Thursday, August 24, 2017

A Declaration of future assessments is not a lien on real property

On August 16, 2017, Maryland's highest court decided Select Portfolio 
Servicing v. Saddlebrook West Utility Company , a case that centered on a long-running dispute among real estate and title lawyers- whether a developer's recorded declarations of future water and sewer charges creates a lien superior to later recorded deeds of trust.

Yes, real estate and title lawyers are pretty nerdy.

It is common for newly developed communities to fund creation of water and sewer facilities by periodic assessments. The future commitment of each lot owner is created and announced by written declarations that are recorded in the land records. The declarations are often recorded early in the development, often before any construction, and before the developer has sold off any lots to regular folks, like you and me.

When you or I buy a lot from the developer we take out a loan. The bank secures it's right to get paid by recording a deed of trust in the land records. This creates a lien on the lot. The bank expects it's lien to be in the first position, so that in the event of a foreclosure it takes all the proceeds of sale needed to pay of the underlying promissory note. Liens in lower positions get paid only if there is a surplus.

Over the years, assessments fall due to pay off the water and sewer construction costs. A portion of the assessment must be paid by me and you, as lot owners.

A failure to pay any assessment will trigger a statement of lien, recorded in the land records, for the amount of that payment. The lien can be foreclosed for up to 12 years after recording.

If you or I don't pay on the mortgage loan, the bank can foreclose, too.

But what lien is in the first position, and thus entitled to get paid first out of the proceeds of a foreclosure auction and sale? Some have argued that the assessments disclosed in the developer's declarations give the lien for unpaid assessments priority over the later filed bank deed of trust. Many more have argued that the bank's lien, evidenced by the recorded deed of trust, has priority over the declarations.

In the Select Portfolio case, both the trial court and the intermediate appellate court reached the wrong conclusion- that the water and sewer assessments trumped the later created bank lien. They reached this conclusion by treating the declaration as a "lien," rather than as notice of future charges that could result in liens.

The highest court, the Maryland Court of Appeals, reversed the case, finding that the bank's lien has priority over the liens for assessments. The reasoning is simple, and entirely consistent with already established law.

Quite simply, the declaration recorded by the land developer is merely notice of future assessments. But the path from declaration to bill to lien for unpaid bill must run through the Maryland Contract Lien Act. It is by recording a notice of lien according to the Act that the assessment announced  in the declarations becomes a lien.

It is only through the act of recording that the lien gains relative priority.  If the notice of lien is recorded after a bank lien, then the bank has the first lien position. The road to a lien for unpaid assessments runs only through the Maryland Contract Lien Act.

It only took the courts five years to get here. Amen.