Ground Rents and the U.S. Constitution
Posted by Jim Walsh on Wednesday, September 29, 2010
The Baltimore Sun reminds its readers in today’s edition that ground rents that are not registered with the State of Maryland will soon be extinguished. Ground rent owners must register in person by Wednesday, 9/29/10, or postmark their application before Thursday, 9/30/10.
As the Sun reports: “Ground rent dates to Colonial times in Maryland and was used by rowhouse developers in the 20th century as a way to make purchases more affordable. But a Sun series in 2006 found that a handful of investors seized hundreds of homes over unpaid bills, reselling them and legally keeping the proceeds. Some of the homeowners said they never received the bills. Intent on reform, the General Assembly passed laws that prohibited such ‘ejectments,’ barred new ground rents and required registration of existing ones.”
Technically, the holder of the ground rent actually owns the property, and leased the property (in perpetuity) to the occupants commonly thought of as the owners of the property for what now seems to be a nominal amount. The typical ground rent in the Baltimore area calls for payments of less than $100 per year payable in semi-annual installments. If the semi-annual rent was not paid, the ground rent owner could go through a legal process to eject the “tenants”, which made the ground rent safe because it operated as a kind of “super mortgage”, being even ahead of the “tenants’” mortgage lender. The typical ground rent could be redeemed at a 6% capitalization rate, i.e., the tenant of a $90/year ground rent could get rid of it by paying the ground rent owner $1,500 ($90/6%).
I personally have never been a big fan of ground rents. A number of my clients own one or a handful of ground rents. Although they offer an attractive yield in today’s market, they are a pain to deal with. Unless the homeowner was willing to redeem the ground rent, the only way to get rid of them was to sell them to investors who would buy them at a substantial discount (maybe $750 for our sample ground rent). A handful of investors bought up hundreds or even thousands of ground rents in the Baltimore area, and brought the full force of contract law down on some delinquent homeowners, charging excessive fees for ground rent payments that were somewhat late, and ultimately even regaining outright ownership of some properties when the “tenant” did not cure the defect in the mandated time.
The General Assembly responded to the Sun’s series by passing legislation that (1) prohibited the creation of new ground rents, (2) eliminated completely the ground rent owner’s right to a eject a delinquent tenant, and (3) required that all existing ground rents in Maryland be registered in a central registry by 9/30/10 or be forever extinguished. I don’t dispute that there were abuses that should have been addressed, but as in often the case the politicians in Annapolis over-reacted. I see no problem with the prohibition against new ground rents, but I do have a problem with the General Assembly completely taking away the ground rent owners’ ability to enforce their rights.
As I recall, there is this inconvenient thing called the U.S. constitution that prohibits any state from passing any “Law impairing the Obligation of Contracts” (Article I, section 10), which is exactly what Maryland has done. In addition, the Fifth Amendment (among its other prohibitions) provides that no person shall be deprived of “life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation.” It sure looks to me that the Maryland General Assembly has taken away property from ground rent owners without any trial or compensation. For the owner of a single ground rent that might be worth only $750 to begin with, it doesn’t make sense to spend tens of thousands of dollar to fight this fight on principle. And the ground rent owners who own enough ground rents to make such a fight worthwhile are the unsympathetic characters whose abuses were exposed by the Sun. It looks like another bite at our Constitutional rights.