Gimer Law

MD and DC real estate law

Legal

The top 3 reasons your closing isn’t happening

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.

Surveys: an overview

As a buyer you may not be required to obtain a survey. However, if you decline a survey, the owners title insurance policy issued to you will exclude coverage for any matters which would have been disclosed by a survey. In that case you would not have title insurance (or legal defense) to respond to a boundary dispute, encroachment, or other survey-related problem.

Choices

For most residential property purchases, the buyer must choose whether to obtain (1) a location drawing, (2) a boundary survey, or (3) neither.

With commercial properties, upgrading to an ALTA/ACSM survey is the most common way to protect the significant investment that a commercial purchase often represents.

Differences between these survey types are outlined below.

Survey Types

Location Drawings

A location drawing is a quick and inexpensive survey of the property and the most common type of survey conducted in connection with residential property resales. This drawing locates the property lines and all improvements on the lot. A location drawing is the minimum required to satisfy the needs of the lender and title company to remove the survey exception; however, it does not establish the actual, true property lines or corners of the property, and it cannot be relied upon for construction. The cost of a location drawing is $200+, depending upon the size and complexity of the land.

Boundary Surveys

A boundary survey takes longer and is more expensive than a location drawing. Boundary surveys locate the actual, true property lines and corners or the property, as well as the location of any building setback lines or easements for utilities, driveways, sidewalks, etc.. The property corners are marked by the surveyor. A boundary survey can be relied upon to accurately erect fences or other improvements on your property. The cost for a boundary survey is $1500+.

If you plan to make any improvements to your property (such as a garage, fence, addition, etc.) it would be a good idea to order a boundary survey.

Boundary surveys are not nearly as comprehensive as ALTA/ACSM surveys.

ALTA/ACSM Surveys

ALTA/ACSM surveys are the standard for commercial property purchases. ALTA/ACSM surveys meet the highest standards recognized throughout the industry and they provide information including property boundaries; easement and encumbrances; encroachments; evidence of use by other parties; names of neighboring property owners; land improvements; roads and property features; access and legal routes to the property; zoning classification; flood zone classification; water boundaries; existence of cemeteries; legal property description.

The cost of an ALTA survey starts in the thousands of dollars. If you need an ALTA/ACSM, we can obtain quotes for you, but you will need to contract with the vendor directly and a deposit will likely be required.

Timing

A location drawing can be completed in under a week; a boundary survey will take a longer; and an ATLA can take considerable time. Actual time to complete any survey will vary depending on the complexity of the property as well as market demand.

Ground rent: an overview

This post should provide some good background information about Ground Rent to potential buyers who are not familiar with how ground rents work.

Leasehold estates

A property that is subject to ground rent is referred to as a leasehold estate. How does a property become leasehold? At some point in the chain of title, a fee simple property owner creates and records a ground lease, taking on a long-term tenant. Ground leases are typically 99-year leases which renew in perpetuity (forever) when the rent is paid. Ground rent payments are most often made in two semi-annual installments, each 6 months apart with the due dates depending upon when the ground lease was created.

Surprise, the property you are interested in has ground rent

When it is discovered that a property is subject to ground rent, some buyers become concerned. They really shouldn’t be. Ground rents have been in existence in Maryland and elsewhere since the mid-1800s. Leasehold property owners may technically have a landlord, but the lease does not contain any rules or regulations, just a promise to pay the rent. And except to the extent there are covenants, conditions and restrictions (CCRs) recorded among the land records, the property can be freely used just like a fee simple estate. For example, leasehold properties can be pledged as security for mortgages; and they can be refinanced and re-sold like any other real estate, with no limitation on the number of transfers or any landlord notice or approval requirements. Settlements on leasehold properties are just like those on other properties except for the instrument of conveyance is an Assignment (or Deed of Assignment) wherein the seller assigns the new buyer its rights under the ground lease. This gets recorded in the land records just like other deeds. Also, ground rent is prorated as of the settlement date. Ground rents are paid in arrears, meaning the rent you pay now covers the prior 6 months.

Registration and collection

Ground rents now need to be registered with the state to enable the owner of the ground to collect rent. So while a property may be still technically a leasehold estate and each subsequent transfer will be a transfer of the leasehold interest, if the owner has not registered the ground rent, there can be no ground rent collected. Why wouldn’t a ground rent owner register the ground rent? The registration requirement is relatively new. So when the owner of a ground rent dies, if the rent is not registered, his or her heirs will be unaware of the existence of the lease. So the right to collect rent essentially dies with the decedent. If the owner of a registered ground rent is unable to be located at the time of a transfer of the property, three years of rents (the maximum amount allowed to be pursued by the owner of a ground rent for past due rent) are collected and held in escrow. An additional $650.00 is escrowed above and beyond the three years to cover potential attorney fees and costs of collection. As of October 1, 2020, this escrow is not required for an unregistered ground rent.

What happens if you don’t pay ground rent?

Most ground rent owners will take action. They will make written demand for the rent and, if it remains unpaid for several months, they will then hire an attorney and pursue an action for ejectment. This is essentially an eviction and the landlord, if successful, will retake possession of the property and the lease will be extinguished. Since everyone with an interest in the property (such as a lender) must receive notice of the suit, most ground rents get paid before possession of the property is lost and lender liens extinguished. Most ground rents of residential properties are of modest amounts — $30-$300 annually — but additional fees and expenses will also become due if the process gets that far.

Buying out the ground lease

If you’re not interested in paying ground rent forever, you don’t have to. The process of buying out ground rent (extinguishing the lease and returning the property to fee simple) is called “redemption”. Maryland law provides for the right of redemption (except in the case of irredeemable ground leases — quite rare) by the leasehold title owner at any time upon 30 days notice. The ground rent owner’s interest is said to merge with that of the lessee when a Ground Rent Redemption Deed is executed and recorded in the land records and the leasehold is extinguished. The purchase price for the ground (redemption amount) is fixed by Maryland law at a capitalization rate dictated by statute, based upon the annual rent and the date the lease was created. Just pay for a GRR redemption deed to be prepared, add transfer and recordation taxes based upon the redemption amount plus the deed recording fee and the property will be yours in fee simple.

Judgments and liens

A property which is subject to a ground rent is treated the same as a property which is not subject to a ground rent as concerns judgmens, liens and title searches. The documentation which is provided by the title company differs only in the wording of the estate on the commitment, which will read “Leasehold” rather than “Fee Simple” plus the amount and due dates of annual rent are included. The lease itself appears as an exception on Schedule B, Section II of the title commitment and the final title policy. This is necessary because a lease is a related collateral document that runs with the land just as in the case of covenants, conditions, restrictions, etc. Judgments and liens attach to leasehold interests the same way as fee simple properties.

Hopefully this information proves helpful to you in your analysis of transactions involving leasehold properties. Please do not hesitate to reach out to me if you should require any clarification or additional information on this subject.