Maryland Real Property Developers: Make Sure You Create a Lien Before You Try to Impose It
A document that notifies a real property owner of a lien does not necessarily create that lien, according to an opinion recently issued by the Maryland Court of Appeals.
The opinion, written by Judge Robert N. McDonald, is in the case of Select Portfolio Servicing, Inc., v. Saddlebrook West Utility Co., LLC, and concerns a dispute over deferred financing for the construction of a residential subdivision’s water and sewer infrastructure. Respondents Saddlebrook West (“Saddlebrook”) and Saddlebrook West Utility (“Utility”) claimed that a document they had executed in 2000, prior to construction of the infrastructure, imposed an annual fee on future homeowners and established a lien on all 187 lots in the residential development. Respondents contended that their interest in the property had priority over that of the Petitioner, a holder of a deed of trust that arose out of the financing of one of the homes in the aforementioned development.
Reversing a lower court’s decision, the Court of Appeals held that while the Respondents’ document authorized the creation of a lien, it did not in and of itself establish a lien pursuant to the Maryland Contract Lien Act.
Saddlebrook and Utility recorded a “Declaration of Deferred Water and Sewer Charges,” the document in question, in the Prince George’s County land records on May 17, 2000. Because, as the opinion states, “the priority of a lien is determined by the date it is recorded in the land records,” Respondents would indeed have had priority—had they complied with Maryland law.
As it stands, no lien between the homeowners and Saddlebrook and Utility exists. The Declaration could have functioned as a lien instrument—that is, it could have authorized the eventual establishment of a lien—but it did not follow the necessary legal procedures in the state of Maryland to create a lien, and is therefore unenforceable. Additionally, no recordation and transfer taxes had been collected at the time the Declaration was filed.
The court ruled that Saddlebrook and Utility had misread and misunderstood the Maryland Contract Lien Act, specifically regarding the section (Real Property, 14-202) that stipulates that a contract “must expressly provide for the creation of a lien, identify the party entitled to establish and enforce the lien, and identify the property against which a lien may be imposed.” In the view of the court, Respondents were selectively ignoring this section’s relation to the rest of the statute.
Writes Judge McDonald (emphasis added):
“Under the view of Saddlebrook and Utility, RP §14-202 allows for creation of a lien simply by virtue of the existence of a contract without any need to follow the procedures set forth in the remainder of the Act. The dichotomy that Saddlebrook would read into the statute is inconsistent with the statutory language. The statute specifies that a lien is to secure ‘damages’ and related costs – i.e., the monetary remedy for a breach of contract. Thus, a lien under the statute always relates to a breach of the contract. A lien is not created on the date of the recording of the contract because presumably it has not yet been breached and there are no damages to secure.”
This case highlights the importance of a disciplined process in real property documentation, and should serve as a reminder to all land developers to consult with an experienced attorney when drafting lien instruments and related paperwork. In the words of Judge McDonald, “just because a document says something is so does not make it so.”
ABOUT TRACIE CLABAUGH
Tracie Clabaugh assists real estate developers, homebuilders, lenders and homeowners with a wide variety of real estate transactions and land use and zoning matters.
Tracie prepares, reviews and negotiates various types of commercial and residential real estate contracts and leases. She also drafts documents related to homeowner associations, disclosure documents for builders and developers, corporate documents for homeowner associations, deeds, deeds of trust, promissory notes, commercial contracts of sale, forbearance agreements and other real estate related agreements and instruments. She reviews title work and provides title opinions, reviews improvement plans, engineering plans, detailed site plans and surveys for real estate transactions, performs due diligence and manages community reviews for builders and developers. This work includes, but is not limited to, updating homeowner association disclosures, preparing necessary easement agreements and working with municipalities and County governmental entities in order to obtain the required subdivision approvals.
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