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CBy: Angela Nasuta, Esq.
You’ve found the perfect home for your family. You’er nestled in one of the quiet historic neighborhoods of Baltimore City. Then, you sit down with your real estate agent to finalize the contract paperwork you learn the property is “Subject to GROUND RENT”?! Have no fear, this blog is designed for mythbusting residential ground rents and teaching you how you may have more options than you think.
History of Ground Rents
So what is ground rent and where did they even come from? Well, the use of ground rents in Maryland dates back to the 1600s when King Charles I of England granted the land of Maryland to the second Lord Baltimore, Cecilius Calvert. Calvert, as the owner of the land, charged rent to colonists for building on his land.
The practice continued until shortly before the American Revolution. At this time, it evolved into a formalized system of ground leases like those used today, providing for annual rents reserved on leases “for 99 years renewable forever.” Thus, leases expiring in the late 1800s were renewed prior to expiration, and many still exist today.
Another wave of ground leases was later popularized by home builders after World War II. They created these leases as a means for selling homes at more affordable rates to soldiers returning home and looking to grow their families.
Ground Rents Today
While the majority of Maryland residential leasehold properties are situated in Baltimore City and Baltimore County, some can also be found in Anne Arundel, Cecil, Prince George’s, and Worcester Counties. The concept of ground rents is still unique, though, as few other U.S. states have them. Even some mortgage lenders struggle with how to underwrite residential properties subject to ground rent.
It is also important to distinguish between the types of Maryland ground rents.
- commercial properties
- mobile/manufactured home parks
- residential single-family homes
Ground rents for commercial properties and mobile/manufactured home parks continue as an ongoing component of tenant expenses to landlords. However, for residential single-family homes it’s lessened and below are a few reasons why:
Legislative Changes
In 2007, the Maryland legislature overhauled the residential ground leases system, requiring registration of all ground leases with the State Department of Assessments and Taxation (“SDAT”). The legislation prohibits the creation of any new such leases. The registry resolves rent collection by providing the ground lessee with the ground lessor’s contact information and vice versa. The legislation initially provided that ground rents not timely registered with SDAT were subject to extinguishment. However, Maryland’s highest Court later held that portion of the legislation as an unconstitutional taking of a vested property interest.
The Maryland legislature also attempted to limit ground rent lessee recourse options for non-payment of rent by eliminating the use of complaint for ejectment actions and leaving only the filing and foreclosure of a statement of lien. Once more, a constitutional challenge was made, and once more Maryland’s highest Court agreed, striking down this restriction.
The remaining portions of the ground rent legislation are still in effect and require any ground lessors to register before proceeding with any collection actions.
Redemption of Ground Rent
For residential ground rent properties, Maryland law provides the right of the lessee, under most leases, to “redeem” the ground rent from the lessor at a set capitalized rate. The rates range from 4% to 12% based on the year in which the ground rent lease was first established, with the most common rate being 6%. Redeeming the ground rent forever extinguishes and merges the lessor’s “reversionary” interest with the leasehold interest to vest full “fee simple” title in the property owner.
What if the owner of a ground rent is unknown and has not registered with the State’s Registry? Not a problem – the ground rent can be redeemed through processes established through Maryland SDAT. The redemption funds are collected and held by the State for in the event a ground owner later comes forward to claim the funds. Upon completion of the redemption process with the SDAT, a Certificate of Redemption is issued for recording among the local land records.
Conclusion
Ground rent can be a confusing and worrying subject for many homeowners, as well as some mortgage lenders. When considering your next leasehold property, let Breza & Associates and Community Settlement Group help you with the process. Our experienced attorneys and staff are here to handle all of your ground rent needs.
1 Muskin v. State Dept of Assessments & Taxation, 422 Md. 544, 30 A.3d 962 (2011)
2 State of Maryland v. Stanley Goldberg, et al., 437 Md. 191, 85 A.3d 231 (2014)
3 Md. Real Prop. Title 8. Landlord and Tenant, Subtitle 8. Residential Ground Leases
