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Michael Swanenburg
As we approach the Holiday Season, the activities of the Real Property Section are well under way. Judging by the record turnout, many of you are undoubtedly aware of the recent successful presentation of the Advanced Real Property Institute. Additionally, the Real Estate Discussion Group Lunches continue to be well attended (and highly viewed on our web-casts transmissions). We are also pleased to have sponsored an ADR Business Symposium held in Baltimore at the end of October.
Be on the lookout for upcoming programs to be presented by our Construction Law Committee, as well as our Land Use Committee. Have a wonderful and safe Holiday Season.
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FROM
THE EDITOR |
Ronald S. Deutsch
Cohn, Goldberg & Deutsch, LLC
The leaves are now falling from the trees. Not to say that the changes facing the real estate practitioner are falling from trees but the legislature and the judiciary have been particularly active in the last few months. This edition of Ground Rules attempts to elucidate some of these changes as well as provide some practical resource tools for our members. We hope you find this edition helpful and that you enjoy the holiday season.
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COMMERCIAL LANDLORDS MAY ONCE AGAIN RECOVER ATTORNEYS’ FEES IN
FAILURE TO PAY RENT CASES |
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Glenn A. Cline and Emily J. Alt
Ballard Spahr Andrews & Ingersoll, LLP
For years, real estate lawyers drafted provisions in commercial leases entitling landlords to recover their attorneys’ fees in lawsuits for repossession of the rented property due to the tenants’ failure to pay rent. And in most cases, District Courts in Maryland honored those provisions, granting money judgments against commercial tenants which included the reasonable amount of attorneys’ fees incurred by the landlords.
However, the landscape changed in 2006, when the Court of Special Appeals, in Law Offices of Taiwo Agbaje, P.C. v. JLH Properties, II, LLC, 169 Md. App. 355 (2006), held that attorneys’ fees were not recoverable in an action for repossession due to the tenant’s failure to pay rent under §8-401 of the Real Property Article (also known as the summary ejectment statute). The Court ruled that although §8-401 authorizes District Courts to award a money judgment in favor of a landlord for past-due “rent,”1 attorneys’ fees were not recoverable—even if attorneys’ fees were expressly defined in the lease as “additional rent”. It reasoned that attorneys’ fees could not constitute “rent” within the ambit of §8-401 because attorneys’ fees do not relate to the use or enjoyment of the property. Id. at 368-70.
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PRESCRIPTION FOR A GOOD NIGHT’S SLEEP—THE RULE AGAINST PERPETUITIES
NO LONGER APPLIES TO COMMERCIAL TRANSACTIONS |
Edward J. Levin
DLA Piper US LLP
Unless you have a fetish for things old, arcane, and draconian, you will be pleased to know that as of October 1 recent legislation has removed some teeth from the common law Rule Against Perpetuities.
The legislation, House Bill 188 or Chapter 381 of the Laws of Maryland of 2007, will abolish the Rule Against Perpetuities for commercial transactions in Maryland and replace it with a statute that in circumstances involving actual consideration will promote the narrow interests served by the Rule without the notorious mischief caused by unborn widows, fertile octogenarians, lives in being, and actual periods of gestation. House Bill 188 amends Estates and Trust Article Section 11-102, it adds a new ET Section 11-102.1, and it amends Section 2 116(d) of the Real Property Article by adding to it a cross reference to the two Estates and Trust Article sections.
Delegate Sandy Rosenberg introduced House Bill 188 on behalf of the Section of Real Property, Planning and Zoning of the Maryland State Bar Association. The Section tried to have the General Assembly adopt similar legislation in 1989 and 1990, and in each of those years the bills passed the House but died in the Senate. This year, the General Assembly enacted House Bill 188, and the Governor signed it into law.
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SLOW
URBAN RENEWAL AND DUE PROCESS |
Patrick Murphy, Esq.
Baltimore, Maryland
The Urban Renewal process and the use of eminent domain power in
Maryland has had a slow evolving history. That said, the future
demands continuing redevelopment of blighted areas utilizing the
condemnation as well as faster and more modern mediation
processes.
Any observant commuter driving from Towson to Mount Vernon in the
past decade noticed the prevalence of unrealized development
possibilities, resulting from under-utilized or deteriorated
quality brick and stone structures. The miasma of dejection,
listlessness and lack of opportunity seeps from sidewalk to
sidewalk between littered streets and forgotten homes. So it
might surprise the observer to learn that quasi-intellectual
plans for revamping the mid-town district have existed in a
nominal legal and statutory form for almost 25 years.
The Urban Renewal process of land re-development in previous
moderate to high-density land use areas, began an intense phase
in the late 1940s and continued at least through the 1980s. Often
manifested in part by exerting the eminent domain power, it had a
major impact on the landscape of many cities. This process is
expected to continue well into the 21st century. It has played an
important role in wordlwide metropolitcan history and demography.
City planners like Georges-Eugène Haussmann of Paris and New York
City’s Robert Moses conceived such controversial revisions (often
by condemnation) of real property arrangements as a step towards
remedying the post-Industrial Revolution crises of deficient slum
housing and blighted or underutilized commercial manufacturing
areas.
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THE
2007 GROUND RENT LEGISLATION |
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Robert A. McFarland,
Esq.
Real Estate practitioners are frequently confronted by
non-practitioner confusion of ground leases. Ground leases are
not common in most areas of the Country or even in the State.
The Maryland legislature has made significant changes in this
area of practice.
Frequently a conversation will occur between the practitioner
and the unfamiliar party as follows:
Lender: “The title commitment says this property is subject to a
lease”
Attorney: “That’s correct, its subject to the payment of a
$60.00 ground rent”
Lender: “A what?”
Attorney: “A ground rent. A 99 year ground rent lease that
requires your borrower to pay $60.00 a year in half-yearly
installments”
After taking some time to explain how the Maryland ground rent
system works, you get hit with the question, “Can you get a
pay-off statement from the landlord?
Hardly anyone outside of Maryland has understood our arcane
system of making home ownership more affordable. The ground rent
system has been with us since colonial times. In the 20th
Century, the ground rent was a way to allow a builder to sell a
home to a buyer at a lower price and still get an income stream
in rents that could be capitalized by statute at six percent. At
the time, it was not a bad return. Ground rents however have
long lost their appeal to most investors as more profitable and
liquid investment opportunities have taken their place.
During the 2007 legislative session, the Maryland Legislature
has passed a bill that brings a curtain call on the ground rent
system.
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IS IT
POSSIBLE TO DEFER GAIN ON A PRIMARY RESIDENCE?
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Shawn A. Goldfaden, Esq.
Division Manager for Asset Preservation, Inc.
Maryland State Counsel for Stewart Title Guaranty Company
Although IRC Sec. 121 permits taxpayers to exclude up to
$250,000 if single and $500,000 if married filing jointly of the
capital gain on the sale of the taxpayers primary residence if
at least one of the homeowners has used the property as their
primary residence for 24 out of the last 60 months, homeowners
are increasingly seeing proceeds from sales in excess of such
exemption. As such, homeowners must look for ways to defer the
tax on gain. One method of accomplishing this goal would be for
the taxpayer to establish a new primary residence, convert the
existing property into an investment opportunity and hold on to
it for the requisite period before utilizing a §1031 exchange
(most tax advisors believe that renting the property for one or
two years is sufficient). Once the one or two year rental term
expires, the taxpayer can segregate their tax liability by using
IRC §121 and §1031 to exclude the first $250,000 or $500,000 and
defer taxes on the remainder of the proceeds by using the excess
proceeds in a §1031 exchange transaction (ex.: home bought for
$500,000, sold for $2 million, §121 exclusion on $500,000 and
§1031 deferral on remaining $1 million). Of course the couple
will have to follow the required rules of §1031 exchanges in
order for them to leverage their capital gain tax deferral,
substituting their property with a “like-kind” asset which will
hopefully be worth considerably more than the tax on their gain.
Another opportunity exists for those taxpayers who own property
as a home and as a business proportionately appurtenant. For
instance, a duplex in which the owner resides in one section of
the property, by rents out the remainder or uses that portion as
a home office may qualify for a segregated §1031 exchange. IRS
private letter ruling 2005-14 makes it clear that the exchange
of a home can qualify for both the Code §121 home sale exclusion
and Code §1031 like-kind exchange deferral. This can occur where
the property was used as a principal residence and a business
consecutively (e.g., use as a principal residence followed by
rental of the property) or concurrently (a portion of the home
used as a principal residence and a portion used as a home
office). Make sure your clients understand that an accountant is
generally needed to determine the value allocated to the
residence portion and to the remaining units held for
investment. A tax professional may use factors such as the
square footage or the quality and value of improvements to each
unit in determining what percentage is considered the primary
residence and what percentage is allocated to the exchange
portion. [Note: Proper closing techniques must also be applied.
Caveat: Private letter rulings are based upon very specific
scenarios and are not to be interpreted or applied broadly.
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HELPFUL
DATA AND LINKS |
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William J. Thomas
Senior Underwriter
Pinnacle Title & Escrow Inc.
In a recent round of professional e-mails that floated through
an industry platform, there was a remark that many “newbies in
the profession as well as “old-timers” could use a quick
resource for finding important cases, statutes and computer
links. Below is a list of helpful links and cites which may be
found to be useful.
After September 11, 2001, the Federal Government under the
Patriot Act and Presidential Executive Order that followed, made
our industry one where it was mandated for practitioners to
confirm if any of the parties in a transaction are on the
Specially Designated Nationals (SDN) List of the United States
Department of the Treasury Office of Foreign Assets Control.
Some industry insurers have processes in place to computerize
the search. The list can be downloaded in Portable Document
Format (PDF) and then pertinent pages printed out. Here is the
link:
http://www.treasury.gov/offices/enforcement/ofac/sdn/
Since the late 1990’s, there has been a push for the
computerization of Land Records in the anticipation of e-filing
and in consideration for the Clerk’s to use modern computer
technology for scanning and indexing documents. Even though
these are not official records, the Internet Maryland LANDREC
system is a very helpful source since it is a Digital Image
Retrieval System for Land Record Indices in Maryland and is a
Joint eGovernment Service of the Maryland Judiciary and the
Maryland State Archives. Sign up is required. Here is the link:
http://ww2.mdlandrec.net
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