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Maryland Court Grants Lien Priority to Lenders over Private Infrastructure Assessments

Commercial Lending Bulletin

The Maryland Court of Appeals recently ruled that lenders have lien priority for purchase money deeds of trust over privately financed infrastructure assessments established by a prior declaration.

The case, Select Portfolio Servicing, Inc. vs Saddlebrook West Utility Company, LLC, arose out of an attempt by a developer to enforce its lien for the construction of water and sewer infrastructure as a first lien against the property, superior to a subsequent purchase money lender.

Background

The developer entered into an agreement with the Washington Suburban Sanitary Commission (WSSC) to assume responsibility for construction of water and sewer facilities for a residential development. The developer filed a declaration in the land records, which provided that the expense for installing the water and sewer connections would be passed onto the future homeowners as an annual assessment, creating a lien to secure such obligations.

The developer initiated a foreclosure proceeding under the Maryland Contract Lien Act after the homeowner failed to pay the assessments. The developer contended that because the declaration pre-dated the recording of the purchase money deed of trust, its lien had priority over the deed of trust, and it could foreclose on that lien under the Act.

The developer likened its lien to the lien for deferred water and sewer charges afforded WSSC when it undertakes the construction of water and sewer. Those deferred charges are included in a homeowner’s real property tax bill and take priority over any other liens of record. The lender argued that the declaration is merely a notice instrument, affording the developer the ability to create a lien in the future by filing a Statement of Lien and enforcing its rights under the Act.

The Court Decisions

While the lower courts ruled in favor of the developer and granted “super lien” status to the developer’s lien, determining that the lien was created upon the recordation of the declaration, the appellate court reversed the decision.

The appellate court ruled that the declaration is akin to a “contract” creating an obligation for the homeowners to pay the annual assessment, but not granting the developer any lien rights until there is a breach of that “contract” by non-payment of the assessment. At that point, the developer may seek to create a lien under the Act for the unpaid assessments.

The court ruled that even though the declaration attempted to establish the lien as a priority lien, the declaration did not create the lien itself and the developer was required to follow the procedures under the Act to establish its lien once a homeowner breaches its obligation to pay the assessment. Thus, unless the developer files a Statement of Lien prior to a lender’s deed of trust, it will have a lower priority than deed of trust liens of record.

What’s Next

While this opinion is a relief to lenders and title companies insuring transactions, it does highlight the need for lenders to understand what potential liens may affect the property they are financing. Under the Act, a lien holder has 12 years to commence an action to foreclose after a Statement of Lien is recorded.

As more developers finance and build their developments’ water and sewer infrastructure, it is prudent for a lender to carefully review the exceptions recorded against a property it is securing to determine whether any assessments may exist and whether a Statement of Lien has been filed. Then, prior to closing, a lender should confirm whether the owner is current under its obligations to pay such assessments. Lenders can also decide to escrow for the payment of these assessments if they are collecting real estate tax escrows.

Alison Rind is a commercial lending and real estate attorney who represents commercial lenders in loan transactions and other commercial matters, including participants in SBA and other government-guaranteed lending programs. She chairs Lerch Early’s Commercial Lending practice. For more information on financing property with privately financed infrastructure assessments, contact Alison at awrind@lerchearly.com or 301-657-0750.

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