Officials defend ground rent bill

Real estate lawyer says `big loophole' allows new leases

General Assembly

March 30, 2007|By Andrew A. Green and June Arney | Andrew A. Green and June Arney,Sun Reporters

Legislators are confident that a new law meant to ban the creation of new ground rents accomplishes that goal, despite a Baltimore real estate lawyer's contention that the language contains "a loophole big enough to drive an ocean liner through."

The lawyer, Gregory Reed, says that the emergency bill enacted into law last week permits the creation of new ground leases as long as they aren't "renewable forever."

But Del. Doyle L. Niemann, a Prince George's County Democrat who helped write the bill, said that ground rents are by definition renewable forever, meaning that the bill's language effectively outlaws new leases.

Attorneys, lawmakers, legal scholars and ground rent holders said that as a practical matter, the ban will likely be effective because any contracts designed to get around it would be unenforceable, not economically viable or unacceptable to mortgage lenders.

"We have ended ground rents in the way they do, in fact, exist," said Del. Maggie L. McIntosh, a Baltimore Democrat. "We will look at this, although I think we are safe and covered. I don't think the creation of new ground rent is going to happen after these bills."

The General Assembly sought to ban new ground rents as one of a package of reforms responding to a Sun series detailing abuses of the current ground rent system, in which ground rent owners have seized homes over unpaid debts as small as $24. An estimated 80,000 Baltimore homeowners pay rent on the land under their houses, under 99-year leases that are renewable forever unless the homeowner buys them out.

The prohibition on new ground rents was the first part of the package to pass the General Assembly and was signed into law by Gov. Martin O'Malley. Several other bills have passed both chambers and are awaiting final approval. They include bills that would stop the "ejectment" process that ground rent holders use to take houses, and create a ground rent registry.

O'Malley spokesman Rick Abbruzzese said the governor's chief counsel, Ralph S. Tyler, examined the issue and believes the law does prohibit the creation of new ground rents.

But Reed, who made his argument in a letter published in The Sun, yesterday called the law "basically not effective in banning new ground rents if that's what the legislature thought they were doing. I think that's why the people who own ground rents didn't get too upset about it."

Garrett Power, a professor at the University of Maryland School of Law who is an expert on ground rent, said he agreed with Reed's legal interpretation but said that it is not practically significant.

Mortgage lenders won't accept the creation of new ground rents, he said.

"They're not going to be created, because under the current conditions in the mortgage market, mortgage lenders are not going to be willing to take a secondary position to the holders of ground rents," he said.

Rich Leffler, a consultant with Wachovia Mortgage Corp. in Pikesville, agreed. Given the legislature's clear intent, financial institutions would not likely accept contracts that mimic the current ground rent system, he said.

Legislators who crafted the bill's language said they worked to eliminate loopholes.

An initial version of the bill prohibited 99-year, perpetually renewable leases, the typical set-up for a ground rent. Legislators amended the bill in committees to avoid specifying the number of years, for fear that a property holder could create a 98-year lease.

Niemann, an attorney, said creating a long-term, nonrenewable lease -- as Reed suggested could happen -- would not pass legal muster.

He said a legal concept called the "rule of perpetuities" prevents the creation of a contract that goes beyond the point at which it would be possible to identify who holds the contract.

As a practical matter, the courts have held that 99 years is the longest duration at which a contract is enforceable, he said, which is why ground leases are written for 99 years.

"To have a 100-, 200-, 500-year lease is totally in violation of that doctrine," Niemann said.

Kathleen S. Skullney, staff attorney for the Legal Aid Bureau Inc. in Baltimore, said the legislature's intent to ban new ground rents would make it difficult to take advantage of a loophole.

"If somebody created one, and it was challenged in court, the court would look at not only the literal language but also the legislative intent," Skullney said. "It will become very clear, very fast that ground rents of any kind are disfavored in Maryland law. That helps make the intent the pragmatic reality."

Gary Alexander, a lobbyist for ground rent owners, said his clients had no role in drafting the ban on new ground rents and did not object to it. They have been more interested in the other bills, particularly the one that would end ejectment, he said.

"It's a nonissue," Alexander said. "Nobody stood up for the proposition that ground rent should be continued in the future. ... Our group has favored redemption. Not creating new ground leases but getting rid of all the old ones. We're the group that's worked very hard to come up with a procedure that would have ground rent paid off at settlement, refinancing or upon the sale of a house."

Sen. George W. Della Jr., who has sponsored some of the ground rent legislation, said he thinks Reed is "trying to cloud the issue."

"We have attorneys who work here on the staff," Della said. "They're really pretty sharp. ... Everybody in the so-called industry knows exactly what this means. It's nothing to be alarmed about. The intent of the legislature is really quite clear."

andy.green@baltsun.com june.arney@baltsun.com

Online

See stories, maps, photos at baltimoresun.com/groundrent

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.