The Court of Appeals of Maryland, the state's highest court, recently held that a real estate development company's recording of a declaration for utility infrastructure expenses did not create a lien on the referenced real estate, and instead it should have followed the Maryland Contract Lien Act procedures to create a lien and establish its priority for the delinquent assessments purportedly owed by a mortgagee.
A copy of the opinion is available at: Link to Opinion
A real estate development company ("developer") purchased land for a 330-lot residential development and assumed responsibility for the construction of water and sewer facilities. The developer recorded a declaration stating that the expense of creating that infrastructure would be passed on to the future homeowners in the form of an annual assessment with the future homeowner's liability secured by a lien granted by the homeowner on the homeowner's property.
The homeowners were to pay the utility company for the expenses in 23 equal installments of $700 for each lot on the first of each year following conveyance of the lot to the homeowner. The declaration stated that by accepting a deed to a lot, the owner of the lot agreed to pay the annual expenses and granted the utility company a lien to secure the payment of those expenses, but the declaration did not state the value of the lien it sought to create. The declaration further stated that the utility company could foreclose under the Maryland Contract Lien Act, Maryland Code, Real Property Article ("RP"), §14-201 et seq., if the lot owner failed to pay.
The developer and homebuilders were explicitly excluded from any obligation to pay the annual assessment while they owned the lots. The developer recorded the declaration with a copy of the lots in the development but did not pay recordation and transfer taxes, which would have amounted to approximately $60,000.
The water and sewer infrastructure was installed and the developer contracted with a construction company to build homes on the lots. A copy of the declaration was attached to the lot purchase agreement and incorporated by reference and was disclosed to each home purchaser as part of the sales transaction.
A man purchased a lot with a home, and the recorded deed stated that it was made "subject to all easements, covenants, and restrictions of record." When the man failed to pay the assessments, the utility company recorded two statements of lien stating that the property was covered by the declaration and subject to a lien for the amount stated pursuant to the Maryland Contract Lien Act.
The man then sold the property to a woman who financed the purchase with a loan secured by a deed of trust. In the deed conveying the property to her, the man stated that he had not encumbered the property, but he failed to reference the declaration or the statements of lien and the deed did not state that it was "subject to all easements, covenants and restrictions of record" as the previous deed had. Thus, the property was sold with the statements of lien not being paid, cleared, or released.
The woman refinanced the loan on the property and the mortgage lender conducted a two-party title search that included only the woman and the man from whom she had purchased the property. Again, when the loan closed, the statements of lien were not paid, cleared, or released. The new loan was secured by a new deed of trust in favor of the mortgage lender, who sold the loan to a bank that later sold it to the current mortgagee.
The statements of lien expired under RP § 14–204(c) (requiring foreclosure within 3 years from recordation) without being paid or foreclosed. Several years later, the utility company filed for foreclosure against the property for the unpaid water and sewer charges based on the declaration. The mortgagee filed a motion to dismiss the foreclosure and a declaratory judgment action. The utility voluntarily dismissed the foreclosure lawsuit.
In the declaratory judgment action, the trial court held that the declaration was a covenant running with the land and was a "super lien" in favor of the utility that had priority over the lender's deed of trust because it was recorded before the first homeowner purchased the lot. The trial court rejected the mortgagee's argument that the declaration would then be invalid under the rule against perpetuities, faulted the mortgagee for not discovering the declaration in a more comprehensive title search, and ruled that the failure to pay recordation and transfer taxes with the filing of the declaration did not affect its validity. The trial court implicitly rejected the mortgagee's argument that the Maryland Contract Lien Act is the sole vehicle for enforcement of any lien created under the declaration.
The mortgagee appealed, and the Court of Special Appeals affirmed the trial court's ruling. The Maryland Court of Appeals granted the mortgagee's petition for certiorari.
The Maryland Court of Appeals rejected the developer's and utility's argument that simply recording the declaration established a lien, explaining that doing so was inconsistent with the language and legislative history of the Act. The Court explained that a lien could not be created on the property by the declaration without following the "coherent framework" and procedures established by the Maryland Contract Lien Act.
The Court of Appeals held that the declaration, as a covenant that runs with the land, fell within the statutory definition of "contract" under RP §14-201(b)(1) of the Maryland Contract Lien Act, but that the declaration did not itself create an enforceable lien without following the Maryland Contract Lien Act's procedures.
The Court held that, in order to create and enforce an actual lien under RP §14-202(a), the declaration should have expressly provided for the creation of a lien and expressly described the party in whose favor the lien was created and the property against which the lien was imposed. The developer and utility failed to follow those procedures.
Additionally, the Court noted, instead of paying the recordation or transfer taxes that would have established a lien, the developer and utility treated the declaration as a notice instrument that merely authorized the establishment of a lien pursuant to the Maryland Contract Lien Act.
The failure to follow the Maryland Contract Lien Act's procedures continued when the utility pursued foreclosure. The Court of Appeals held that, in order to establish the lien under RP §14-203(a)-(b), written notice should have been given within two years of the breach of the declaration to the party whose property was subject to the lien and that notice should have included certain information specified in the statute. The Court also noted that the utility company, when seeking to enforce the lien, should have then foreclosed on it just as it would a deed of trust, as prescribed by RP § 14-204.
The Court of Appeals rejected both the developer's and utility's argument that Maryland common law and the Maryland Rules of foreclosure supported their separate theories that the declaration created a lien because they had misread both. The Court also rejected the developer's and utility's analogizing of their responsibility for constructing the infrastructure to the responsibility of a governmental entity who does the same and receives lien priority because neither the developer nor the utility were governmental entities.
Accordingly, the judgment of the Court of Special Appeals was reversed, and the action was remanded with instructions to remand it to the trial court with instructions to vacate the declaratory judgment previously entered and enter a new declaratory judgment consistent with the opinion and assessing costs to be paid by the developer and utility.
Ralph T. Wutscher
Maurice Wutscher LLP
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