In this issue:
BILLS THAT WERE SIGNED INTO LAW
BILLS THAT FAILED
Ground Leases Must be Registered, But They Will Not Be Extinguished If They Are Not
Chapter 464 (SB 135) and Chapter 465 (HB 177)
Ground Leases - Registration - Failure to Register
(Effective date: July 1, 2012)
On March 1, 2012, we circulated an updated report on the judicial decisions that profoundly affected the General Assembly’s 2007 heavy-handed attempt to redress the grievances it perceived regarding Maryland ground rents and their collection. [Relating to Real Estate, March 2012]
To briefly review, in response to reported abuses by certain holders of Maryland ground rents, the General Assembly established a registration system, extinguished ground rents that were not registered by a deadline it set, and otherwise restricted the ability of ground rent owners to collect unpaid rents.
In October of 2011, the Maryland Court of Appeals ruled in Muskin, Trustee v. State Department of Assessments and Taxation, 422 Md. 544, 30 A.3d 962 (2011), that the part of the 2007 legislation that extinguished unregistered ground rents is unconstitutional as a violation of the Maryland Declaration of Rights and the Maryland Constitution.
In December of 2011, the Circuit Court for Anne Arundel County, in Braverman, et al. v. State of Maryland, 02-C-07-126810, invalidated another of the 2007 laws which sought to eliminate a ground lease holder’s right to eject a delinquent residential ground lease tenant and re-enter the property. Under the theory of ground leases, the lessor owns the reversionary interest and becomes entitled to possession of the property when the ground lease tenant defaults.
On March 1, we noted that legislation had been introduced in the 2012 session of the General Assembly to respond to these court decisions. We can now report the results of those efforts.
Chapters 464 (SB 135) and 465 (HB 177) will delete the extinguishment provisions of the 2007 legislation, but they maintain the registration requirements for ground leases. The new law also prohibits holders of ground leases from collecting their ground rent payments, establishing a lien for delinquent payments or seeking a monetary judgment during the period that a ground lease is not registered. The ground rent holder must also send the ground lessee a bill at least 60 days before a payment is due. The bill must include a statutorily prescribed notice.
The State Department of Assessments and Taxation is directed to, in effect, rescind any extinguishment certificates that it had filed against unregistered properties, as provided in the 2007 laws but invalidated in Muskin.
Given the language in Muskin, we believe that is it likely that the provisions in the new law requiring registration before a ground rent holder may resort to the courts for enforcement or collection will be upheld if challenged. However, there remain unanswered questions from the 2007 legislative attack. In particular, the 2012 General Assembly did not restore the right of ejectment for residential ground rents, the elimination of which in the 2007 legislation was declared unconstitutional in Braverman. Stay tuned!!!.
Focusing Growth in Designated Areas
Chapter 149 (SB 236)
Sustainable Growth and Agricultural Preservation Act of 2012
(Effective date: July 1, 2012)
One of the most controversial bills to become law this year is the Sustainable Growth and Agricultural Preservation Act of 2012. The bill is designed both to limit pollution from septic sewage systems and to prevent sprawl by directing development to designated growth areas.
Background: A Sustainable Growth bill was introduced to the General Assembly last year at the Governor’s request, but the bill died in committee. The bill would have prohibited new major residential subdivisions using septic systems. New minor subdivisions would have been permitted to use septic systems only if they used the best available technology for nitrogen removal.
Following the bill’s defeat, the Governor organized the Task Force on Sustainable Growth and Wastewater Disposal to come up with a new plan. The Task Force’s report, released in December 2011, became the blueprint for the 2012 Act.
The 2012 Act as originally introduced would have given the State the power to determine where and whether new residential developments could be built in less developed areas. The Act later was amended to put control in the hands of the local governments.
How it works: The 2012 Act establishes four “Tiers” for new residential development. Generally speaking, Tier I Growth Areas are already served by sewage systems. Tier II is for areas where public sewage systems are planned to satisfy increased need for development. Tier III generally covers rural areas where there has been some development. Tier IV is for forests, farmland and protected areas. The rules for sewage systems respond to the needs of each area. In Tier I, all new residential subdivisions must be served by public sewage systems. In Tier IV, major development is not allowed, and smaller subdivisions are generally allowed to use septic or other on-site systems.
Local governments are expected to “adopt” the Tiers they choose to use by December 31, 2012 and develop a map showing where the Tiers apply. The mapped Tiers are to be adopted into each local government’s comprehensive plan when the plan comes up for six-year review.
Local governments that do not adopt the Tiers by the deadline cannot authorize major subdivisions unless they are served by public sewer systems. Minor subdivisions can still be approved if they otherwise satisfy the Act.
Some concerns: Even as amended, the bill raises concerns. Some environmentalists worry that Tier III could be used to allow too much septic development in rural areas. Some farmers fear that Tier IV limits on development will reduce the amount they will be able to borrow against their land.
Beat the Clock: Developers who have projects in process have a chance to complete their work under the current laws. To take advantage of the grandfathering provisions in the new law, developers must either submit a plan for preliminary approval by October 1, 2012 or, if a soil percolation test is required, developers must take specific steps in preparation for the test by July 1, 2012, with timely submission of a plan for preliminary approval to follow later.
New Fee for Fighting Stormwater Runoff
Chapter 151 (HB987)
Stormwater Management - Watershed Protection and Restoration Program
(Effective date: July 1, 2012)
Stormwater runoff is a significant source of pollution in Maryland, adding both nitrogen and phosphorus to the State’s waterways. This session the General Assembly voted to turn the tide on stormwater runoff by requiring Maryland’s larger counties and cities to establish “watershed protection and restoration programs.” As a result, property owners in those areas will be hit with a new “stormwater remediation fee” that can be used to reduce pollution from stormwater runoff.
Chapter 151 (HB 987) affects large and medium-sized counties including Baltimore, Anne Arundel, Prince George’s, Montgomery, Harford, Howard, and Carroll counties as well as Baltimore City. The local governments for each of these jurisdictions are directed to have watershed protection and restoration programs in place by July 1, 2013. Localities that already have compliant programs in place can satisfy the new requirements with their existing programs.
The stormwater remediation fee is supposed to be based on the services required to manage the stormwater created by each property, but each local government has latitude to set its own fee structure. Because runoff is largely caused by impervious surfaces that do not allow rain to sink into the ground (e.g., asphalt parking lots), the fee could be based on the amount of impervious surface on a property. But local governments are also free to set a flat fee or design their own method of assessment.
Property owners receive several important protections under the law. For one thing, a property cannot be subject to a fee from both a county and a city; the city and county governments must coordinate so that the property is assessed only once. Also, each program must provide procedures that:
The storm remediation fees collected must be deposited in the locality’s “watershed protection and restoration fund.” The fund will then pay for additional stormwater management services not already provided by a State or local government.
Registering Property Purchased at Foreclosure Sales
Chapter 155 (HB 1373)
Real Property - Foreclosed Property Registry
(Effective date: October 1, 2012)
Chapter 155 (HB 1373) adds Section 14-126.1 to the Real Property Article. This section establishes an internet-based foreclosed property registry. This section requires the purchaser at a foreclosure sale to submit an initial registration for the property within 30 days after the sale. The registration shall include basic information regarding the property, as well as the name and address of the person who is authorized to accept service for the purchaser; whether the residential property is vacant; the name, telephone number, and street address of the person who is responsible for maintenance of the property; and whether the foreclosure purchaser has possession of the property. At the time of the foreclosure sale, the person responsible for conducting the foreclosure must obtain from the purchaser written acknowledgment that the purchaser is aware of the requirements of this section. Within 30 days after the deed is recorded, the purchaser must submit a final registration form that states the name, telephone number, and address of the owner on the deed; the date of ratification of the foreclosure sale; and the date the deed was recorded. The filing fee for the initial registration is $50, or $100 if the filing is late. There is no fee for the final registration. A local jurisdiction may impose a civil penalty for failure to register in an amount not to exceed $1,000.
In addition, in accordance with any applicable building code or local ordinance of the jurisdiction, if the jurisdiction abates a nuisance on a residential property that is registered, the jurisdiction can collect the cost associated with the abatement or other action and include it as a charge on the residential property’s property tax bill. The jurisdiction must provide advance notice to the person identified in the registry as authorized to accept legal service and the person identified as responsible for maintenance of the property.
The foreclosed property registry is not a public record; however, information can be released to persons who own property on the same block or to a homeowners association or condominium association in which the property is located. The bill establishes a foreclosed property registry fund, and the revenue collected from the filing fees is used to support the development, administration, and maintenance of the foreclosed property registry.
Mediating Before a Foreclosure Sale Is Docketed
Chapter 156 (HB 1374)
Real Property - Real Property - Foreclosures and Mediation
(Effective date: October 1, 2012)
Under Chapter 156 (HB 1374), a secured party is permitted (but not required) to offer mediation before a foreclosure case is docketed (which Chapter 156 calls "prefile mediation") to a mortgagor of residential, owner-occupied property to whom a notice of intent to foreclose was sent. If the mortgagor wants to participate in prefile mediation, the mortgagor must so request it within 25 days after a notice of intent to foreclose is mailed. Under the new procedure, the mortgagor notifies the secured party, and mediation is scheduled 60 days after the day that the office of administrative hearing receives notice from the secured party of the mediation request. There will be a fee for prefile mediation, but it has not yet been determined. If the mortgagor requests prefile mediation, the mortgagor must engage in housing counseling. Also, no foreclosure may be filed until after completion of the prefile mediation. If the parties participate in prefile mediation and the prefile mediation agreement entered into by the parties during prefile mediation does not permit mediation after a foreclosure case is docketed (which Chapter 156 calls "postfile mediation"), postfile mediation is not permitted. The Commissioner of Financial Regulation, by regulation, is to prescribe the forms to be used for prefile mediation and other necessary regulations to carry out the requirements of Section 7-105.1 of the Real Property Article.
After October 1, 2012, the order to docket a residential foreclosure must either include the report of prefile mediation issued by the Office of Administrative Hearings (if prefile mediation does not produce a satisfactory result) or a statement that the parties have not elected to participate in prefile mediation.
Currently, and before the effective date of Chapter 156, mediation is available to owners of residential, owner-occupied properties being foreclosed upon. The mortgagor may request mediation 25 days after service of an order to docket foreclosure (as opposed to a notice of intent to foreclose), under Chapter 156 if the complaint was served with a final loss mitigation affidavit, or 25 days after the final loss mitigation affidavit was mailed. The fee is $50 for mediation, which is scheduled 60 days after the request is made.
Because an order to docket foreclosure cannot be filed for at least 45 days after a notice of intent to foreclose is filed or 90 days after a default, starting the mediation process prior to the filing of an order to docket foreclosure (as permitted by Chapter 156) should reduce the time for the foreclosure process to be completed.
If however, the parties do not participate in prefile mediation (regardless of whether prefile mediation was offered by the secured party) or if the prefile mediation report permits postfile mediation, the mortgagor can request postfile mediation. In such event, no time would be saved by offering prefile mediation.
Chapter 156 also adds a new Section 7-105.11 to the Real Property Article, under which the county or municipal corporation where the property is located can issue a Certificate of Vacancy or Certificate of Property Unfit for Human Habitation (or in Baltimore City, a Certificate of Substantial Repair) upon the request of a secured party. If the secured party has such a certificate when it files an order to docket a suit, it is not required to follow the residential foreclosure rules. Certificates are valid only for 60 days. The record owner of a property has the opportunity to contest such a certificate, and if the owner is successful, the secured party must follow the residential rules. Personal service required in residential foreclosure cases still must be made notwithstanding the issuance of the Certificate. The practical effect is that, if a certificate is issued, the secured party would not have to send a notice of intent to defend and could file for foreclosure prior to waiting 90 days for a loan to be in default or 45 days after a notice of intent to defend is mailed.
Chapter 156 also adds a subsection (r) to Section 10-208 of the Tax-General Article to permit any payment to an individual made as a result of a foreclosure settlement negotiated by the Attorney General to be subtracted from the federal adjusted gross income of a resident to determine the individual’s Maryland adjusted gross income. (This provision works in tandem with Chapters 544 (SB 580) and 534 (HB 600), discussed below, which provide a subtraction modification for debt forgiveness on certain home loans in 2013.)
Reporting Foreclosure Purchases to the SDAT
Chapter 461 (SB 123)
Real Property - Foreclosure Sale of Residential Property - Notice to Local Supervisor of Assessments
(Effective date: July 1, 2012, applicable to tax years beginning after December 31, 2012)
Chapter 461 (SB 123) also adds a new Section 7-105.11 (which will likely be renumbered because Chapter 156 (HB 1374) added the same section number), under which the purchaser of a residential property at a foreclosure sale is required to provide a copy of the order of ratification to the supervisor of assessments for the county in which the property is located. This must be done by the later of 60 days after the entry of the order for ratification, or 30 days after entry of a court order resolving the issues set forth in a motion filed pursuant to Maryland Rule 2-535 (review of judgments). This section will not apply if a deed has been recorded before the expiration of the above time period, or the foreclosure sale is subject to (i) an appeal, (ii) bankruptcy stay, or (ii) an unexpired right of redemption in favor of the United States or agency or department of the United States. The supervisor of assessments is to provide a receipt to the person providing the copy of the order of ratification.
If the foreclosure sale purchaser does not provide a copy of the order of ratification to the supervisor of assessments as required by Chapter 461 (SB 123), any reduction in the property tax received by the property because of its status as an owner-occupied principal residence, from the date of the entry of the order of ratification until the earlier of the receipt by the supervisor of assessments of the order of ratification or the recordation of the deed, shall remain due and collectable as a property tax. Because many owners of properties in foreclosure are not timely paying their property taxes, the purchasers (especially if the purchaser is the secured party) often have to pay the past due property taxes upon transfer of the property, and, as a result, the likely impact is that if a purchaser misses the deadline, the purchaser will be paying more taxes for the property as a result of the lost credit. This will be another item for legal counsel to add to the checklist in a residential foreclosure case.
Chapter 547 (HB 678) details the contents and supporting documents required for an effective “affidavit of affixation.” Among other things, the affidavit must identify the manufactured home, the land, and the property owners. It must also indicate that the home is not subject to a lien or other security interest.
Once the procedures are satisfied, the home is considered real property under the law. Title to the property is recorded at the relevant county clerk’s office, as are any related financing documents, and the home becomes subject to real estate taxes.
Chapter 547 (HB 678) also provides a procedure for filing an “affidavit of severance” that changes an affixed manufactured home back into personal property.
One More Notice Period for Tax Sale Foreclosures
Chapter 188 (SB 182)
Tax Sales - Complaint to Foreclose Right of Redemption - Notice
(Effective date: October 1, 2012)
Even after the hammer falls on a tax sale auction, the delinquent property owner gets at least six months to redeem the property by paying the overdue taxes, interest, penalties, and expenses. At least four months after the tax sale, the purchaser can send out the first of two required notices stating that an owner or secured creditor still has the right to redeem the property. The second notice can be sent out as soon as one week after that. If the property is not redeemed within two months of the first notice, the party that purchased the property at the tax sale can file a complaint to foreclose on the property.
Effective October 1, 2012, pursuant to Chapter 188 (SB 182), there is one more notice period: At least 30 days must pass from the mailing of the second notice before the purchaser can file a complaint to foreclose. This makes the second notice more meaningful – a delinquent property owner would not receive a second notice in time if it were mailed just one day before the foreclosure filing. It also makes an already complicated process a bit more complex.
Revisions to the Limited Liability Company Act
Chapter 599 (SB 855) and Chapter 600 (HB 777)
Corporations and Associations - Limited Liability Act - Revisions
(Effective date: October 1, 2012)
Chapters 599 (SB 855) and 600 (HB 777) amend the Maryland Limited Liability Company Act (the “Act”) as of October 1, 2012. The new law is particularly significant as limited liabilities companies are often the entities of choice for many business and real estate ventures.
The new law introduces new terminology to identify the various aspects of an interest in an LLC. The legislation introduces the terms “economic interest” (share of profits and losses and the right to distributions), “noneconomic interest” (all rights other than the economic rights), and “membership interest” (both the economic and noneconomic interests). While many existing LLC operating agreements distinguish between the rights of a member of an LLC (holder of the entire interest – both economic and noneconomic) and those of an unadmitted assignee (economic interest holder only), this amendment codifies and standardizes the use of such terminology. Under the new law, any new LLC operating agreements should be drafted using this new statutory terminology, and existing LLCs may wish to review their operating agreements, and the terminology used therein, to determine whether any amendment should be made. The legislation also provides that unless permitted by an operating agreement or approved by all of an LLC’s members, only the “economic interest” in an LLC may be assigned. Therefore, lenders taking a security interest in more than a borrower’s “economic interest” in an LLC (i.e., a lien on the borrower’s entire “membership interest”), must make sure that the lien is permitted under the terms of the LLC’s operating agreement or that all of the members of the LLC have consented to the lien.
Under current law, a creditor may obtain a charging order against the economic interest of a debtor, and the charging order constitutes a lien against that economic interest. The legislation clarifies that the effect of a charging order is to require the LLC to pay over to the creditor only those distributions that otherwise would be payable to the debtor, up to the unsatisfied amount of the debt. The legislation also clarifies that the non-economic interest of the debtor (for example, voting rights) is not affected by a charging order.
Under current law, a court may order foreclosure of an LLC economic interest that is subject to a charging order, at any time. Foreclosure results in the debtor losing all future economic rights from the interest subject to the charging order, without regard to the amount of the unsatisfied portion of the debt. The new law limits the power of a court to order foreclosure by allowing a court to order foreclosure only upon a showing that the distributions under a charging order “will not pay the amount owed to the creditor within a reasonable time.” This seems to mean that to obtain a foreclosure order, a creditor will need to prove to the court the likely payment stream that will result from the charging order and convince the court that the amount of time it would take for such payment stream to pay off the unsatisfied portion of the debt is “unreasonable.” The new law does not include any standard for establishing the reasonableness of a likely payout period. Therefore the process of obtaining a foreclosure order may be more contentious and more costly due to these added proof requirements.
It should be noted that most provisions within the new law may be modified in an LLC’s articles of organization, an operating agreement, by the unanimous consent of an LLC’s members, or by agreement among the LLC’s members and a third party whose agreement may be required.
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