Round Two – Ground Rent Holders vs. Legislature – Goes to…

by Pessin Katz Law, P.A.

In a case decided February 26, 2014, State of Maryland v. Stanley Goldberg, et al., No. 8, September Term, 2013, the Maryland Court of Appeals found that legislation that replaced the remedy of ejectment with a lien-and-foreclosure process applicable to defaulting lessees of ground leases violated the due process provision of Maryland’s Declaration of Rights and the “takings” provision of Maryland’s Constitution. 

The case is described as “a re-match of sorts between the General Assembly and certain Baltimore landlords,” referring to a prior appeal concerning the same subject matter, (Muskin v. State Dep’t of Assessments & Taxation, 422 Md. 544, 30 A.3d 962 (2011).  In Muskin the Court ruled in favor of a group of Maryland ground rent holders, finding that 2007 legislation designed to provide more protection to consumers in ground rent actions, violated the Maryland Declaration of Rights and the Maryland Constitution.

Prior to the 2007 legislation, the remedy available to a ground lease holder for failure to pay rent, regardless of the amount in arrears, was ejectment. Ejectment is a process that allows a landlord (in this case the ground lease holder) to re-enter the property after a tenant’s default, eject the tenant, retake possession and if desired, sell the property and keep the full proceeds.  The 2007 legislation replaced ejectment with a lien-and-foreclosure process for defaulting lessees of ground leases when more than six months of rent is overdue.  In the “lien-and-foreclosure process” a lien attaches which receives priority from the date the ground lease was created. The debt of the ground rent lessee is paid from the proceeds of the sale. If the ground lease is redeemable, the redemption amount is deducted also from the proceeds of the sale. If the ground lease is irredeemable, the foreclosure buyer takes subject to the ground lease.  The Court held that the remedy of ejectment was a “vested right” which the Maryland legislature was not permitted to invalidate retrospectively.

Appealing its loss before the Circuit Court, the State, argued that the 2007 legislation was simply a permissible substitution of remedies aimed at curtailing reported abuses of tenants by ground lease holders. The ground rent holders disagreed and challenged three aspects of the law: (1) a provision prohibiting ejectment proceedings for residential ground leases with four or fewer units; (2) the establishment of a lien-and-foreclosure process available for ground lease holders in lieu of ejectment whose tenants owe at least six months’ rent; and (3) a provision limiting the amount of attorneys’ fees that would be available as part of a judgment in the ground rent proceedings.

In addition to seeking declaratory relief as to the unconstitutional nature of the legislation, the ground rent holders (certified as a class by the Circuit Court) sought $114 million in damages due to the State’s enactment of the law.  The Circuit Court entered partial summary judgment on the ground rent holders constitutional and damage claims, from which arose the current appeal.

The Circuit Court began its analysis with the Maryland Constitution’s prohibition against the Legislature enacting any law “authorizing private property, to be taken for public use, without just compensation, as agreed upon between the parties, or awarded by a Jury, being first paid or tendered to the party entitled to such compensation.” Md. Const. art. III, § 40. In considering the constitutional implications, the Circuit Court addressed two questions in its ruling: the first is the threshold question of whether a ground lease holder’s action for ejectment constitutes a vested right or a remedy; the second is the ultimate question of whether the legislation constitutes an unconstitutional taking through abrogation of vested property rights. In answering the threshold question, the Circuit Court interpreted the Muskin decision to hold that the bundle of vested rights that make up ground leases includes the vested right of re-entry upon default.  Because it interpreted the Court of Appeals’ prior holding that the right to re-enter in the event of default is a vested property right, the Circuit Court held that the law operated as an unconstitutional taking of the ground lease holder’s property.

The Court of Appeals affirmed the Circuit Court’s decision.  The basis for the Court’s affirmance of the Circuit Court’s decision is that the lien-and-foreclosure remedy of the law did not provide the same safeguards for leaseholders as the ejectment remedy. Under ejectment, the remedy for the right of re-entry in ground rent leases prior to 2007, the right of present possession is returned to the ground lease holder, terminating the ground lease such that the holder owned the property in fee simple (and not subject to any lease), and provided the ground lease holder (now owner in fee simple) the ability also to recover rents due prior to the termination of the lease. Under lien-and-foreclosure remedy, the ground lease holder is not able to seek any judicial remedy to terminate the lease such that the ground lease holder could regain the right to present possession of the property.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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