In this issue:
SIMILAR CASES, OPPOSITE RESULTS: LETTERS OF INTENT UNDER FALLS GARDEN AND COCHRAN
The Maryland Court of Appeals recently held that a letter of intent signed as part of settlement discussions between two parties who were litigating over the ownership and use of parking spaces was unambiguous and constituted an enforceable contract between them even though the lease that was to guide the relationship of the parties for 99 years had not been agreed upon. Falls Garden Condo. Ass'n, Inc. v. Falls Homeowners Ass'n, Inc., 441 Md. 290, 107 A.3d 1183 (2015).
In so doing, the court reached a contrary result from its decision in another case, Cochran v. Norkunas, 398 Md. 1, 919 A.2d 700 (2007).
Falls Garden Condominium Association Inc. (“Falls Garden”) is an association of condominiums near Falls and Old Pimlico Roads in Baltimore County. It is adjacent to The Falls Homeowners Association Inc. (“The Falls”), which consists of 112 townhomes. For 23 years extending to 2008, Falls Garden thought it owned the 67 parking spaces between the two developments, but in 2009 it found out that it did not have title to the spaces. Falls Garden filed a complaint for declaratory judgment in the Circuit Court for Baltimore County requesting a determination that it owned 39 of the 67 spaces by adverse possession or that it held an easement over them by prescription or by necessity.
Before the trial date, the parties entered into settlement discussions that led to a “Letter of Intent.” The Letter of Intent, signed by counsel to the parties, said the parties would enter into a lease with a term of 99 years for certain of the parking spaces, and The Falls sent a draft of such a lease to Falls Garden. Falls Garden did not accept the lease as drafted and contended the Letter of Intent was not enforceable.
The Falls moved to enforce the settlement agreement, including the Letter of Intent. After a hearing, the judge noted that even though the Letter of Intent did not state on its face whether the parties intended to be bound by it, it reflected the agreement that the parties reached. Therefore, the court granted the motion.
The Court of Special Appeals affirmed in a published opinion in 2013, finding the Letter of Intent was unambiguous and that “a reasonable observer would conclude the parties intended to be bound.”
The Court of Appeals issued a writ of certiorari. In its published opinion in January 2015, it reached the same result as the lower courts as to the enforceability of the Letter of Intent.
In doing so, the court relied extensively on Cochran and on Joseph M. Perillo, Corbin on Contracts.
In Cochran the Court of Appeals held that a particular letter of intent signed by the prospective seller and buyers of residential real estate was not enforceable. Despite this result, the Cochran court stated that a letter of intent can constitute an enforceable contract. Also, the court noted, the fact that a letter of intent “explicitly contemplates future agreements does not make it unenforceable.”
In Cochran the letter of intent was only several paragraphs long, but it included all the business terms of the transaction. It provided that the parties would sign the standard form Maryland Realtors contract. After the seller received the form contract and addenda to it, she had seller’s remorse and decided not to proceed. The buyers sued for specific performance.
The Court of Appeals looked to Corbin, which sets forth the following four categories of letters of intent:
Definite or Indefinite?
The Cochran court stated that a contract has been made if it falls within either category (3) or (4). It held that, to form a contract the parties must have the intent to be bound and there must be definiteness of terms in a letter of intent.
In Cochran, the court determined that the parties did not show the requisite intent to be bound because the letter of intent referred to the form realtors contract in three places, and a reasonable person, therefore, would have understood that a formal contract was to follow the execution of the letter of intent.
When the court analyzed the Letter of Intent in Falls Garden, it considered the difference between Corbin’s categories (2) and (3) to be whether the terms of the Letter of Intent were definite or indefinite. According to the court, this “informs the central question of whether there was an intent to be bound and, thus, mutual assent.”
The court also found that a binding letter of intent must address all the material terms relating to the subject, citing Peoples Drug Stores, Inc. v. Fenton Realty Corp., 191 Md. 489 (1948), and Corbin. The opinion notes that, in Falls Garden, both the circuit court and the Court of Special Appeals agreed that the Letter of Intent included all of the material terms and that they were definite.
Falls Garden argued that the Letter of Intent was not enforceable because it clearly anticipated that there would be a lease, that the form of the lease had not been agreed upon, and that Falls Garden did not accept the form of lease that The Falls sent to it. Falls Garden noted five business points addressed in the lease with which it took issue.
The Court of Appeals, however, ruled that the Letter of Intent was inclusive and definite as to all material terms. It considered the Letter of Intent to be in Corbin’s category (3), and therefore enforceable.
But — unlike the lower courts — the Court of Appeals declined to hold that the lease referred to in the Letter of Intent was enforceable. The court found the lease was merely a draft that was not agreed to by The Falls and that specific performance was not available to enforce it.
How can the Falls Garden Letter of Intent be enforceable if the lease — which is to control the relationship of the parties for nearly a century — is not enforceable? What if each party refuses to budge from its positions on the five open points, or on any of them? They cannot walk away and say there is no deal: the Court of Appeals held that the Letter of Intent is an enforceable agreement, and the Letter of Intent unequivocally provides there will be a lease.
So, who decides on the provisions of the lease that are not explicitly set forth in the Letter of Intent? Will a stalemate trigger yet another round of litigation?
The Court of Appeals in both Falls Garden and Cochran cited Corbin for the proposition that “[i]f the document or contract that the parties agree to make is to contain any material term that is not already agreed on, no contract has yet been made; the so-called ‘contract to make a contract’ is not a contract at all.” Doesn’t the failure to have an agreed-upon lease make the Letter of Intent a “contract to make a contract”?
If the letter of intent in only one of the Falls Garden and Cochran cases were to be held to be enforceable, shouldn’t it have been the one in Cochran? In each case, all material terms were specified in the applicable letter of intent. In each case, the applicable letter of intent stated that the parties would later sign another, more definite document.
The document to be signed later in Falls Garden was a commercial lease that was not a “shelf document” but had numerous provisions open to negotiation between the parties. Indeed, the Letter of Intent expressly stated that the lease would contain a number of other “usual and customary” provisions, and proceeded to identify a non-exclusive list of those provisions. The form of lease was not available to Falls Garden at the time the Letter of Intent was signed, unlike the standard Maryland Realtors form which is readily available through a broker.
The Cochran letter of intent repeatedly referred to the form Maryland Realtors contract, which is a standard form. There were no terms left to negotiate after the Cochran letter of intent was signed, and the seller never articulated any point that was not agreed to by the parties. She merely changed her mind about selling her house.
Falls Garden and Cochran are two factually very similar cases that reached diametrically opposite results. To avoid being in a position where it is virtually undeterminable whether a court will find your letter of intent to be an enforceable contract, it is important to explicitly provide in the letter of intent if it is intended to be binding on the parties.
If the parties desire that they are both bound to the deal specified in the letter of intent once it is signed, the letter of intent should so state. Because the provisions of a letter of intent are not as comprehensive as final documents, the parties should consider including a mechanism for determining the resolution of the points that are not addressed by the letter of intent. If the parties do not want to be bound unless subsequent transaction documents are fully negotiated, executed, and delivered, the letter of intent should contain such a provision.
Otherwise, the parties may find themselves in the murky netherworld between categories (2) or (3) of Corbin’s analytical framework.
Here is suggested language that the parties could include in a letter of intent that the parties do not want to be generally enforceable. This states that the parties are not obligated to act in good faith to reach an agreement; it is to enable the parties, or one of them, to terminate discussions at some future point in time without the obligation to negotiate endlessly. It also provides that designated provisions of the letter of intent, such as those relating to exclusivity and confidentiality, are enforceable.
This is merely a letter of intent which sets forth some, but not all, of the terms of the subject transaction, and other material terms remain subject to negotiation. The parties agree that neither is bound by the provisions of this letter of intent. Each agrees that neither it nor the other party to this letter of intent will be legally or equitably bound unless and until they have both executed and delivered other documents. If and when that occurs, the parties will be bound by the provisions in those documents, and not by the terms of this letter of intent. The parties agree that neither shall have any obligation to negotiate in good faith or otherwise to reach agreement on the terms and conditions in such documents, and they each disclaim any implied duty to the contrary. Notwithstanding the foregoing, the parties intend that section __ [which prohibits the parties from negotiating with third parties about the property for __ days] and section __ [which requires the parties to keep the provisions of this letter of intent confidential] shall be binding upon execution of this letter of intent.
For questions, please contact Ed Levin (410) 576-1900.
An earlier version of this article was published in The Daily Record on February 10, 2015 and in Ground Rules on February 11, 2015. Ed would like to thank Kevin L. Shepherd of Venable LLP for his thoughtful comments and suggestions.
PLAINTIFFS FAIL TO ESTABLISH THEIR STANDING TO CHALLENGE COMPREHENSIVE REZONING IN ANNE ARUNDEL COUNTY
In Anne Arundel County, Maryland v. Bell, No. 29, Sept. Term, 2014 (filed Apr. 21, 2015), the Court of Appeals held that challengers to comprehensive zoning ordinances must satisfy the requirements of the taxpayer standing doctrine, rather than the property owner standing doctrine.
In Bell, a group of citizens (the “Citizens”) challenged Bill 12-11 (the “Bill”), a comprehensive zoning ordinance adopted by the County Council for Anne Arundel County, which changed the previous zoning classifications of 264 out of the 59,045 individual parcels and lots totaling 4,265 acres in the vicinity of the Baltimore/Washington International Airport and all of the property along the Baltimore-Washington Parkway corridor in Anne Arundel County. The Circuit Court concluded that the Citizens lacked standing to bring suit because they failed to prove special aggrievement. On appeal, the Court of Special Appeals vacated the judgment of the Circuit Court, holding that the Citizens enjoyed property owner standing to challenge the Bill. In a 4 to 3 decision written by Judge Harrell, the Court of Appeals reversed the Court of Special Appeals.
Complainants may maintain suits regarding land use actions under one of two standing doctrines depending on the circumstances: property owner standing and taxpayer standing. Under the property owner standing doctrine as it has been applied in Maryland cases, an “aggrieved person” may challenge a zoning action if he can show that he is “specially harmed” by the action in a manner different from the general public and if he lives no more than 200 to 1,000 feet away. On the other hand, to maintain a suit under the taxpayer standing doctrine, a complainant must allege: (1) that the complainant is a taxpayer; and (2) that the suit is brought, either expressly or implicitly, on behalf of all other taxpayers. Once a complainant establishes eligibility to bring a suit under the taxpayer standing doctrine, he must allege that the governmental action is illegal or ultra vires and that the action may reasonably result in a pecuniary loss to the taxpayer or an increase in taxes.
The Bell Court decided that property owner standing is reserved for challenges to land use decisions reached through quasi-judicial or administrative/executive processes – including piecemeal rezoning of individual properties – while taxpayer standing is the appropriate doctrine applied to judicial challenges to land use actions reached via a purely legislative process – including comprehensive zoning actions, such as the action in the Bell case.
The Court of Appeals ruled that the Citizens did not satisfy the requirements of the taxpayer standing doctrine because they failed to allege that their taxes would be increased or that the illegal action would result in any other form of pecuniary loss to them, and that therefore the Circuit Court appropriately dismissed their case.
In dissent, Judge Adkins wrote that the property owner standing doctrine should not be limited to administrative land use decisions, but should also apply to legislative land use decisions like comprehensive zoning. Expansion of that doctrine would ensure that all complainants who are specially aggrieved by rezoning have standing to challenge it in the courts. Further, it would not result in an opening of the floodgates to suits by the owners of 59,045 parcels or lots, as the majority alleged; rather, only those property owners living in very close proximity to the 264 affected parcels that underwent zoning changes under the Bill would have standing to challenge the comprehensive rezoning.
For questions, please contact Richard Topaz (410) 576-4004.
CHALLENGE TO CONDOMINIUM MAINTENANCE ARRANGEMENT FAILS
Abreu v. Condominium 4 at the Colonnade, et al., No. 2371, Sept. Term, 2013 (Md. Ct. Spec. App., April 8, 2015), involved the unsuccessful challenge of repair and maintenance obligations at a condominium regime.
The plaintiff, Abreu, lived in Condominium 4 of the Colonnade. This is one of five condominium regimes that are part of a condominium community of The Colonnade at Kentland in Gaithersburg. Before November 2012 each of the five condominiums and the umbrella organization, the Colonnade Community Association (the “Association”), had separate responsibility for the maintenance and repair of its own common areas. In November 2012 the Association Board and the Board of Directors of each condominium entered into an Access and Maintenance Agreement under which the Association agreed to perform the maintenance and repair work on all of the common areas, and the condominiums agreed to pay their respective shares in reimbursement to the Association.
Abreu challenged the arrangement as being in violation of the Maryland Condominium Act and the Maryland Homeowners Association Act, in violation of the fiduciary duties of the members of the naming boards, and a breach of contract. The Circuit Court for Montgomery County dismissed Abreu’s complaint, and the Court of Special Appeals affirmed.
The court found that this arrangement was not inconsistent with the condominium documents and that it did not involve an impermissible delegation of rights or obligations.
The court noted that a fiduciary relationship exists between a condominium board and a unit owner, but that Abreu had not pled a good cause of action because he did not allege any individual harm.
The court held that the Homeowners Association Act was not applicable because the individual condominiums were governed by condominium documents and “the governing documents of the Association created a larger condominium cooperative.”
Finally, the court ruled that the actions complained of and the delegations of authority that they involved were all authorized or permitted by the applicable condominium documents or the Maryland Condominium Act.
For questions, please contact Ed Levin (410) 576-1900.
EXPRESS EASEMENT MAY BE CREATED BY PLAT
In Peters v. Emerald Hills Homeowners’ Association, Inc., 221 Md.App. 338 (2015), the Court of Special Appeals held that an easement may be created by a plat, which is an exception to the general rule. Also, the court held that the easement did not conflict with a subsequent recorded document, and therefore the easement was not terminated.
Mr. and Mrs. William Peters purchased a lot near Bel Air and wanted to build a house on it. The lot had been reserved by the seller in an earlier conveyance of a large tract to Victor Posner. The lot did not have direct access to a public street. The lot was shown on a recorded plat, and notations on the plat gave the lot a non-exclusive easement over two small parcels that led to a public road.
In Kobrine v. Metzer, 380 Md. 620, 636 (2004), the Court of Appeals set forth the general rule that express easements “may be created only ‘in the mode and manner presented by the recording statutory.’” But the Kobrine Court went on to state that an easement could also be validly created by a memorandum that complies with the Statute of Frauds (§5-103 of the Real Property Article of the Maryland Code).
Under the facts of Kobrine, the writing in question did not meet the requirements of the Statute of Frauds, and therefore that court found that no easement was created. However, in Peters the Court of Special Appeals held that all of the necessary points were satisfied and that an easement was created even though words such as “grant,” “convey,” “assign,” or “transfer” were not used.
The Court of Special Appeals next considered the effect of a Cross Easement Agreement that Posner recorded in 2001. The trial court had ruled that even if an easement had been created by the plat, it was extinguished by the Cross Easement Agreement. The Court of Special Appeals disagreed. It found that the Cross Easement Agreement had been drafted for the purpose of creating reciprocal easements for lot owners, but that the Peters property was not a “lot” for this purpose because in 2001 it was under separate ownership from the other properties. The Court of Special Appeals held that the Cross Easement Agreement was for the purpose of granting reciprocal rights of access, and there was no conflict between this access easement and the non-exclusive rights of members of the Association to use open spaces in the subdivision.
Therefore, the Court of Special Appeals reversed the decision of the Circuit Court for Harford County, which had found that an easement in favor of the Peters lot did not exist.
For questions, please contact Ed Levin (410) 576-1900.
PINEY ORCHARD PROPERTY MAY HAVE BEEN IN THE MIDDLE OF A HUGE TRACT THAT WAS SUBJECT TO RESTRICTIONS, BUT THE PROPERTY WAS NOT SUBJECT TO THEM
Although restrictive covenants apply to large portions of property in the Piney Orchard Community, the covenants do not apply to certain property within the community, according to the Circuit Court for Anne Arundel County and the Court of Special Appeals. Piney Orchard Cmty. Ass'n, Inc. v. Piney Pad A, LLC, 221 Md. App. 196, 108 A.3d 536 (2015).
The property subject to the litigation (the “Property”) is located adjacent to the Piney Orchard Village Center, a commercial area surrounded by 4,500 apartments, condominium units, townhomes, and single family houses. Much of the land in Piney Orchard is currently subject to a Declaration of Covenants, Conditions, and Restrictions that was recorded in 1990. That Declaration originally affected only one lot, but between 1991 and 2006 it was amended by more than 50 supplemental declarations which added a considerable amount of property. The Property was never added to it explicitly. The Property became subject to a different set of covenants and restrictions when it was mentioned in a 1997 declaration. However, an amendment to that declaration “de-annexed” the Property from it.
On October 15, 2012 the owners of the Property sought a declaratory judgment that the Property was not subject to the 1990 declaration. The defendant, the Piney Orchard Community Association, Inc. (the “Association”), contended that even though the Property was not mentioned in the 1990 declaration or any amendment to it, the Property had been reserved for commercial development and that the Property was subject to the 1997 declaration. Among other things, the Association alleged that the de-annexation was not effective.
After a hearing, the trial judge issued an order that the Property was not subject to or entitled to the benefits of the 1990 declaration. The Association appealed, and the Court of Special Appeals affirmed the orders of the Circuit Court for Anne Arundel County.
The Court of Special Appeals found no ambiguity in the 1990 declaration and that there is no reading of it or its amendments that includes the Property. The Association’s argument was that the Property was meant to be included within the reach of the 1990 declaration and that the purported de-annexation from the 1997 declaration could not have left the Property unencumbered by any declaration. But the Court of Special Appeals did not find these arguments credible.
The Court cited recent cases for its holding that in the absence of an ambiguity in the declaration, the trial court was correct in not considering extrinsic evidence as to its scope. See Newell v. Johns Hopkins University, 215 Md.App. 217 (2013), cert. denied, 487 Md. 424 (2014) and Dumbarton Improvement Association, Inc. v. Druid Ridge Cemetery Co., 434 Md. 37 (2013).
The Court followed Point’s Reach Condo Council v. The Point Homeowners’ Association, 213 Md.App. 222 (2013), and its line which addressed situations where parties litigated over whether certain properties were or were not subject to recorded declarations. In Point’s Reach the Court of Appeals found an ambiguity, it permitted the homeowners’ association to introduce extrinsic evidence, and it concluded that the homeowners’ association had successfully rebutted the presumption that the condominium association was not part of the declaration and restriction because the parties had intended a general scheme of development.
In Schovee v. Mikolasko, 356 Md. 93 (1999), the Court of Appeals considered the doctrine of negative implied reciprocal easements. The doctrine provides that, as a matter of fairness, an owner who sells property subject to restrictions may impose those same restrictions on the owner’s own property even if no recorded document so states. Under the facts of Schovee the Court of Appeals held that the owner did not intend to subject its property to the declaration under consideration.
In Turner v. Brocato, 206 Md. 335 (1955), the Court of Appeals had found that the subject lot was part of a development, that the developer had intended to bind all of the land to the declaration, that the intention was manifested by promotional material and advertisements, and that the property was therefore subject to the restrictions.
The case of Roper v. Camuso, 376 Md. 240 (2003), presented “an interesting twist” in this line of decisions. In that case Ms. Roper claimed that her property was not subject to a declaration but that her neighbor’s property was bound under the doctrine of implied negative reciprocal easements. Although the Roper court noted that “covenants creating restrictions are to be construed strictly in favor of the freedom of the land,” the court determined that Ms. Roper had produced sufficient evidence “to support the conclusion that a common plan of development existed and was intended to exist by the grantor” and that Ms. Roper’s land “was intended to be a part of that community and thence subject to, and reciprocally able to enforce, the [community’s] covenants.”
Based on its analysis of the facts presents in Piney Orchard and its reading of the prior cases, the Court of Special Appeals held that because the Property was not specifically included in the 1990 declaration, there was no ambiguity in the documentation (including notes on subdivision plats), and there was no evidence in the record that the developer intended the Property only to be used for a particular purpose, there was no genuine issue of material fact. Therefore, it was proper for the trial court to grant summary judgment to the owners of the Property.
For questions, please contact Ed Levin (410) 576-1900.
REQUIREMENTS FOR ADVERSE POSSESSION WERE MET FOR PROPERTY ON THE MAGOTHY RIVER
The Court of Special Appeals affirmed the decision of the Circuit Court for Anne Arundel County in a recent unreported opinion involving ownership of and easements relating to two strips of land in the Sillery Bay community on the Magothy River in Pasadena, Maryland. Sillery Bay Improvement Ass’n, Inc. et al. v. McGahagan, III et al., No. 2532, Sept. Term, 2012 (Md. Ct. Spec. App., Feb. 5, 2015).
John and Diane McGahagan own a house on two lots in the community, and they own a number of other platted lots that are separated from their house by two non-public roads, one of which is called the “Paper Road” and the other is called the “Gravel Road.” The McGahagans’ property is also divided by Sillery Bay Road, which is a dedicated public road. To the west of the McGahagans is a marina owned by the Sillery Bay Improvement Association (the “Association”). The Gravel Road connects the marina to Sillery Bay Road. To resolve issues of title and to prevent raucous partygoers from passing through their property, the McGahagans brought an action to quiet title to the Paper Road and the Gravel Road.
The Circuit Court held that the McGahagans had acquired title to both the Paper Road and the Gravel Road both by adverse possession and by operation of §2-114 of the Real Property Article of the Maryland Code (“RP”). RP §2-114 provides that an adjoiner has title to the center of the street that binds on the adjoiner’s property, and the McGahagans own the property on either side of each of the Paper Road and the Gravel Road. The court concluded that the McGahagans’ title to the Gravel Road was subject to an easement for access by those who validly use the marina.
Adverse Possession Requirements
On appeal, the Court of Special Appeals affirmed. The court noted that there are six elements of adverse possession, and they can be placed in the following three groups: (1) actual, open and notorious, and exclusive (these are based on the use by the adverse possession); (2) continuous or uninterrupted for 20 years; and (3) hostile, under claim of title or ownership (this focuses on whether the use was adverse or permissive).
Following is the way that the Court of Special Appeals described the components of adverse possession:
A. Actual Open and Notorious, and Exclusive
Open and notorious relates to the owners having constructive notice. However, the adverse possessor does not need to overtly alert the true owner of the adverse use. To establish that the exclusivity aspect has been met, the adverse possessor must show “an exclusive domain over the land and an appropriation of it to his own use and benefit.” However, the adverse possessor’s use need not be absolutely exclusive, although it must be “the type of possession which would characterize an owner’s use.”
B. Continuous and Uninterrupted for the 20-Year Period
Tacking is permitted to enable the period of adverse possession to reach 20 years, but tacking requires privity of estate between successive parties. This may be accomplished with a deed that describes the property. It may also be achieved if the land in dispute is contiguous to land described in a deed and part of an enclosure created by physical boundaries that is actually turned over to the purchaser.
Hostility is exhibited if the adverse possessor “claims a right to the land that is superior to the rights of others.” The court noted that hostility does not require that there be an ouster.
Issue Relating to the Gravel Road
The trial court held that the ownership rights of the McGahagans to the Gravel Road were subject to an access easement by two other lot owners and by others who used the road for valid access to the marina.
A. Implied Easement by Plat
The court stated that an easement by implication could be created by plat, but it held that the intention of the parties at the time that the plat was recorded was that the Gravel Road would be used only for a limited use. Therefore, it was not error for the trial court to decline to find an implied easement.
B. Easement by Prescription
An easement by prescription may be created when there is “an adverse, exclusive, and uninterrupted use of another’s property for 20 years.” The law disfavors the creation of easements by prescription.
The Court of Special Appeals said that there is a subset of presumptive easements called “public prescriptive easements.” This type of easement is “essentially a prescriptive easement for use by the general public.” “Continued use and enjoyment of a private street or road by the public over the [20-year period] will establish the existence of a public way by presumption.” The concept of exclusivity is different in the context of public prescriptive easements.
The Court of Special Appeals said that for there to be a prescription easement required by the public, “there would have to be sufficient evidence suggesting that the Gravel Road was used by the general community in a manner similar to other public streets.” The Association asked to find a prescription easement that was broader in scope than the actual use that was made during the prescriptive period, but the court declined to do so.
Therefore, the Court of Special Appeals affirmed the holding of the Circuit Court for Anne Arundel County.
For questions, please contact Ed Levin (410) 576-1900.
WHEN IS AN LLC A CORPORATION? WHEN IT SEEKS A PARTICULAR TAX EXEMPTION
The Court of Special Appeals recently held that a limited liability company may avail itself of the benefit of an exemption from recordation and transfer taxes relating to mergers that the State Department of Assessments and Taxation (“SDAT”) argued was only applicable to corporations. Super-Concrete Corp. v. State Department of Assessments and Taxation, No. 877, Sept. Term 2013 (Md. Ct. Spec. App., Feb. 27, 2015).
In reaching its result, the Court of Special Appeals reversed both the Tax Court and the Circuit Court for Baltimore City.
Section 12-108(p)(2) of the Tax-Property Article of the Maryland Code (“TP”) provides that “an instrument of writing is not subject to recordation tax if [it] is . . . made pursuant to reorganizations described in §368(a) of the Internal Revenue Code [(“IRC”)].” The issue presented arose in the context of a merger between Super-Concrete Corporation, a District of Columbia corporation, and Silver Hill Materials II, LLC, a Maryland limited liability company. In connection with the merger, Super-Concrete filed Articles of Merger and a Certificate of Conveyance with the SDAT and claimed an exemption under TP §12-108(p)(2). The SDAT denied the exemption because one of the parties to the merger was a limited liability company (an “LLC”).
Super-Concrete paid recordation and transfer taxes in the amount of approximately $300,000 on the Articles of Merger. It filed for a claim for refund with the SDAT and lost, appealed to the Tax Court and lost, obtained Judicial Review by the Circuit Court for Baltimore City and lost, and filed an appeal with the Court of Special Appeals. There its losing streak ended.
In its analysis, the Court of Special Appeals noted that IRC §368(a)(1)(A) provides that a reorganization includes “a statutory merger or consolidation.” The Court of Special Appeals stated that this language, if read literally, could extend the exemption for any statutory merger, but that this would render meaningless many related provisions under the Maryland Code. This would, therefore, be too broad of a reading.
Administrative agencies are generally accorded deference by courts when they have adopted and consistently applied rules. However, after analyzing the practice of the SDAT with respect to the taxation of mergers that involved LLCs, the Court of Special Appeals found no long-standing and consistent agency interpretation that is entitled to deference.
The Court of Special Appeals found that the purpose of TP §12-108(p)(2) “has been and remains to be providing exemption from recordation tax for the merger of business entities for no consideration.” Therefore, the court found that this provision and the corresponding provisions dealing with exemptions from transfer tax reflect the intent of the General Assembly to extend an exemption to mergers and consolidations for no consideration to business entities that are similarly situated to corporations. Also, because under Maryland and federal law LLCs are sometimes treated as corporations, the Court of Special Appeals concluded that the claim by Super-Concrete for a refund of recordation and transfer taxes paid was improperly denied.
For questions, please contact Ed Levin (410) 576-1900.
FARMERS' MARKET STALLS VIOLATED SUPERMARKET'S RESTRICTIVE USE COVENANT
In Redner’s Markets, Inc. v. Joppatowne G.P. Limited Partnership, 594 F. App’x 798 (4th Cir. 2014), the United States Court of Appeals for the Fourth Circuit affirmed the District Court’s decision that landlord’s permitting the operation of two “stalls” in the same shopping center as tenant violated a restrictive use covenant in the tenant’s lease.
Plaintiff Redner’s Markets, Inc. (“Redner’s”) operated a grocery store within a shopping center (the “Shopping Center”) owned and managed by defendant Joppatowne G.P. Limited Partnership (“Joppatowne”). Redner’s lease contained a restrictive use covenant prohibiting Joppatowne from leasing space in the Shopping Center to (i) a butcher shop, seafood shop or “food supermarket or grocery store,” or (ii) a “retail operator” of a particular size that sold a certain amount of enumerated, prohibited items (the “Restrictive Covenant”). Nevertheless, Joppatowne subsequently entered into a lease with a third party, JTF, LLC (“JTF”), which opened up a flea market and an Amish farmers’ market (the “Amish Market”) in the Shopping Center. Redner’s brought suit against Joppatowne alleging that by permitting a group of ten stalls to operate in the Shopping Center – seven of the stalls were located within the Amish Market, while three were located in the other space JTF leased from Joppatowne – Joppatowne was in breach of the Restrictive Covenant.
The United States District Court for the District of Maryland applied the Restictive Covenant literally and held that two of the stalls – a butcher shop located within the Amish Market, and a seafood shop outside the Amish Market – violated part (i) of the Restrictive Covenant (918 F. Supp. 2d 428, 447-48 (D. Md. 2013)). The court issued a permanent injunction requiring Joppatowne to remove those two stalls (2013 WL 2903285, at *6 (D. Md. June 13, 2013)). However, because Redner’s failed to prove it had lost profits as a result of Joppatowne’s breach, the District Court did not award Redner’s any damages (2013 WL 3678248, at *10 (D. Md. July 11, 2013)), except nominal damages in the amount of $1.00 for each breach (2013 WL 5274356, at *8 (D. Md. Sept. 17, 2013)). The District Court looked at the rest of the stalls and determined that they were not being used for prohibited uses under parts (i) or (ii) of the Restrictive Covenant.
Redner’s also argued that JTF was a retail operator, and therefore the entire Amish Market violated the Restrictive Covenant. The District Court disagreed, however, ruling that only the subtenants in the Amish Market were retail operators. The District Court defined “retail operator” as someone who “runs a business that sells in small quantities directly to the ultimate consumer” and held that there can be only one retail operator of a stall. Thus, the proprietors of the individual stalls – each of whom operated under a separate business license from the State of Maryland, had a separate cash register, arranged its own labor, paid its own taxes, purchased its own inventory, and operated its stall as it sees fit – were the retail operators. JTF, which was a limited liability company with only one employee, and which subleased space to the owners of the stalls, was not.
Both parties appealed the District Court’s decisions, and the Circuit Court affirmed by an unpublished per curiam opinion.
For questions, please contact Richard Topaz (410) 576-4004.
FOURTH CIRCUIT DECLINES TO ISSUE INJUNCTION TO ENFORCE A RECIPROCAL EASEMENT AGREEMENT AT WHITE FLINT MALL
The Fourth Circuit Court of Appeals affirmed an order of the United States District Court for the District of Maryland which denied the request of Lord & Taylor, LLC to stop the redevelopment of White Flint Shopping Center (the “Mall”) along Rockville Pike in Montgomery County. Lord & Taylor, LLC v. White Flint, L.P., 780 F.3d 211 (4th Cir. 2015).
In or about 1975 Lord & Taylor and Bloomingdale’s agreed to become the anchor tenants at the Mall, and they entered into a reciprocal easement agreement (the “REA”) with White Flint, L.P., the Mall’s owner. The REA specified the layout of the Mall and many aspects of the use and development of the Mall, and it provided that White Flint would maintain a “first class high fashion regional [s]hopping [c]enter” at the Mall. The REA further provided that any changes to the Mall must be approved by Lord & Taylor. The REA stated that its provisions were covenants that ran with the land and that they would be in effect until at least the year 2042.
Although the Mall was highly successful for a number of years, its fortunes changed over time. In 2012 Bloomingdale’s did not renew its lease; by 2013 three-quarters of the tenants at the Mall had left; and by the beginning of January 2015 the Mall was permanently shuttered. At the time the Fourth Circuit issued its decision on January 28, Lord & Taylor was the only store open for business.
As part of a public-private undertaking, White Flint prepared a plan for a major urban center on the property that had been the Mall and on other property. As part of the plan, the Lord & Taylor store would remain, but the enclosed Mall would be demolished. Montgomery County approved the plan in October 2012.
In July 2013 Lord & Taylor filed a complaint with the District Court, seeking a declaration that the REA precludes White Flint from redeveloping the Mall property and requesting a permanent injunction requiring White Flint to follow the provisions of the REA. Judge Roger Titus of the District Court dismissed the request for a permanent injunction even though he assumed that Lord & Taylor would be able to show that the development breached the REA and that Lord & Taylor could show damages. He did so because he concluded that it would be infeasible to grant injunctive relief under the circumstances.
On appeal, the Fourth Circuit noted that injunctive relief is typically an appropriate remedy for breach of a restrictive covenant under Maryland law, but it is subject to “sound judicial discretion” even when restrictive covenants and real property rights are involved. Also, the court noted that Maryland courts typically will issue injunctions only where no other relief is possible. The court also stated that there is a “state-law presumption in favor of injunctive relief.”
The Fourth Circuit agreed with Judge Titus that it would be impractical for the District Court to supervise the project to insure compliance with the REA, especially in light of the “highly detailed provisions of the REA.” Therefore, the Fourth Circuit refused to second guess the decision of the District Court.
For questions, please contact Ed Levin (410) 576-1900.
Ed Levin was a panelist on "Risky Business: Who Gets Sued over Opinion Letters and How to Reduce Your Chances of Being Next" at the Spring Symposia of the American Bar Association's Section of Real Property, Trust & Estate Law on May 1, 2015 in Washington, D.C. with Charles L. Menges, of McGuireWoods LLP, Richmond, Virginia; Shauna Reeder of High Exposure Professional Services CNA, New York, New York; and Craig D. Singer and John K. Villa, of Williams & Connolly LLP, Washington, D.C.
Ed Levin was the speaker on "2015 Maryland Real Property Legislation and Recent Appellate Court Decisions including Falls Garden Condominium Association, Inc. v. Falls Homeowners Association, Inc." at the meeting of the Commercial Real Estate Attorneys Discussion Group of the Maryland State Bar Association's Section of Real Property, Planning, and Zoning on May 12, 2015 in Baltimore.
Ed Levin will be a panelist on "LLC Legal Opinions," a webinar on May 20, 2015, jointly sponsored by the American Bar Association's Section of Real Property, Trust & Estate Law and Section of Business Law, with Sylvia Fung Chin, White & Case LLP, New York, New York and Norman Powell, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware.
Ed Levin wrote "Bills of Interest to Real Property Lawyers that were Passed by the 2015 General Assembly of Maryland," which was published in the May 2015 issue of The Barrister, a publication of the Bar Association of Baltimore City.
2015 MARYLAND GENERAL ASSEMBLY ENDS
The 2015 session of the Maryland General Assembly ended on April 13. With the two signing ceremonies on May 12, Governor Hogan has signed 475 of the 652 bills that passed both houses. Some of the bills that passed in the General Assembly that have not been signed had been cross-filed with bills that have been signed. Still, the Governor has not acted on a number of passed bills. Promptly after the last date for signing or vetoing bills, we will publish an issue of Relating to Real Estate devoted to bills affecting real property in the 2015 General Assembly of Maryland.