In Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, LLC et al, the Court of Appeals of Maryland considered a Real Estate Developer and its private Utility Company’s assertion of a lien for water and sewer infrastructure costs under a Declaration recorded in the land records.
The Court determined that the Declaration providing for annual assessment payments to finance the Developer’s construction of such infrastructure did not create a lien itself. Rather, the Declaration authorizes the establishment of a lien pursuant to the Maryland Contract Lien Act, Md. Code, Real Property §14-201 et seq. (“MCLA”), which sets forth procedures to obtain and enforce a statement of lien after a respective homeowner fails to pay the required assessment. “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.” Op. at 26.
Consequently, the recorded Declaration itself was not a lien, and therefore was not entitled to priority over a deed of trust.
A copy of the opinion is available here.
To finance the construction of water and sewer facilities for its subdivision of single-family homes, Real Estate Developer recorded a Declaration in the land records providing for the payment of 23 annual assessments by each lot within the subdivision, and that its provisions would run with the land. The Declaration itself provided that each lot owner agreed to pay annual water and sewer charges to Utility, and purported to grant Utility a lien to secure payment of the assessment. The Declaration further provided that the lien would have priority from the date of recording the Declaration in the land records over any subsequently recorded lien, deed of trust, or mortgage. The Declaration also provided that if the lot owner failed to pay the assessment, Utility may foreclose the lien under the MCLA, and granted Utility a power of sale that could be exercised in the event of foreclosure. The Declaration did not state the value of the lien it sought to create.
Developer then completed construction of the water and sewer infrastructure and sold the lots to a builder, who built and sold homes to individual homeowners, to whom Builder disclosed the Declaration and required annual assessments. See Op. at 7.
As to one such lot, which is the subject Property of the appeal, the homeowner failed to pay the first two annual assessments, resulting in Utility recording two statements of lien against the Property. Thereafter the Property was sold to a subsequent homeowner, who encumbered the Property pursuant to a deed of trust in favor of Lender.
Utility commenced a foreclosure proceeding against the Property relating to unpaid water and sewer assessments based upon the Declaration itself, rather than the two statements of lien it had obtained against the Property. Utility later voluntarily dismissed the foreclosure (presumably without prejudice) after Lender filed a separate declaratory judgment action, underlying the subject appeal, to seek determination that the Declaration itself did not create a lien with priority over the Deed of Trust, noting that if did, Developer would have had to pay approximately $60,000 in recordation and transfer taxes, and would need to have filed statements of lien under the MCLA.
The Circuit Court and the intermediate appellate court disagreed, and held that the Declaration itself constituted a valid, enforceable first priority lien, and therefore enjoyed priority over Lender’s Deed of Trust. Lender obtained certiorari in the Court of Appeals, which reversed in a reported decision.
The Court of Appeals held that the Declaration could not create a lien without following the procedures of the MCLA. The Court noted that the MCLA was “designed to establish procedural rules that comported with due process for establishing, enforcing, or denying a lien based on a contract.” Op. at 22.
As to the scope of the lien, the Court explained: “[t]he [MCLA] addresses the creation and enforcement of a lien on real property arising from a breach of contract” that either runs with the land or is recorded in the applicable land records. Op. at 19-20 (citing RP §14-201(b)(1)). As an aside, the Court noted that such contract includes a declaration or bylaws under the Maryland Condominium Act or Maryland Real Estate Time-Sharing Act. See Op. at 20, n. 22.
The Court summarized the statute's provisions for the creation and enforcement of a lien as follows:
- – There must be a contract or covenant running with the land recorded in the land records. (RP §14-201(b)).
- – The contract or covenant 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. (RP §14-202(a)).
- – Upon breach of the contract or covenant, the party seeking to create the lien must provide notice to the property owner of the claimant’s intent to impose a lien and, after following the Act’s procedures, record a statement of lien that secures the damages resulting from the breach and related expenses. (RP §14-203).
- – The party seeking to enforce the lien may then foreclose on the lien in the same manner of a deed of trust. (RP §14204).
Consequently, recordation of the Declaration itself does not establish a lien. “Rather, [t]he 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.” Op. at 26.
“The Declaration may be a contract for purposes of the Maryland Contract Lien Act, and, as required by RP §14-201(b), recording the Declaration was an essential step for establishing a lien under the Act. But the Declaration itself is not a statement of lien and, unless Utility follows the procedures set forth in RP §14-203 (as it did on two occasions with respect to the Property), it does not have a lien under the Act for unpaid assessments.” Op. at 27.
The Court also rejected Developer and Utility’s argument that the Declaration constituted a lien under the common law, the Maryland Rules, or based on public utility legislation shifting the responsibility for the construction of water and sewer infrastructure from the governmental entities to private developers. The Court observed the absence of any authority for a common law right to create such a lien that is not a deed of trust, mortgage, or land installment contract (which are excluded from the purview of the MCLA). See Op. at 27. Further, the Court rejected the creation of a lien under the Maryland Rules, noting that “[t]he adoption of rules of procedure is not an occasion for the creation of substantive law concerning interests in real property and, even if it was, the rules in question govern the procedures for foreclosure of a lien, not the creation of the lien.” Op. at 28. As to the public utility argument, the Court noted that Developer was not a governmental entity, and therefore declined to equate the Declaration with a “front foot benefit assessment” charged by a governmental entity. See Op. at 29.
Accordingly, the Court concluded that the Declaration itself did not create a lien on the Property and reversed the Court of Special Appeals’ holding.