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William J. Thomas, MBA
Senior Underwriter
Pinnacle Title & Escrow Inc.
Rockville Maryland
Improvement liens and assessments can create many title issues
and complications. Practitioners must be vigilant in reviewing
all matters appearing of record and in carefully reading the
title documents. Additionally, proper exceptions must be
included in title insurance binders and policies, so that the
title company does not end up paying assessment costs for the
unaware buyer.
Most think that utility liens and assessments are easily found
in title searches by obtaining a lien certificate. This
assumption might be true if the subject property is served by
public water and sewer where the assessment is made by the
County or local jurisdiction. However, if the property is
subject to a private utility assessment, the charge and
obligation to pay the assessment may not be so easily
identified.
As background, Maryland’s local governments maintained, for many
years, a system for separate assessments known as front foot
benefit charges in order to pay for needed utility
infrastructure. These assessments funded improvements such as
water pipes and sewers. Historically, these forms of assessments
have been found in the Washington suburbs and a number of
Maryland counties and municipalities and were collected on a
property owner’s tax bill. In recent years, some of the local
governments have demanded payment for the utility infrastructure
upfront from the developer. In response to these added costs of
development, some developers, instead of passing all such costs
immediately onto the buyer, will amortize the cost over time and
include covenants in declarations providing for a special
assessment that the buyer must pay to a private “utility
company” for a number of years. These special assessments also
are utilized for improving large areas or for constructing a
neighborhood’s sidewalks, street improvements, facilities
(recreation, transportation, wastewater, and the like), and for
shoreline maintenance. In some contracts of sale, the balance of
these improvement charges must be paid in full at the transfer
or are assumed by the purchaser for the balance of the term. The
problem with the developer’s special assessment collection is
that it is not found on a local government tax bill or a lien
certificate, so the assessment can go unreported in a title
report. Further, such covenants or private special assessments
are extremely detailed and are often overlooked by title
abstractors and examiners as to the effect and priority of the
liens that are established.
For example, some of these title documents or agreements
creating the private special assessment lien have been drafted
to make their liens superior to ALL SUBSEQUENT LIENS including,
but not limited to first mortgages. Some make their liens
subordinate to ONLY FIRST MORTGAGES WITH INSTITUTIONAL LENDERS
and therefore secondary loans are not subordinated for the
superior lien of these private contracts. Some do not even
address the delinquency issue at all and others make the
delinquencies subject to the "Maryland Contract Lien Act".
This non-standard dichotomy is very concerning to those
examining and issuing title commitments. If a Declaration of
Covenants including covenants dealing with private special
assessments is not fully and accurately reported by the
abstractor, it might be improperly listed on the commitment and
final policy. Moreover it could cause both the title insurer and
title agent to be at risk. It is imperative that the abstracting
community provide pertinent portions and properly report the
effect of these documents. Merely providing a copy or citing an
exception is not sufficient to alert the practitioner to the
private special assessment. Moreover, second trusts may be
jeopardized if priority is not reviewed.
A best practice technique is for the practitioner, abstractor
and/or title agent to obtain satisfactory certification as to
the status of the amounts owed. The "belt and suspenders
approach" for all cases should be to obtain local government
lien certificate information and a certificate issued by the
private special assessment company or their agents, like a
certificate of resale from a condominium association. Also, the
following type of clauses should be added to the commitment for
title insurance, if applicable:
TO THE LEGAL DESCRIPTION CLAUSE
SUBJECT TO THE TERMS AND CONDITIONS AND PRIORITIES OF THE LIEN
OF DEFERRED WATER AND SEWER CHARGES as established pursuant to
that certain Declaration of Deferred Water and Sewer Charges
dated ____2004 and recorded among the Land Records of Montgomery
County, Maryland on ____2004 in Liber **** folio >>> from
Declarant to FFBC Company.
TO SCHEDULE B PART II EXCEPTIONS
Effect of that certain Declaration of Deferred Water and Sewer
Charges dated ____2004 and recorded among the Land Records of
Montgomery County, Maryland on ____2004 in Liber **** folio >>>
from Declarant to FFBC Company.
TO SUBORDINATE CLAUSE FOR POLICY AND BINDER
Effect at time of delinquency of a separate and subordinate lien
as to delinquent water and sewer charges as established by that
certain Declaration of Deferred Water and Sewer Charges dated
____2004 and recorded among the Land Records of Montgomery
County, Maryland on ____2004 in Liber **** folio >>> from
Declarant to FFBC Company where said delinquency prior to
foreclosure thereof being governed by and becoming subordinate
to prior liens of record as prioritized by the filing of a
Statement of Lien instrument pursuant to the Maryland Contract
Lien Act pursuant to Real Property Article §14-201 et seq. of
the Annotated Code of Maryland.
In conclusion, abstractors, title company agents and attorneys
have to be vigilant when reviewing title and property documents
for liens. One cannot rely on a local government lien sheet or a
cursory review of a title report.
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