Bulletin: MD2015010

Dear Associates:

Many Maryland properties are subject to “ground rents”. The terms “ground rents” and “ground leases” are often used interchangeably.  

A major overhaul of residential ground rent law occurred in 2015, resulting in the enactment of “SUBTITLE 8 - RESIDENTIAL GROUND LEASES” in the Maryland Real Property Article. This new statute became effective on June 1, 2015.

Some background on Maryland ground rents follows.

Origins of Ground Rents:

Ground rents link Maryland to its colonial past. The concept of paying ground rent originated in feudal times in England, when the monarch or his lords owned all real property, and collected rents from perpetual leases.

When Maryland became a state, thousands of ground rent properties were already in existence. Today, ground rent properties primarily exist in Baltimore City and Baltimore County, and to a much lesser extent in surrounding counties. An estimated 115,000 ground rent properties are believed to exist. 

Creation of Ground Leases:

A “ground lease” is created when the owner of property in fee simple leases the property by means of a specially-drafted 99-year lease with a perpetual renewal clause. The effect of this is to create two estates, with two separate chains of title:

1. The leasehold estate, held by the “ground lease tenant” (the lessee); and 
2. The ground lease estate, held by the “ground lease holder” (the lessor). The ground lease holder is deemed to hold the “reversionary interest” in the property.

Since 2007, new residential ground leases can no longer be created. As more and more ground leases are redeemed or extinguished (see below), residential ground leases could eventually become a thing of the past.

Transfer of Interests/Insuring Ground Lease Interests:

The ground lease tenant’s interest is fully and freely transferable and assignable, and there are no restrictions on selling the leasehold estate or encumbering it with a deed of trust or mortgage. The reversionary estate is also freely transferable.

Both of these interests, as well as any deed of trust or mortgage placed against the leasehold interest by the ground lease tenant, may be insured by a title insurance policy, e.g.: 

• A leasehold owner’s policy for the ground lease tenant;
• A leasehold lender’s policy for the deed of trust/mortgage holder;
• An owner’s policy for the ground lease holder, taking exception to any existing ground leases in Schedule B.

Registration Requirements:

In most cases, the original ground lease can be found by accessing the Maryland Land Records at the following Web address:

https://mdlandrec.net/main/

You will also find recorded leasehold “assignments” (i.e., a leasehold deed conveying the ground lease tenant’s interest from one tenant to another) on this website.

However, it is often difficult to identify the original ground lease holder’s successors in interest. Most ground leases charge rents of $150 or less per year, payable in half amounts spaced six months apart. Since yearly ground rent amounts are insubstantial, heirs to the original ground lease holder’s interest are often unaware of (or sometimes lack interest in!) their right to payments under a ground lease. As a result, many reversionary interests have become lost in history. 

In 2007, Maryland enacted legislation requiring properties subject to ground leases to be registered with the State Department of Assessments and Taxation (“SDAT”). Originally, the law decreed that ground rents not registered with SDAT by October 1, 2010, would be extinguished automatically. However, in a law suit entitled Charles Muskin, Trustee v. State Department of Assessments and Taxation, decided by the Maryland Court of Appeals on October 25, 2011, the justices held that it was unconstitutional to extinguish ground leases based solely upon the failure to register them with SDAT.

In the follow-on case of State of Maryland v. Stanley Goldberg, decided on February 26, 2014, the Court of Appeals determined that the 2007 statute’s attempt to extinguish the traditional remedy of “ejectment” for ground lease holders was invalid. In other words, instead of requiring the ground lease holder to place a lien on the property and foreclose for lack of ground lease payments, the former remedy of ejectment, i.e., eviction, would still apply.

Some General Ground Rent Rules:

• Unregistered ground lease holders may not collect ground rents due under the ground lease or bring any action to enforce their rights under the ground lease;
• There is a three-year limit on how much rent the ground rent holder may collect (but see the explanation of new §8-806 below);
• Except for certain “irredeemable” ground leases created before April 9, 1884, the ground lease tenants may extinguish (i.e., terminate) the ground lease by one of the following methods:

1. By paying the ground lease holder a sum of money as set forth in a formula specified by the ground rent statutes, or as agreed to between the parties;
2. If the ground lease holder cannot be identified, by following the procedure and paying funds as specified by the State Department of Assessments and Taxation.

Effects of 2015 Legislation:

House Bill 511 essentially repealed most existing ground lease provisions in the Maryland Real Property Article, and reenacted them in a new SUBTITLE 8 - RESIDENTIAL GROUND LEASES, now codified as Maryland Real Property §8-801 through §8-812. Although many provisions of Subtitle 8 remain the same as their repealed counterparts, the following items have been changed by the new legislation:

• §8-804 permits any reversion reserved in a ground lease for longer than 15 years to be redeemed at any time, at the option of the ground lease (“GL”) tenant, after 30 days’ notice to the GL holder. For the first time in a Maryland statute, holders of a security instrument in which the borrower is in default may also redeem the property.
• §8-806 permits holders of a GL to demand up to 3 years of past-due ground rents, but if authorized under the GL, may also be reimbursed for reasonable late fees, interest, collection costs, and expenses.
• §8-807 permits GL holders and holders of a secured interest to file an action in the Circuit Court for possession of the property following notice and publication procedures as set forth in this section.

Last, but not least, MD Real Property §7-113 was amended to permit a GL holder, who reasonably believes the tenant has abandoned the property and provides notice as provided in this section, to evict a tenant by means of self-help.

Additional Ground Rent Issues:

Escrowing funds from closings where the ground lease lessor cannot be found: It is common for Maryland title agencies to withhold $500.00 plus 3 years of ground rent payments where the lessor cannot be identified. These funds are returned to the seller after the 3 years have passed. However, in light of new §8-806, consult with a Maryland underwriter where the ground lease allows for the reimbursement of late fees, interest, collection costs, and/or expenses.

Conveying the wrong interest: It is not uncommon to see an incorrect property interest (i.e., fee simple vs. leasehold, or vice-versa), conveyed in a Maryland deed. For example, if a property is purchased as a leasehold but the loan policy is issued in fee simple, this can cause serious problems in the event of a foreclosure. Similar problems occur when the property is mortgaged as a leasehold, but the property owner obtains a merged title thereafter and a foreclosure subsequently occurs. You must consult with a Maryland underwriter under these circumstances. 

If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.

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