E-Alert Case Updates

Ground Rent Laws Found Partially Unconstitutional

Muskin v. Dep’t of Assessments & Taxation
Case No. 140 (Md. Oct. 25, 2011)
by Lydia S. Hu, Esq., Associate
Semmes, Bowen & Semmes (www.semmes.com)

By way of background, Baltimore City is one of the few jurisdictions in the country that recognizes property ownership in the form of ground rents. In 2006, increased media attention surrounding the ground rent system and perceived problems, including unfair ejectments, prompted the Maryland General Assembly to pass laws requiring the State Department of Assessments and Taxation (“SDAT”) to create and maintain an online registry of properties subject to ground leases. The registry law was designed to create a centralized database where ground rent tenants could easily locate “the amount of ground rent owed, the ground rent due date, the ground rent payee, and the address to whom the rents could be sent.”

The new law required ground rent owners to submit a form and registration fee, assessed per ground lease, $10 for the first ground lease and between $3 and $5 for each subsequent ground lease, no later than September 30, 2010. Failure to register by the deadline extinguished the property interest in the ground lease holder and vested fee simple title in the leaseholder tenant.

In this case, Petitioner Muskin did not register his 300 ground leases by the deadline, and instead, filed an action in the Circuit Court for Anne Arundel County seeking an injunction prohibiting SDAT from issuing extinguishment certificates. The action was transferred to the Circuit Court for Baltimore City, which denied Petitioner Muskin’s Motion for Summary Judgment and granted the SDAT’s Motion for Summary Judgment. The trial court declared the ground lease laws to be constitutional under the United States and Maryland Constitutions.

The Court of Appeals analyzed whether the laws passed muster under only Maryland’s Declaration of Rights and Constitution, explaining that “Maryland law may impose greater limitations (or extend greater protections) than those prescribed by the United States Constitution’s analog provisions.” The Court’s decision in this case was guided by Maryland case law interpreting the Maryland Constitution.

Maryland’s Declaration of Rights and Constitution prohibit the retrospective reach of statutes that effectively abrogate vested rights. Retrospective statutes operate on transactions that have occurred or rights and obligations which existed prior to the passage of the law. Here, the registration requirement is prospective in application while the extinguishment and transfer provisions are retrospective in application because, upon failure to register timely, the SDAT is required to reach back in time and “divest the reversionary interest of the ground rent owner” and forever eliminate the right to receive ground rent.

The Court of Appeals explained that the right to receive ground rent is a vested right. Vested rights create legal or equitable title to present or future enjoyment of property. Here, the right is to receive ground rent payments and the reversionary interest to re-enter the property in the event of a default on rent or if the leaseholder fails to renew the lease. These are vested and present property rights. Accordingly, the law that allowed SDAT to divest the present right to receive ground rent for failure to register the property unconstitutionally operates retrospectively to terminate property rights that are already vested in the ground rent owners.

The Court of Appeals reversed the trial court, in part, with instructions that the provisions of Maryland ground rent law that allow SDAT to extinguish ownership interests for failure to register the property be struck down, but upheld the registration requirement.