Relating to Real Estate

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Relating to Real Estate - May 2014

In this issue:

GROUND LEASES IN MARYLAND -- THE SAGA CONTINUES: IT IS UNCONSTITUTIONAL TO DEPRIVE GROUND LEASE HOLDERS OF THE RIGHT OF EJECTMENT

In, 2012, we circulated reports on the judicial decisions that had profoundly affected the General Assembly’s 2007 heavy-handed attempt to redress the grievances it perceived regarding Maryland ground rents and their collection. Please see Relating to Real Estate March 2012 and Relating to Real Estate June 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 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 re-enter the property and eject a delinquent residential ground lease tenant. 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.

In the 2012 session, the General Assembly responded to these court decisions.

The law that was enacted as Senate Bill 135/House Bill 177 (Chapters 464 and 465) deleted the extinguishment provisions of the 2007 legislation, but it maintained the registration requirements for ground leases. The new law also prohibited 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. Under this legislation the ground rent holder must also send the ground lessee a bill at least 60 days before a payment is due, which must include a statutorily prescribed notice.

The State Department of Assessments and Taxation was 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.

We predicted that given the language in Muskin, the provisions in the 2012 law that require registration before a ground rent holder may resort to the courts for enforcement or collection would be upheld if challenged. To our knowledge, no one has initiated litigation attacking those changes.
However, we noted that unanswered questions from the 2007 legislative attack remained open; most importantly, the failure of the General Assembly to restore the right of ejectment for residential ground rents, the elimination of which in the 2007 legislation was declared unconstitutional in Braverman.

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OPPONENTS WAITED TOO LONG TO STOP THE STATE CENTER PROJECT

In an opinion that was widely publicized in the local press, State Center v. Lexington Charles Limited Partnership, No. 12 Sept. Term 2013 (Md. Mar. 27, 2014), the Court of Appeals reversed a ruling of the Circuit Court for Baltimore City and held that the challengers to the redevelopment of the State Center project, located just north of downtown Baltimore, had waited too long to file their lawsuit. As a result, the Court dismissed their complaint, and the project may proceed.

Judge Glenn T. Harrell, Jr., writing for the Court of Appeals, never reached the question as to whether state procurement laws and regulations were followed, which was the basis of the challengers’ objection. Instead, the Court explored the applicability of a number of legal doctrines in its self-styled novella-length opinion (157 pages in length) before deciding that the doctrine of laches prohibited the challengers from asserting their claims.

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ROBO-SIGNING FORECLOSURE DOCUMENTS YIELD NINE-MONTH SUSPENSIONS FOR TWO LAWYERS

The Maryland Court of Appeals has suspended two lawyers from the practice of law for 90 days each for violating Maryland Lawyers’ Rules of Professional Conduct (“MLRPC”) as a result of “robo-signing” documents that were filed in court in foreclosure proceedings. Attorney Grievance Commission v. Thomas Dore, 433 Md. 685, 73 A.3d 161 (2013) and Attorney Grievance Commission of Maryland v. George Jacob Geesing, 436 Md. 56, 80 A.3d 718 (2013). Two other attorneys are also facing sanctions for false signatures on foreclosure documents.

The Court of Appeals defined “robo-signing” in the Dore case as “refer[ring] to the process of mass-producing affidavits for foreclosures without having knowledge of or verifying the facts” or to “the mass-production of affidavits that the affiant did not sign.” The proceedings against Dore were based on each of these definitions. The case against Geesing was based only on the second.

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IDOTs STILL WORK FOR DEPOSIT MORTGAGES

Recent legislation -- Senate Bill 1302 of the First Special Session of the 2012 Maryland General Assembly as modified by Senate Bill 436 and House Bill 1209 of the 2013 Session of the Maryland General Assembly -- has seriously impaired the use of indemnity mortgages and indemnity deeds of trust (either of which is called an “IDOT”) as financing devices. However, in at least some respects, the reports of the demise of the IDOT are greatly exaggerated.

Senate Bill 1302 provided that for a loan in the amount of $1 million or more (which amount has been increased to $3 million or more by the 2013 legislation), when an IDOT is used the recordation tax applies as in the case of other financing transactions. This law ended the comparative advantage of IDOTs for loans in excess of the applicable threshold amount. Other uses of IDOTs are still available, however.

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FAILURE TO SERVE NECESSARY DEFENDANTS MEANS THEIR INTERESTS CONTINUE AFTER TAX SALE FORECLOSURE OF THE EQUITY OF REDEMPTION

In PNC Bank, National Association v. Braddock Properties, 215 Md. App. 415, 81 A.3d 560 (2013), the Court of Special Appeals considered an action regarding the foreclosure of the equity of redemption after a tax sale. The Court held that the interest of PNC Bank as beneficiary of the deed of trust on the property was not terminated in the foreclosure proceedings even though PNC Bank, in its capacity of a judgment creditor, received actual notice of the foreclosure proceedings. This was because the trustees under the PNC Bank deed of trust were not served in the foreclosure action.

BBR Properties, L.L.C. borrowed $395,000 from Farmers and Merchants Bank, which loan was secured by a deed of trust encumbering 14.3 acres of real property in Frederick County. Farmers and Merchants merged into PNC Bank, which thereby succeeded to the interest of beneficiary of the deed of trust. BBR Properties did not pay its real property taxes, and Frederick County sold the property to Braddock Properties L.L.C. at a tax sale. Thereafter, the substitute trustees under the deed of trust filed a foreclosure action at the direction of PNC. PNC also obtained a separate judgment against BBR Properties.

Braddock filed an action to foreclosure the equity of redemption on June 3, 2011, but it did not name PNC or its substitute trustees as defendants. On August 30, 2011 the Circuit Court for Frederick County entered an order foreclosing the equity of redemption on the property.

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SPEAKING OF REAL ESTATE

AWARDS / RECOGNITION

Twenty-six lawyers at Gordon Feinblatt LLC have been named The Best Lawyers in America® for 2014 (Copyright 2013 by Woodward/White, Inc., of Aiken, S.C.). Since it was first published in 1983, Best Lawyers has become widely regarded as the definitive guide to legal excellence. Inclusion in Best Lawyers is considered a singular honor because it is based on an exhaustive peer-review survey in which more than 36,000 leading attorneys cast almost 4.4 million votes on the legal abilities of other lawyers in their practice areas, and because lawyers are not required or allowed to pay a fee to be listed. Corporate Counsel Magazine has called Best Lawyers “the most respected referral list of attorneys in practice.”

The 26 Gordon Feinblatt attorneys who have been recognized by Best Lawyers include five of our real estate lawyers: Timothy D.A. Chriss, David H. Fishman, Edward J. Levin, Searle E. Mitnick, and William D. Shaughnessy.

Ed Levin received the F. Patrick Hughes Legislative Award presented by NAIOP Maryland (formerly, the National Association for Industrial & Office Parks) for success in helping to pass legislation that restructured how recordation tax applies to indemnity deeds of trust (IDOT) in the State of Maryland, on April 24, 2014.

PRESENTATIONS, PUBLICATIONS, AND PARTICIPATIONS

Ed Levin wrote “What is an SNDA and Who Needs One?” which was published in The Daily Record, Baltimore, Maryland (January 17, 2014); http://thedailyrecord.com/2014/01/16/edward-j-levin-what-is-an-snda-and-who-needs-one/.

Ed co-wrote with Robert J. Krapf of Wilmington, Delaware, "An Overview of the Real Estate Finance Opinion Report of 2012," Delaware Law Review, Volume 14, Number 2 (2014); http://media.dsba.org/Publications/DLR/PDFs/DLR.14-2.pdf.

Ed Levin was the organizer and a panelist on the webinar sponsored by the Section of Real Property, Trust and Estate Law of the American Bar Association in the 2014 Fundamentals of Commercial Real Estate program entitled, “An Introduction to Third Party Opinion Letter Policy and Some Practice Pointers for Transactional Attorneys,” March 19, 2014, along with Charles Menges of Richmond, Virginia, and Lydia Stefanowicz of Madison, New Jersey.

Ed also presented on 2014 Maryland Real Property Legislation, at the Commercial Real Estate Discussion Group, Section of Real Property, Planning and Zoning, MSBA, April 8, 2014 with Baltimore City Special Chief Solicitor John P. Machen.

Searle Mitnick attended the Mid-Year Meeting of the American College of Real Estate Lawyers in Kauai, Hawaii from March 27 to 30. Searle is secretary of the ACREL Title Insurance Committee. Ed Levin attended the Spring Symposia of the ABA’s Section of Real Property, Trust and Estate Law in Chicago on May 1 and 2 in Chicago. Ed is vice-chair of the Section’s Real Estate Financing Group.