss your assessment and a possible appeal, contact Ed Levin at (410) 576-1900.

 

DEPARTMENT OF ENVIRONMENT TO REQUIRE REPORTING OF SAMPLE RESULTS

The Maryland Department of the Environment (MDE) has revived proposed regulations that will require real property owners to disclose many (perhaps most) environmental sampling results to the MDE. The proposed regulations are intended to implement legislation from 2008 that requires a responsible person who possesses a sample result indicating the release of a hazardous substance to the environment at or above thresholds established by MDE to report the finding “immediately” to the MDE.

The MDE originally proposed regulations in 2009 but subsequently withdrew them after receiving significant opposition to its initial draft. The MDE intends to publish the new draft regulations in the spring and finalize them later this year.

The proposed thresholds for reporting are based on very conservative risk assessment numbers, including some that are lower than naturally occurring background levels, and in many cases will be shown not to pose any significant risk to human health or the environment. The obligation to disclose also may apply retroactively to reports created before the promulgation of the regulations. All properties reported to MDE will be added to the Brownfields Master Inventory List.

PRACTICE POINTER: In light of the proposed regulations, sellers of real estate should think twice before obtaining copies of Phase II reports because, once received, possessing such a report may trigger an obligation to invite regulatory scrutiny. Sellers should consider including language in sale contracts that provides the seller with the right to request a copy of an environmental report but does not automatically require production until and unless the seller requests the report.

There is still an opportunity to comment on the draft regulations before they become final. For more information about the proposed regulations, how they could affect your particular situation, or to submit comments on the draft regulations, contact Michael C. Powell.

 

LAW PERMITTING AN ENTITY TO BE NAMED AS A TRUSTEE UNDER A DEED OF TRUST IS APPROVED

In Svrcek v. Rosenberg, Trustee, 203 Md.App. 705 (2012), Paul Svrcek attempted to set aside the foreclosure sale of his house. One of the points that he raised was that the deed of trust originally named an entity, not an individual, as the trustee. Svrcek claimed that the deed of trust, which he had signed in 2005, was void for that reason.

When Svreck signed his deed of trust, Section 7-105 of the Real Property Article provided, “A provision may be inserted in a mortgage or deed of trust authorizing any natural person named in the instrument, including the secured party, to sell the property ... ” [Emphasis added.] This permitted a power of sale to be given to an individual trustee who was named in a deed of trust, a mortgagee who was a natural person, or an attorney who was named as having a power of sale, if the mortgage or deed of trust went into default. However, on its face the statute did not authorize a power of sale if it was granted only to an entity or to an entity and its successors or assigns.

In 2010, the Maryland General Assembly changed Section 7-105 of the Real Property Article to provide beneficiaries of deeds of trust with the full arsenal of rights available to secured creditors regardless of whether the trustees named in the deeds of trust were individuals or entities (or even if the deeds of trust failed to appoint any trustee). See Laws of Maryland of 2010, Chapter 322 (Senate Bill 562) and Chapter 323 (House Bill 633). Prior to that time, there was an open question as to whether a property could be sold at foreclosure using the power of sale method if no individual was originally named as a trustee under the deed of trust.

Of note is that there was never a real legal issue about whether a deed of trust that did not originally name an individual trustee was void. A deed of trust that named an entity as the trustee could always have been effective under Maryland law. The only point that Chapters 322 and 323 were designed to fix was that without an individual originally named as trustee, there may not have been the right to sell the property at foreclosure under a power of sale. If the deed of trust contained an assent to decree clause, that method of foreclosure could have been employed. Even without an effective power of sale provision and without an assent to decree clause, a deed of trust could have been foreclosed if the lender filed a complaint in the circuit court where the property was located, and then the foreclosure case would have proceeded in the same manner as any other civil case. This would not be the most efficient way to foreclose and it would not provide for an expedited sale, but it could produce a foreclosure sale of the property after default under the deed of trust.

Neither the trial judge who first heard the Svrcek case nor the Court of Appeals on its appeal realized that the point under discussion should have been whether a power of sale foreclosure could have occurred, and not whether the deed of trust was void in its entirety.

Chapters 322 and 323 each contain a section that states that the law is intended to apply to all mortgages and deeds of trust that were of record when the law became effective on June 1, 2010. Svrcek contended that this retroactive application of the law was unconstitutionally impermissible. However, the Court of Special Appeals, relying on a 1973 case of the Court of Appeals, held that the retroactivity was permissible because the legislature is entitled to pass retroactively anything that it could have enacted prospectively so long as the law does not disturb a vested right. The Court of Special Appeals held that Svrcek executed his deed of trust and granted a power of sale to the trustee named in it, and there was no infringement of a vested right to find that the 2010 law applied retroactively to his deed of trust. For this and other reasons, the Court of Appeals affirmed the ratification of the foreclosure sale by the Circuit Court for Queen Anne’s County.

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

 

SELF-HELP IS A VIABLE REMEDY BUT PROPERTY TAKEN MUST BE ACCOUNTED FOR

In Nickens v. Mount Vernon Realty Group, LLC, et al., 429 Md. 53 (2012), Deutsche Bank National Trust Company bought the house at 3022 Kentucky Avenue in Baltimore City at the foreclosure sale that its servicer had instituted. The property was occupied by Demetrius Nickens, whose parents had been the owners and mortgagors of the property. Mr. Nickens notified counsel for the secured party that he was a tenant in the property when he filed an appearance in the foreclosure action. The foreclosure sale was ratified on January 30, 2009, and Deutsche Bank was awarded judgment of possession on May 14, 2009. It or its servicer engaged Mount Vernon Realty Group, LLC to act as agent.

Mount Vernon gave notice to Mr. Nickens that unless he vacated the premises it would enter the house and remove his possessions. After finding out that Mr. Nickens would then be away, on September 6, 2009, Mount Vernon entered the home (which was unoccupied at the time), removed and disposed of Mr. Nickens’ personal property, changed the locks, and placed a “no trespassing” sign on the door. According to Nickens, his personal property included appliances, computers, clothing and furniture and was worth $75,000.

Mr. Nickens sued Mount Vernon in the Circuit Court for Baltimore City on April 19, 2010. His amended complaint consisted of 10 counts. The Circuit Court, after a hearing, granted Mount Vernon’s motions to dismiss.

Mr. Nickens appealed to the Court of Special Appeals (CSA), which considered his claims of forcible entry and conversion. The CSA held in an unreported opinion that by using self-help to repossess the real property, Mount Vernon did not violate Maryland law. It further held that Mount Vernon’s taking the personal property was not an act of conversion, because Mr. Nickens had abandoned it by leaving his belongings in the house where he had no legal possessory interest.

The Court of Appeals (Court) granted Mr. Nickens’ petition for a writ of certiorari. The Court first considered the common law origin of peaceful self-help, reaching back to the statutes of 5 Richard II, Chapter 8 (1381) and 8 Henry VI, Chapter 9 (1429). The Court held that the common law in Maryland, adopted from England in 1776, provided Mount Vernon with the right to use peaceable self-help against Mr. Nickens and that Mr. Nickens, who did not have a right to lawful possession of the real property, did not have a cause of action under either of the old English statutes.

The Court of Appeals then considered the self-help remedy as it has evolved under Maryland law. The Court cited a number of cases upholding the right of title holders, without judicial process and without prior notice, to enter and repossess their properties, whether residential or commercial. The Court noted that a standard of reasonableness applies to the exercise of a titleholder’s right to self-help and that there may be no unnecessary force. The Court held that Mount Vernon had acted reasonably in repossessing the property when Nickens was out-of-town, and that Mr. Nickens had received notice of Mount Vernon’s intention to repossess even though no notice was required to peaceable self-help.
The Court of Appeals considered Mr. Nickens’ assertion that a 2008 Baltimore City ordinance regarding writs of possession executed by the sheriff of Baltimore City provided an exclusive remedy. The Court held, however, that there was no demonstrable evidence that the City intended to supersede the use of the common law remedy of self-help.

Finally, the Court discussed Mr. Nickens’ claim that Mount Vernon committed the tort of conversion. There cannot be a conversion of property if it has been abandoned, but Mr. Nickens had pleaded that he never showed an intention to abandon the personal property. The Court held that reasonable means must be exercised to dispose of personal property. Because the record on the subject case did not disclose whether Mount Vernon acted reasonably with regard to the disposition of Mr. Nickens’ property, the Court of Appeals remanded the case for discovery on that point.

For questions about this case, please contact Ed Levin at (410) 576-1900.

 

LEASEHOLD FINANCING: THE NEED TO PROVIDE FOR NEW LEASES

We are asked from time to time why a lender whose security is a leasehold mortgage (that is, an encumbrance of the lessee’s interest under a ground lease) needs to have the right to enter into a new lease with the ground lessor if the ground lessor calls a default under the ground lease and then terminates the ground lease. In the structure under consideration the ground lessee is or will be the owner of the improvements on the property during the term of the lease.

Leasehold financing is used after a party that owns real property (the ground lessor or fee owner) leases it for an extended period of time (the tenant is called the ground lessee). The ground lessee may be interested in borrowing in order to construct improvements on the leased property or financing (or refinancing) the leased property.

By operation of law and in the absence of an agreement to the contrary, the interest of the ground lessor is superior to the interest of the leasehold mortgagee, and the priority of the ground lease is superior to the position of the leasehold mortgage. Therefore, if the ground lessee defaults under the ground lease and the default continues after the giving of notice and the expiration of any cure period, the ground lessor may have the right to terminate the ground lease. Unfortunately for the leasehold mortgagee, a termination of the ground lease would result in the termination of the leasehold mortgage, and the leasehold mortgagee would lose its security.

To prevent this result, the leasehold mortgagee should have the right to cure defaults that the ground lessor commits under the ground lease. Also, the leasehold mortgagee should have the right to require that the ground lessor enter into a new lease with the leasehold mortgagee as the tenant.

It is important for the leasehold mortgagee that the new lease have the same priority and entitlements that the original lease had. For example, the original ground lease may provide that the ground lessor may grant a fee mortgage on its interest, but that such fee mortgage shall be subject and subordinate to the ground lease and to the rights of the ground lessee under the ground lease. With the subordination, if there is a default under the fee mortgage, the fee mortgagee may pursue its remedies against the rent due under the ground lease, but a foreclosure of the fee mortgage will not terminate the ground lease. If the new lease is not entitled to the same priority as the original ground lease, a default under the fee mortgage would enable the fee mortgagee to terminate the ground lease or the new lease, and the leasehold mortgagee’s position would thereby be at risk.

If you have questions about this, please contact Ed Levin at (410) 576-1900.

SPEAKING OF REAL ESTATE

AWARDS / RECOGNITION

For 2013, Gordon Feinblatt had 27 attorneys on the “Best Lawyers In America” list, including real estate attorneys Tim Chriss, David Fishman, Ed Levin, Searle Mitnick, Peter Rosenwald, and Bill Shaughnessy. Ed Levin is the 2012 "Best Lawyers" Real Estate Attorney of the Year for Maryland.

For 2013, Gordon Feinblatt has 21 attorneys on the "Maryland Super Lawyers" list, including Tim Chriss, David Fishman, Ed Levin, and Searle Mitnick for Real Estate Practice.

PRESENTATIONS AND PUBLICATIONS

Searle Mitnick was a presenter at a seminar at the 2012 International Council of Shopping Centers Law Conference in Orlando, Florida on October 26, 2012 on “Purchase and Sale Transactions: A Refocus on the Fundamentals.”

On the topic of indemnity deeds of trust and indemnity mortgages (IDOTs), Ed Levin served as a member of the workgroup that was named by the Director of the Maryland State Department of Assessments and Taxation that studied the impacts of imposing the recordation tax on indemnity mortgages and deeds of trust as provided under Chapter 2 of the First Special Session of 2012 of the Maryland General Assembly (Senate Bill 1302). The workgroup issued its Report on December 21, 2012, which was the subject of a Gordon Feinblatt Legal Bulletin. Ed was a member of the panel on “2012 Legislation, Including Issues Surviving the Demise of the IDOT” that was presented to the Commercial Real Estate Discussion Group of the MSBA’s Section of Real Property, Planning and Zoning on September 11, 2012 at the Hotel Monaco in downtown Baltimore. Also, Ed was a speaker at the MylesTitle Advisory Council Breakfast Seminar on “Maryland IDOTs, Past, Present and Future,” Hunt Valley, Maryland, September 13, 2012. Posted at Advisory Council Seminar Archive.

On the topic of opinion letters to federal agencies, Ed Levin led a group call of the Attorneys’ Opinions Committee of the American College of Real Estate Lawyers (ACREL) on September 19, 2012. Ed presented a Hot Tip on Governmental Agency Opinions at the American Bar Association’s (ABA) Section of Real Property, Trust and Estate Law’s (RPTE) Leadership Fall Meeting on November 9, 2012, in Palm Beach, Florida. Ed was the author of “Government Agency Opinions,” published in ABA/RPTE eReport (December, 2012) at http://www.americanbar.org/content/newsletter/publications/rpte_e_report_home/december_2012.html.

On the topic of the Real Estate Finance Opinion Report of 2012, which was a project of the ABA RPTE Committee on Legal Opinions in Real Estate Transactions, the ACREL Attorneys’ Opinions Committee, and the Opinions Committee of the American College of Mortgage Attorneys (ACMA), Ed Levin served as a member of the drafting committee. Ed presented a Hot Tip on “The Real Estate Finance Opinion Report of 2012 (née the Annotated Real Estate Finance Opinion)” at ACREL’s Annual Meeting on October 19, 2012 in Chicago, Illinois and again at the ABA RPTE Leadership Fall Meeting on November 9, 2012. Ed is the author of “Committees Release the Real Estate Finance Opinion Report of 2012,” published in ABA/RPTE eReport (December, 2012) at http://www.americanbar.org/content/newsletter/publications/rpte_e_report_home/december_2012.html, and he is the author of an article that summarizes the Report that will be published in the January/February 2013 issue of PROBATE & PROPERTY.