March 8, 2011
In This Issue:
- Deed in Lieu of Foreclosure Executed Before a Default is Invalid
- Corridor Cities Transitway (CCT) System Gaining Momentum
- Remember to Work on the Work Letter
- New Legislation Extends Timetable for Foreclosures in Maryland and D.C.
- Find Additional Real Estate and Land Use Information at Lerch Early's New Website
Deed in Lieu of Foreclosure Executed Before a Default is Invalid
The Maryland Court of Appeals recently held that a deed in lieu of foreclosure, executed before a default, is invalid because it clogs the borrower’s equity of redemption.
The case of C. Phillip Johnson Full Gospel Ministries, Inc. v Investors Financial Services, LLC involved a loan made in Maryland to a Maryland borrowing entity where the borrower executed, at the initial closing, both a deed of trust encumbering property in Virginia and a deed in lieu of foreclosure to the lender conveying the same property to be recorded only following a default. Because the case involved a Maryland loan contract and Virginia foreclosure law, the Maryland Court of Appeals analyzed the validity of the deed in lieu of foreclosure under both Maryland and Virginia law.
While the deed in lieu was executed at the time of the loan closing, the loan documents provided that the lender would hold the deed in escrow and not record it until the borrower had missed two payments and had not made satisfactory payment arrangements. The court ruled that the deed was invalid because it had the effect of cutting off or “clogging” the borrower’s equity of redemption – a borrower’s right, in the event of default, to tender payment in full at any time prior to foreclosure and retain title to the property. The court of appeals reviewed the long history of courts finding that an agreement created contemporaneously with a mortgage that impairs the mortgagor’s right of payment is ineffective. This analysis was consistent under both Maryland and Virginia law. Under Maryland law, the court found additional statutory support for its ruling in Section 7-101 of the Real Property Article of the Maryland Code, which states that every deed appears to have been intended only as security for payment of an indebtedness or performance of an obligation, though expressed as an absolute grant, is considered a mortgage.
C. Phillip Johnson Full Gospel Ministries, Inc. v Investors Financial Services, LLC, No.115, September Term 2008.
Corridor Cities Transitway (CCT) System Gaining Momentum
The Corridor Cities Transitway (CCT) continues to gain speed on the long road of potential approval, funding, and ultimately construction.
The CCT is a proposed transitway system being studied by the Maryland Transit Administration (MTA) that would extend north from the Shady Grove Metrorail Station in Rockville to COMSAT, just south of Clarksburg in Montgomery County. It would cover approximately 15 miles and have approximately 15 stops. The CCT is expected to carry between 30,000-40,000 riders daily depending on the ultimate alignment and mode. The system takes its name from the corridor cities along I-270 that it is designed to serve: Rockville, Gaithersburg, Germantown, and Clarksburg.
The CCT system is proposed to be either Light Rail Transit (LRT) or Bus Rapid Transit (BRT). Each transit mode would operate on an exclusive guideway (either an exclusive set of tracks for LRT or dedicated lanes for BRT). The advantages of a LRT system include greater passenger volume if multiple-car trains are used, a smooth ride, and less noise (typically, LRT vehicles are powered by electricity and use an overhead source of power). The advantages of a BRT system include versatility (the buses can leave the dedicated lanes to serve local destinations as needed) and lower capital cost. In rough numbers, a BRT system is projected to cost approximately $500 million while a LRT system would cost approximately $1 billion.
The CCT is widely regarded as a critical component of future economic development in Montgomery County. The recently adopted Master Plans for Germantown Town Center and the Great Seneca Science Corridor have phasing elements that are dependent on the CCT. The project has been part of the County’s planning efforts since the 1964 General Plan for Montgomery County, and the county has been reserving the right of way. On November 30, 2010, MTA released the Supplemental Environmental Assessment (SEA) that focuses on proposed alignment modifications near Crown Farm, the Life Sciences Center, and Kentlands in Gaithersburg, and other new developments since the last environmental assessment. The proposed realignment through the Life Sciences Center would create a loop serving Shady Grove Adventist Hospital, the Universities at Shady Grove, the emerging Johns Hopkins University campus, a redeveloped county public safety training academy site and other businesses. On December 15, 2010, MTA conducted a very well attended open house and public hearing in Gaithersburg to solicit comments on the SEA.
MTA next will make a recommendation to the governor followed by the governor’s announcement of the “Locally Preferred Alternative” that expresses the preferred alignment and mode. The project then can be submitted for federal funding under the FTA’s New Starts Program. If approved by the FTA, the project could begin preliminary engineering. The timing of the project will depend on funding, but under a best case scenario, construction could begin as early as 2015.
For more information on the CCT visit www.mta.maryland.gov/cct. For any questions on this article, please contact Stuart Barr, who serves on the Corridor Cities Transitway Coalition board of directors. Stuart can be reached at 301-961-6095 or at srbarr@lerchearly.com.
Remember to Work on the Work Letter
Landlord and Tenant have spent hours negotiating the essential business and legal terms of the new lease: rent, Common Area Maintenance charges, insurance, assignment and sublease provisions, maintenance responsibilities, and default triggers. All of these essentials are laid out in the body of the fifty-page lease document. The parties glance at the few pages of exhibits at the end, one of which is entitled “Work Letter.” Tired and eager to sign up, they thumb through the exhibits, sign the lease, and congratulate each other on a done deal. What are the chances that anything will go wrong?
The answer is “plenty” if the work letter is not given thoughtful consideration. Unless the tenant is taking its space “as is,” the lease will likely contain a work letter component. Basically, the work letter or work agreement is a separate construction agreement within the lease that governs the respective responsibilities of the parties for the build-out of the new tenant’s space. For example, the work letter assigns responsibilities for preparation of construction plans, funding of construction costs, and timeframes for completion. Frequently, the commencement of the lease term and rent payment obligations are also tied to completion of the build-out work. If these details are neglected, the parties may face unanticipated costs, delays and other misunderstandings, laying the groundwork for an uncomfortable, if not litigious relationship.
What basic points should be addressed in the work letter? Fundamental topics include:
- Who is performing the build-out work (landlord, tenant or both)?
- What is the scope of the work? Are there any base building items included for “free”? What is the sequencing of the work? Will landlord charge a construction management or oversight fee?
- Who is paying for the build-out work? Will Landlord provide an allowance, and if so, how much and what costs are included? What is the mechanism for paying the allowance?
- What happens if the allowance is not fully spent?
- How and when will excess costs be paid? Will either party require separate security for their payment obligations?
- Who selects the architect and contractor? How many, if any, bids will be solicited?
- What is the timing and process for preparation, review and approval of construction plans? How are change orders handled?
- What happens if there is a delay? What constitutes a “tenant delay”?
- How will disputes be handled?
- When are the improvements deemed completed? What is the definition of “substantial completion”?
- What is the mechanism for final inspection and acceptance of the project? When will punchlist items be completed?
Depending on the nature of the facility (office building, retail or warehouse) and the nature and extent of the build-out work, other issues may arise. In order to avoid unnecessary costs, delays and headaches, the work letter should be carefully considered and crafted from the outset of lease negotiations..
New Legislation Extends Timetable for Foreclosures in Maryland and D.C.
This past year, both Maryland and the District of Columbia enacted legislation that imposes new mediation and other requirements on lenders prior to beginning foreclosure proceedings on residential real property. The result is that foreclosure actions that used to take 30-45 days may now take up to 12 months to process.
Loss Mitigation Analysis Required in Maryland
In Maryland, new mediation procedures were added to the foreclosure statute. Prior to filing a foreclosure action of owner-occupied residential property, a lender must conduct a loss mitigation analysis determining whether the borrower qualifies for loan modification or, if the borrower does not qualify for modification, whether there are any other loss mitigation programs available to the borrower, such as taking a deed in lieu of foreclosure or a short sale of the property. The lender then must include a loss mitigation application in its notice of intent to foreclose on the residential real property.
Once the lender files the foreclosure action, a new notice is sent to the borrower indicating that the foreclosure sale can occur anytime after 45 days of the notice. For owner-occupied residential property this notice provides that if the lender determines the borrower was not eligible for loan modification or other relief, the borrower may request a foreclosure mediation (within 15 days of receipt of the notice). If the lender does not complete a final loss mitigation analysis at the time of the foreclosure action filing, the lender must provide it to the borrower prior to scheduling a foreclosure sale. The borrower then will have 15 days from receipt of the final loss mitigation analysis to request mediation. The court will transmit the borrower’s request for mediation to the Office of Administrative hearings, which can schedule the mediation within 60 days (although the Office may extend time for good cause for another 30 days). The foreclosure sale cannot occur until at least 15 days after the mediation.
The effect of this new legislation further extends the timetable to foreclose on owner-occupied residential property. A process that used to take 30 to 45 days now potentially can take six to 12 months.
District of Columbia Now Requires Demonstration of Note Ownership
Last October, the District of Columbia attorney general issued a “Statement of Enforcement Intent Regarding Deceptive Foreclosure Sale Notices” to protect homeowners from wrongful foreclosures. Any foreclosure sale of owner-occupied residential property (one to four units) now requires the recordation of a copy of the lender’s promissory note (with all endorsements) and all assignments of deeds of trust, accompanied by an affidavit from the lender stating that the copies are true copies of the original documents, which are in the possession of the foreclosing lender. If lost, an acknowledged copy may be recorded with an affidavit that the original note has been lost. If the note has been sold more than once, a complete set of assignments, demonstrating the chain of ownership of the note and deed of trust, must be recorded prior to the foreclosure action.
D.C. Mandates Foreclosure Mediation; Lack of Official Documentation Format Stalls All Homeowner Foreclosures
In November, the Council of the District of Columbia enacted emergency legislation regarding owner-occupied residential properties in the District, mandating mediation prior to the commencement of a foreclosure action. This act effectively stopped foreclosures of all residential owner-occupied properties. It requires certain mediation documentation to be sent to borrowers prior to a foreclosure sale and that a mediation certificate to be filed in the land records prior to commencing a foreclosure action. The format and content of the mediation documentation shall be prescribed by the commissioner of the Department of Insurance, Securities and Banking, but unfortunately, as of this date, this documentation has not been provided. Thus, lenders may not commence a foreclosure of owner-occupied residential property until such time as the commissioner prescribes the forms and the lender completes the mediation procedures under the act.
Once the documentation is issued, lenders will be required to include in their notice of default (a copy of which is to be sent to the mediation administrator): (i) contact information which the borrower may use to reach an agent of the lender who can explain the mediation process along with other information regarding counseling services available to the borrower; (ii) a description of loss mitigation programs available and the eligibility requirements; (iii) an application for the loss mitigation programs available with instructions for completion of the application; and (iv) a mediation election form, with envelopes addressed to the lender and the mediation administrator.
Within seven days of receipt of the notice of default, the mediation administrator will mail to the borrower a statement providing that the borrower may participate in foreclosure mediation or participate in other counseling services, along with a request that the borrower return the mediation election form within 30 days from the date of mailing of the statement to the borrower, along with a $50 fee. In addition, the borrower must mail to the lender the loss mitigation application. The mediator will then send a second notice to the borrower no later than 20 days after the mailing of the notice of default that if the borrower does not elect mediation and pay the fee within 30 days from the original mailing of the notice of default, the borrower shall forfeit the right to mediation. If the borrower elects mediation, it must be scheduled within 45 days. If mediation is not elected, the mediator will issue a mediation certificate to the lender within 45-60 days of the mailing of the original notice of default so that the lender may proceed with the foreclosure sale, by filing the mediation certificate. If the borrower pursues mediation, the lender cannot commence the foreclosure action until the mediation is completed. If the borrower and the lender cannot reach agreement, the mediator shall file a report with the mediation administrator recommending termination of the mediation. The mediation administrator may then either issue the mediation certificate or refer the matter to another mediator.
Thus, a foreclosure process that used to take 30-45 days to complete in the District of Columbia may now take five to seven months to complete.
While the laws in both Maryland and the District of Columbia are intended to help struggling homeowners save their homes, they have imposed substantial burdens upon lenders in order to sell the collateral securing their notes. These laws may result in the further tightening of credit standards in approving home mortgages and may further limit the pool of eligible borrowers to purchase or refinance homes.
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