Legal

If you acquired your Maryland home via an instrument titled “Deed of Assignment”, you hold a “leasehold” interest in the property. Someone else actually owns the ground that your house sits on. A system in which there are two chains of title to a property (the leasehold and the fee) is a bit strange but things have worked this way in certain parts of Maryland since the mid-1800s. The leasehold form of ownership requires you to make rent payments (typically on a semi-annual basis) to the owner of the ground. Should you you fail to make the payments you could lose your interest in the property via a court case brought by the ground rent owner to “eject” you and in so doing extinguish your lease. To stop having to pay the ground rent owner each year, Maryland law provides that you can redeem (buy out) the ground rent at any time*.

*Of course every rule has exceptions. If the ground lease to your property was created prior to 1884, and the ground rent owner has taken certain steps (registration of the ground rent and periodic preservation notices recorded in the land records) the ground rent may be irredeemable, meaning that you would not have the right to buy it out. However, the pool of irredeemable ground rents is so small that this is likely not the case… so let’s assume that you can redeem your ground rent.

In redeeming the ground rent you will be changing the interest you own from leasehold to fee simple by “merging” the leasehold and fee interests. Two chains of title become one. This is done thru a 3 step process — (1) paying the owner of the ground the redemption amount set by statute; (2) obtaining a signed ground rent redemption deed from the ground rent owner; and (3) recording that deed among the land records. Let’s go over each step.

1 – calculating the redemption amount. The dollar amount required to be paid to the ground rent owner is based upon a calculation determined by 2 elements — the amount of annual rent you pay and the date the original ground lease was created. Here is a link to the section of the Maryland Code where the calculation is found:

https://law.justia.com/codes/maryland/real-property/title-8/subtitle-8/section-8-804/

Let’s say your ground rent is $90 per year and the lease was created in 1950. By reading the Code section above, you would see that the cap rate for this lease is set by statute at 6 percent (6%). And here is the math: 90 divided by 0.06 = 1500. $1500 or thereabouts is a fairly common redemption amount.

2 – obtaining the signed ground rent redemption deed. Every ground rent, in order for the rent to be collected legally, must be registered with the State Department of Assessments and Taxation. In the unlikely event you don’t have the contact information for the person who owns your registered ground rent, you can find it on the ground rent registration form on file with SDAT. Once you have it, simply reach out to the ground rent owner and say you want to redeem the ground rent. They will be happy to take your money (they’ll need the rent paid current as well as the redemption $), sign the merger deed, and stop dealing with the periodic billing and collections — trust me on this. You’ll want to retain an attorney (such as our real estate law firm) to properly prepare and record the redemption deed. There is a link to do so below.

3 – recording the deed. In order to record a ground rent redemption deed, recordation and transfer taxes will be due to the state and county, just like they are with any deed to property. These taxes are based on the redemption amount, so they should not be significant. Also most Maryland jurisdictions do not require a lien certificate in order to record a merger deed.

So the costs to redeem a registered ground rent are the redemption amount (as calculated above) + the $60 recording fee to the clerk + recordation / transfer taxes + deed prep. If you would like an estimate to to engage us to handle the redemption for you, complete the form here.

In a future article we’ll discuss how to deal with redeeming ground rent that is not registered. That scenario requires an entirely different framework to be be followed, is slightly more expensive, and takes much longer.

All 3 of the top 3 reasons your closing isn’t actually going to close relate to the seller being unaware of liens on the property (or unaware of the true payoff amounts).

Reason 1: Loan modifications. When someone gets a loan modification, they are often unaware of the new second mortgage that becomes attached to the property as a result. Many owners are understandably eager to complete the loan modification process and reduce their monthly payment, but they don’t actually understand what they are agreeing to. No, the lender doesn’t just lower the rate and monthly payment… more often than not there is a federal program that allows the loan mod to happen. Through the modification process, the original loan balance and the monthly payment are reduced… but those funds are not forgiven — they don’t just disappear. Instead, a portion of the principal amount due under the first mortgage is taken away and a second note is created which is secured by a junior, federally insured mortgage, in that amount. There are no monthly payments on this second mortgage, and no interest accrues on the balance. However, the second is a lien on the property that must be paid in full when the property is sold or refinanced. Since they haven’t been making payments, sellers can forget about the open second mortgage when they sell. And when they sign a sales contract for less than is owed, the deal can fall apart late in the title process. If you want to learn more about this topic, search for HUD partial claim mortgages.

Reason 2: Lender write-offs/charge-offs. During the great recession of ~2008, most residential property values plummeted. Owners who had purchased their properties using high leverage (for example, using 100% financing via an 80% first mortgage and a 20% second mortgage), found themselves way underwater. Many simply stopped paying the second mortgages… and lenders stopped pursuing them for payment. Eventually those second mortgage lenders faced a tough decision — either foreclose their junior lien on an upside-down property (not smart) or write off the debt. Writing off the debt was an easier, less costly decision. Many owners, however, did not understand that the second mortgage, even though the lender was no longer trying collect, was still a valid lien against the property. These non-performing seconds were often sold for pennies on the dollar to creditors. Yes, they are still accruing interest and yes, they still need to be paid off. Charged-off and forgotten second mortgages can be a grenade waiting to blow up your transaction.

Reason 3: Old judgments and liens. Depending upon where the property is located, a judgment may be a lien against real property interests of the owner for twenty or more years. And certain liens — such as some state tax liens — they never expire. So for a seller who has held a property for a long time and has forgotten about old debt, things like this can ruin a planned settlement. The interest rate on judgments can be 10 percent or more (check local law on post-judgment interest) so with an unexpired judgment lien from 10-20 years ago, the seller may be facing a payoff that is now double or even triple the original amount. That can be a shocking disappointment when discovered after going under contract… because it can create a scenario where the seller is unable to close.