August 9, 2023
One of the unique attributes of Maryland real estate law, especially in Baltimore and its surrounding counties, is the prevalence of “ground rent” properties. A ground rent is a periodic monetary payment, typically payable on a semi-annual basis, usually in a low amount (in most instances not exceeding $150 per year), that is required to be paid to a ground lease holder in return for the right to dwell on or otherwise occupy and use the property. In the land records, the ground lease holder is the record owner of the “ground” on which a residence or other structure is constructed, and the party who occupies the property, and who is obligated to pay the ground rent (the payment terms for which are memorialized in the land records), holds the rights of a tenant, rather than the outright owner in fee simple, of the property. Because ground rent arrangements in Maryland have customarily been for a lease term of 99 years (but with the lease holder having the indefinite right to renew the arrangement for a fresh 99-year term whenever the existing term expires), they are sometimes also referred to as “99 year leases”.
Unlike most other leasing transactions for real property, in a residential ground rent arrangement the ground lease holder has no ownership interest in the dwelling or other improvements constructed on, or anything else located on, the property, and the leasehold tenant holds absolute authority with respect to the use, management, and control of the property (including without limitation the right to alter, remodel, and reconstruct any and all improvements thereon). The leasehold tenant holds most outward aspects of property “ownership”, such as:
The leasehold tenant has no duty to obtain the prior consent of the ground lease holder in exercising any of the foregoing powers and responsibilities. In fact, the leasehold tenant has no duties to the ground lease holder whatsoever, other than the duty to pay each installment of the ground rent when due and the duty to do nothing that will impair the ground lease holder’s reversionary rights in the property (which rights are intrinsic to the arrangement).
During the past two decades, the legislative and executive branches of the Maryland government have enacted a number of measures intended to limit the rights of residential ground lease holders, and otherwise to promote the phasing out of residential ground rent arrangements from the state. For example, in 2007 the State enacted legislation requiring all Maryland residential ground lease holders to register their ground rent properties in an electronic registry maintained by the State Department of Assessments and Taxation (SDAT), with the penalty for noncompliance being the loss of the ground lease holder’s right to collect ground rent or to enforce any nonpayment of such ground rents against the leasehold tenant. (That 2007 act also provided that the failure of a ground lease holder to register a residential ground rent property in the SDAT database by October 2010 would cause the ground rent for that property to be automatically extinguished, but that provision of the law was later overturned by the Maryland Court of Appeals (now known as the Maryland Supreme Court), which held that provision to be unconstitutional.)
Also since 2007, the State has prohibited the creation of a new ground rent arrangement in any residential property containing four (4) or fewer dwelling units.
The State has also limited the entitlement of a residential ground lease holder (or any transferee of the reversionary interest) to demand or recover past due ground rent to the three (3) years preceding the sending of written notice to the leasehold tenant demanding payment of same, together with – if authorized under the ground lease – reimbursement for reasonable late fees, interest, collection costs, and expenses.
And further, the State has enacted multiple measures to facilitate the processes by which a residential leasehold tenant may redeem, and thus extinguish, the ground rent from their property (and the ground lease holder’s reversionary rights therein), by payment to the ground lease holder of a redemption amount determined by a formula set forth in the statute. The leasehold tenant, provided that it is not then in default, gets to initiate the redemption process at a time of its choosing, and the ground lease holder is obligated to cooperate in such redemption and extinguishment. Moreover, since 2015, a mortgagee or other holder of a recorded security interest in a residential ground rent property also has the right, if the leasehold tenant is then in default under the security instrument, to redeem the ground rent from the ground lease holder.
Earlier this year the Maryland legislature enacted further legislation, now signed into law, which took effect as of July 1, 2023, which has continued the trend of expanding the procedural requirements imposed on the holders of residential ground rents and making it easier for residential ground rents to be redeemed. In fact, one of these new bills passed included a declaration by the General Assembly that it is in the public interest for ground rents to be redeemed. The new changes in the law include:
If you are either a ground lease holder or a leasehold tenant of a ground lease property and have any questions about the law governing ground leases in Maryland, including any questions about how the most recent legislative changes to the law may impact you, the attorneys at RKW are here to help you!