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The next front for ground-rent reforms

This week’s Court of Appeals decision invalidating one ground-rent reform opens the door for the next stage: a separate class action brought by ground lease holders who say another recent change has made their investments worthless.

In April, Anne Arundel County Circuit Court Judge Paul F. Harris Jr. put the class action on hold, refusing to set a date for trial until the case before the state’s top court was decided.

The class action challenges the change in the enforcement mechanism after a homeowner defaults on ground rent payments.

In 2007, legislators abolished a rule that allowed ground lease holders to take possession of the property, through a process known as ejectment, if homeowners fail to pay the ground rent.

Instead, ground lease holders would have to file a lien against the property and could then pursue foreclosure. However, the law limited the holders’ reimbursement for such expenses to $500 at most, making the action uneconomical.

Edward J. Meehan, the attorney representing the class, is seeking to make the law more amenable to his clients.

“If you don’t fix it in a way that we can endorse as a compromise for the class then we think the courts will strike the law down, and the state will be required to provide just compensation,” he said. “And, another worry for the state is that when you get rid of something the old rule comes back, which means ejectment is back.”

The attorney general’s office did not respond to a request for comment, but in court documents in 2009, the state said the law was a valid response to greedy landlords evicting their tenants to retake the property and sell it for a profit.

The decline in investment value is “not enough to constitute a taking when the government action at issue is, as here, a public program adjusting the benefits and burdens of economic life to promote the public good,” Assistant Maryland Attorney General Adam D. Snyder said in papers filed with the court.

Sen. Brian E. Frosh, a Montgomery County Democrat who chairs the Judicial Proceedings Committee, said the 2007 law was enacted to give people more notice before their homes were taken away.

“People didn’t know their ground rent was due, didn’t know they were in default and all of a sudden they were in a foreclosure proceeding and then had to bid against the ground rent owner to get their house back,” he said.

“What they want is a windfall,” he added. “They want to take your house worth $100,000 for a debt of $150. That’s just grotesquely unfair.”

Alternatives proposed

The ground rent laws were changed after a 2006 series of articles published by The Baltimore Sun, which reported on people who lost their homes for delinquencies that were as low as $24 in one instance.

On Tuesday, the Court of Appeals struck down a reform that would have wiped out ground leases if the holder failed to register the property in a state database by September 2010. Some lease holders said that was an unconstitutional remedy, and the court agreed in a 5-2 decision.

Most prevalent in Baltimore City and Anne Arundel County, ground leases require homeowners to pay fees of around $50 to $100 on the land beneath their homes once or twice a year.

The exact number of ground-rent properties in Maryland is unknown, but 85,000 had been registered by the deadline last year. The State Department of Assessments and Taxation said roughly 30,000 were not registered.

The Court of Appeals said the portion of the law requiring registration of the ground rents is valid, but with its ruling there is no penalty for not registering.

The opinion, written by Judge Glenn T. Harrell Jr., suggested some alternate remedies including restrictions on collecting rents or a denial of access to the courts to enforce unregistered ground rents.

Harrell wrote that no matter how “repugnant” some of the anecdotes from homeowners may have been, “the General Assembly does not have the power to fix even an assertedly broken system, or eliminate it altogether, by transferring a ground rent owner’s reversionary interest to a leaseholder without just compensation.”

Del. Samuel I. “Sandy” Rosenberg, D-Baltimore, who worked on changing the ground rent laws, which affect residents, said at least the court has provided some potential remedies.

“I know that a group of people who worked on the issue will be deciding what an appropriate response is, but it’s far too premature to know what the result will be,” he said.

Frosh, noting the court’s suggestion, was more certain of the outcome.

“If we can’t do it the way we want to do it,” he said, “we’ll do it the way they want us to do it.”

WHAT THE COURT HELD

Case:

Muskin, Trustee v. SDAT, No. 140, Sept. Term 2010. Reported. Opinion by Harrell, J. Dissents by Akins, J. and Bell, C.J. Filed Oct. 25, 2011.

Issue:

Is it unconstitutional to extinguish ground rents for failure to register by a certain date?

Holding:

Yes; a retrospectively reaching registration statute violates the takings provision of Maryland’s Constitution by taking property without providing just compensation.

Counsel:

Charles J. Muskin for appellant; Matthew J. Fader for appellee.

RecordFax #11-1025-21