What is Ground Rent?

What is Ground Rent

What is ground rent?

What is ground rent? Nearly unique to the Greater-Baltimore area, ground rent is a periodic monetary payment to a ground leaseholder who holds a reversionary interest in the property or “ground” underneath a home. Specific terms and conditions are contingent on the actual language of the ground lease, but such leases often require payment from the lessee (homeowner) of between $50-150 per year, commonly paid in semi-annual installments.

In practical effect, a homeowner who is subject to a ground rent must make payment to a ground leaseholder for the right to dwell on the property. Full and timely payment to the leaseholder ensures this right perpetually or until the lease expires and is not renewed.

In common practice, the homeowner is singularly responsible for maintenance of the land and improvements thereon, including those made to the home itself (Kolker v. Biggs, 203 Md. 137, 141 (1953)). Similarly, it is the sole responsibility of the homeowner to procure and make payment on any utilities that service the property.

The leasehold tenant has the authority to “take down and build up, alter, remodel and reconstruct” the property “at his own pleasure so long as he does not render the reversioner’s rent insecure” (Crowe v. Wilson, 65 Md. 479, 484 (1886)). Furthermore, “the absolute management and control of the property is in the leasehold tenant so long as the rent is paid” (Beehler v. Ijams, 72 Md. 193 (1890)).

This type of arrangement differs legally from a normal landlord-tenant relationship because the ground leaseholder has no reversionary interest in anything resting on the property or in the dwelling space built upon the property unless the leasehold tenant is delinquent in payment.

When a home is purchased the homeowner may determine if he or she is subject to payment of a ground rent by looking at the deed or by checking the property listing on the Multiple Listing Service nationwide database.

Ground rent in Baltimore City

The Origins of Ground Rent

Still wondering, “What is ground rent?”  Exploring the origins might help.

The concept of ground rent in Baltimore and surrounding counties may be traced back to colonial times when colonists who wished to settle in the area paid taxes to Lord Baltimore for the right to do so.

As the old English lordship system was phased out, enterprising investors bought tracts of land from the newly sovereign colonial governments. These investors then allowed tenants who otherwise could not purchase land for themselves to make small, incremental rent payments as a less-expensive alternative to land ownership.

The practice was especially popular in the years following the American Revolution. What little wealth had been built in America’s infancy was in many cases erased by the War and many who were previously landowners were forced to begin again from scratch.  Ground leases offered a post-war solution that required little initial investment, but afforded people with all the substantive perks of ownership, including a degree of sovereignty over their home.

The specific terms of these early leases were as arbitrary as they were various, but the popular practice was to set the leases to a term of 99 years with provisions for indefinite renewals thereafter so as to avoid the rule against perpetuities.

As the 99-year leases expired in the late 1800’s, only a very small percentage of them were actually renewed. The practice of drafting ground leases soon gave way to a higher rate of land ownership and more traditional landlord-tenant leases in which the landlord also owned the dwelling space.

Ground rents resurfaced in Baltimore following the Second World War as investors purchased much of the land left vacant by those fighting overseas and drafted ground leases for the properties. When the GI’s returned to settle down and raise families, there was an enormous demand for low-cost home ownership in the city and surrounding counties. Many who were initially unable to afford both the land and the home built upon it jumped at the opportunity for small annual payments on the land in exchange for a larger initial investment in the home. Many of these leases were also drafted to expire after a period of 99 years, hence the lingering prevalence in the area.

Modern Ground Rent Developments

In the present day, ground rent is commonly viewed as a dying, yet no less legally binding, vestige of Maryland’s colonial past. Almost all of the remaining national instances of ground rent are confined to the Greater Baltimore area, isolated areas of Pennsylvania, and most of Hawaii.

Despite the irregular nature of ground rent law, many of the same provisions apply as to normal landlord-tenant relationships. If one pays his or her ground rent, the ground leaseholder receives payment on land that they own, and in return the lessee (homeowner) continues to justify his or her dwelling on the property.

The legal treatment of ground leases has created a problem, however. Ground rent may be bought, sold, and passed to next of kin through wills, not unlike a home or a family heirloom. The leasehold interest in the property is considered personalty and is “governed by the law that directs the administration of personal estate” (Myers v. Silljacks, 58 Md. 319, 330 (1882)). Each time the ground leasehold interest is passed to someone else, the administrative tasks increase in the form of paperwork and sometimes through consultations with lawyers or court appearances. For this reason ground rent leases can become more burdensome than beneficial for the new leaseholders.

When the leasehold interests change hands, the new leaseholders occasionally may not seek out the lessees for payment. Homeowners are not required to make payments if leaseholders do not demand payment. This is a change from Maryland law prior to 2007, which put the legal burden on the lessees to find their ground leaseholders and make payments.

In recent years, according to articles in The Baltimore Sun during 2006 and 2007, several real estate firms and private entities have purchased thousands of inactive ground rents and tracked down the lessees for payment. As a result, some homeowners have been surprised to learn that their long-inactive ground leases are once again active and that in some cases they are considered delinquent in payment even though they hadn’t been notified by their ground leaseholder of the renewal of their debt.

Before Summer 2007, leasehold entities were entitled to sue the homeowners for all back ground rent, charge interest on the debt, and bill the lessees for the legal and procedural costs associated with finding what are often new names, new addresses, and other pertinent billing information. Sometimes, the homeowner is unable to pay such debts in the short time required, in which case the leaseholder in entitled to pursue a judicially-ordered ejectment from the home.

According to Maryland law at the time, a successful ejectment also meant that the leaseholder seized ownership of the home and all associated equity. Potentially, a lessee who defaulted in ground rent payment risked losing the home to the leaseholder, who could then sell the home at market value for a price significantly higher than the original ground rent fees.

Thousands of cases have flooded the Maryland civil court system during the past few decades, with the most frequent activity also being the most recent. According to The Sun, the period between 2000 and 2006 saw the highest rate of ground rent ejectment cases filed. Not coincidentally, that same period was also a time of exceptionally high housing prices, making the pursuit of ejectment more advantageous for leaseholders than in the decades prior.

Following a poignant and thorough investigative series in The Baltimore Sun in December of 2006 titled “On Shaky Ground,” the often-ignored ground rent system gained notoriety for the long-standing provisions in Maryland law that allowed enterprising investors to evict Baltimore homeowners, then seize and sell their homes over simple nonpayment of ground rent.

Sun investigations had turned up a particular case in which a family was forced to settle with the ground leaseholder to the tune of $18,000 or risk losing their home. Their back rent debt had amounted to all of $24 (Ground Rent case settled – for $18,000 The Sun 12/21/06).

The public response that followed The Sun’s ground rent series forced the Maryland General Assembly to make ground rent a legislative priority. The Assembly convened in January 2007 and began drafting emergency legislation to remedy the situation.

Ground Rent Rights and Responsibilities

The very first bill to come out of the General Assembly’s session was January 2007’s Senate Bill 106 and its twin, House Bill 172, which amended the Real Property Article to prohibit the creation of any new ground rents. Companion legislation introduced later in 2007 now prohibits ground leaseholders from collecting more than 3 years’ worth of back ground rent, thereby effectively closing the loophole that had previously disadvantaged Baltimore’s homeowners.

Title 8 of the Real Property Article, Maryland Code, prior to 2007, once entitled the leaseholder to seize the home and property as a remedy for nonpayment of ground rent, including all equity associated with the home. Today, the revised Code entitles ground leaseholders to a lien against the property for the amount owed, whereupon the leaseholder may foreclose upon the lien if the rent goes unpaid after a reasonable time. These foreclosure rights are not unlike that of a bank when it forecloses on a mortgage. The new laws are meant to ensure that when the lien is foreclosed upon, the homeowner retains the equity in his or her home despite the forfeiture of the property.

Perhaps the most progressive measure was Senate Bill 396, which further amended Title 8 of the Real Property Article and provided for the creation of a Ground Rent Registry System through the Department of Assessments and Taxation. Effective July 1, 2007, ground leaseholders have precisely 3 years to officially register their ground leases or face forfeiture of future collections on the leases. This system ensures that leaseholders and lessees have each other’s contact information so that collection problems need not arise through failure to receive payment notices.
Further, the bill shifts the burden to the leaseholder to give proper and timely notice to the lessee of his or her outstanding debts, or to provide an avenue by which the lessee can “buy out” the lease and become owner of the property in fee simple, thereby freeing the lessee from future payment.

Opposition to New Ground Rent Legislation

As of the registration deadline of September 25, 2010, about 85,000 ground rents had been registered with the State Department of Assessments and Taxation (SDAT). It is estimated that approximately 30,000 ground rents may have gone unregistered and were, under the law, subject to being extinguished.

On behalf of a coalition of displeased ground rent owners, attorney and ground rent trustee Charles Muskin has filed a suit challenging the constitutionality of Maryland’s new laws prohibiting new ground rents and forcing ground leaseholders to comply with the State’s registry requirements.

Muskin contends that the new legislation infringes on his rights as a property owner to seek appropriate remedy for delinquent renters. He also claims that the State’s mandates that he register his ground lease and pay the required administrative fees to the Department of Assessments and Taxation violate his rights under Maryland’s constitution.

On October 25, 2011, the Maryland Court of Appeals issued its decision. In the case, Charles Muskin v. State Department of Assessments and Taxation (No. 140 of September Term), the Court of Appeals ruled in favor of Mr. Muskin, ruling that allowing tenants to extinguish unregistered ground rents is an unconstitutional taking.

In addition to the Muskin case, another group of ground rent holders filed a lawsuit against the state in November 2007 over a different provision of the 2007 law, which prohibited ejectments for residential ground leases on properties of four units or less, and established a lien-and-foreclosure process when tenants owe at least six months’ rent. On February 26, 2014, the Maryland Court of Appeals issued its decision. In the case of State of Maryland v. Stanley Goldberg (No. 8, September Term, 2013), the Court ruled in favor of the ground rent holders, holding that “the ground leaseholder’s right of reentry must be viewed as an inextricable part of the bundle of vested rights which the Legislature may not abolish retrospectively.” In effect ground rent holders cannot be forced to file foreclosure actions in order to enforce their rights against the people living on the property.

Redeeming (Purchasing) Your Ground Rent

The ruling in the Muskin case does not affect the 2003 legislation permitting some residential ground rent tenants to redeem the ground rent. The State of Maryland currently regulates the purchase prices for ground rents using a special algorithm. It accounts for both the leasehold value of the property as well as the lessee’s yearly earnings so as to prevent the leaseholder from creating excessive monetary barriers to redeeming (purchasing) one’s ground lease.

Ground rent lessees may obtain information regarding the purchase of their ground lease through the Department of Assessments and Taxation’s Ground Rent Redemption Program. If the leaseholder’s address is unknown, the tenant must post in a conspicuous placelegal notice of his or her intention to purchase. The lessee has 30 days to comply or else forfeit future collections pursuant to the lease.

Should you wish to purchase your ground rent but are unable to afford it, the Maryland Department of Housing and Community Development offers a Ground Rent Redemption Loan Program through which income-eligible homeowners may redeem their ground rent.

Source: The People’s Law Library of Maryland (http://www.peoples-law.org/)

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