Court Of Appeals Strikes Penalty For Failure To Register Ground Leases With The SDAT

By Searle Mitnick

In 2006, the Baltimore Sun ran a number of articles describing horror stories of homeowners losing their properties because of delinquencies in the payment of small amounts of ground rent.  In many cases, the costs and attorneys’ fees that the ground tenants were required to pay far exceeded the amount of the rent that was due.

These extreme cases attracted the attention of the Governor and the Maryland General Assembly.  The response was Chapter 290 of the Laws of 2007.  This law provided for a registration system for ground rents that would be accessible online at the Maryland State Department of Assessments and Taxation (SDAT).  It also provided that if the ground leaseholder failed to register by September 30, 2010, the ground lease was extinguished and rent was no longer payable to the owner of the ground lease.

On October 25, 2011, the Maryland Court of Appeals ruled in Muskin, Trustee v. State Department of Assessments and Taxation, No 140, September Term 2010 (Md. Oct. 25, 2011), by a vote of five to two, that the part of Chapter 290 that extinguishes ground rents that were not registered, is unconstitutional as a violation of the Maryland Declaration of Rights and Constitution.

The Court emphasized that it was making its decision under Maryland law.  It assumed that under applicable federal decisions, this scheme might well have passed muster under the U.S. Constitution.  However, the Court noted that sometimes Maryland law may impose greater limitations than the U.S. Constitution.

In reaching its decision, the Court found that Chapter 290 retrospectively abrogates vested rights of ground rent owners.  In evaluating whether a statute operates retrospectively, the Court looked to issues of fair notice, reasonable reliance, and settled expectations.

As to the first requirement of fair notice, the Court held that there was no problem because the registration deadline of September 30, 2010 was more than three years following enactment of Chapter 290. 

However, the Court went on to say that Chapter 290, to the extent that it provided for forfeiture of unregistered ground rents, violated the reasonable reliance and settled expectations of the owners.  The Court said, “Ground rent leases, established through transactions consummated many years ago, create rights and obligations for ground rent owners and leaseholders … .  [T]he extinguishment and transfer provisions of the statute are retrospective in application because, upon failure to register timely, the SDAT is required to reach back in time and divest the reversionary interest of the ground rent owner and cancel his/her/its right to receive future ground rent from the leaseholder.”

The Court went on to determine that the owner of a ground rent is possessed of vested rights under the law and that these rights may not be retrospectively impaired.  After analyzing various causes of action in which courts approved of restrictions on certain remedies, the Court went on to describe vested real property and contract rights as “almost sacrosanct in our history.”  The Court further determined that the forfeiture provisions of Chapter 290 constitute an unconstitutional deprivation of the property of the ground rent owners without just compensation.

Two judges dissented, believing that the Maryland Constitution permits the type of prospective condition on the retention of a vested right so long as the holder of the right had a sufficiently reasonable time and opportunity to protect it by complying with the statute.

Of interest is what is left of the legislature’s attempt to address what it perceived to be a serious problem.  The Court of Appeals did not strike down the registration requirements of the new law.  It suggested other approaches that would not be impermissibly retrospective.  Expressly mentioned were a regulation whereby the failure to register a ground lease triggers an interim consequence such as restrictions on collecting rents prospectively, or denial of access to the courts for the collection of ground rents until the ground rent is registered.

Another case is currently pending in the Circuit Court for Anne Arundel County in which ground rent owners contend that Chapter 290’s requirements for collection of ground rents were so costly and difficult as to constitute an unconstitutional diminution in the value of their property without compensation.

We confidently predict battles on ground rents in the legislative and judicial branches for years to come.

Searle Mitnick is with the Baltimore firm of Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC