|
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.
Maryland Laws 2007, chapter 290 (H.B. 580) was signed into law
by Governor O’Malley, effective October 1, 2007. Ground rent
reversions will have to be registered with the State Department
of Assessment and Taxation ( “SDAT”) by September 30, 2010, with
some exceptions, or they fade into the mists of history.
This legislation creates a new Subtitle 7 to Title 8 of the Real
Property Article of the Annotated Code of Maryland. Also, a
slight amendment is made to Section 3-102(a)(2)(v). by adding
reference to the fact that certificates of extinguishment made
pursuant to the new Subtitle are instruments that may be
recorded.
First, this new legislation applies only to residential
properties (one-to-four dwelling units) and not to commercial
ground leases, multifamily apartment or condominium or mobile
home park properties. Next, the SDAT is directed to establish a
registry of applicable ground rent reversions in Maryland and to
keep accurate records of the same. Section 8-704 covers
registration requirements and fees. This section gives all the
requirements for the registration form to be used by the SDAT
for registration of reversions. The following section requires
the SDAT to register the ground rent if it receives the properly
completed form and registration fee. If any information is
missing, the SDAT will notify the ground rent holder and allow
30 days for the owner to supply the needed information.
Once the ground rent reversion has been registered, the ground
rent holder is responsible for notifying the SDAT of any change
of owner’s address, whether the ground rent has been redeemed,
or any other information the SDAT may require. As mentioned
above, registration must occur by September 30, 2010. A grace
period is given to a ground rent owner under a legal disability
on the date of the deadline of two years after the owner has
removed the disability.
If an owner does not comply with the registration requirements
by the September 30, 2010 deadline, the ground rent is
extinguished and it is only for the leasehold owner to apply for
a certificate of extinguishment with the SDAT. Once the
certificate is issued, it becomes effective against the ground
rent owner and anyone claiming through him/her upon it being
recorded in the appropriate land records. The leasehold owner
then becomes fully vested with fee simple title to the property.
(Any income recognized to the leasehold owner from the
extinguishment of the ground rent cannot be counted as income
for purposes of qualifying for any State or local programs).
As for the ground rent owner under disability after the deadline
passes, if the disability is removed after the leasehold owner
has recorded the certificate of extinguishment, the owner is
entitled to recover only the redemption amount applicable to
that particular ground rent. If the certificate has not been
recorded at the time the disability has been removed, the owner
can reinstate the ground rent by registering it with the SDAT
within the two year period. The accrued ground rent during the
period of disability is not recoverable.
If someone purchases a leasehold property on which the ground
rent has been extinguished, but the certificate of
extinguishment has not been recorded, the purchaser can apply to
the SDAT for a certificate and record it. Once recorded, the
purchaser may not be required to escrow any deposit or accrued
rent for the extinguished ground rent.
The SDAT is charged to work together with the State Archives for
registering, indexing and linking ground rent leases so
registered. Fees collected from registrations will be held in
the fund created for defraying costs for keeping the registry
created under the new law. The SDAT is charged to promulgate
regulations to carry out this legislation. Not surprisingly, a
quick check of COMAR did not reveal any regulations that have
been promulgated yet. While the legislation does not do away
with the ground rent system, it sets the stage for the gradual
elimination of the ground rents we have come to know so well
here in the Free State.
|
