City of Bowie v. Area Development Corp.

• Decision Date: 12 April 1971
• Docket Number: No. 369,369
• Citation: 276 A.2d 90,261 Md. 446
• Parties: The CITY OF BOWIE v. AREA DEVELOPMENT CORPORATION.
• Court: Maryland Court of Appeals

Page 446

261 Md. 446

276 A.2d 90

The CITY OF BOWIE v. AREA DEVELOPMENT CORPORATION.

No. 369.

Court of Appeals of Maryland.

April 12, 1971.

Ralph J. Luttrell, Washington, D. C. (Joseph S. Casula, Upper Marlboro, on the brief) for appellant.

Richard W. Case, Baltimore (Michael A. Pretl and Smith, Somerville & Case, Baltimore, on the brief) for appellee.

Argued before HAMMOND, C. J., and FINAN, SINGLEY, SMITH and DIGGES, JJ.

SINGLEY, Judge.

Until about 10 years ago, The City of Bowie (Bowie) remained, as it had been for years, a small town in Prince George's County, about equally distant from Annapolis and Washington. In 1960, its population was 1,489, Maryland Manual 1965-1966 at 746. In that year, a dramatic change began when Levitt & Sons, Inc. (Levitt) purchased Belair Farm, a tract of more than 2,000 acres, which had been operated by the late William Woodward as a farm and racing stable. ¹ By later purchases the tract was increased to some 3,000 acres. ²

Levitt commenced promptly to develop Belair Farm as the residential community now known as Belair and built in the next decade about 7,600 houses and some commercial and service properties there. As a part of the plan of development Area Development Corporation (Area Development), a Levitt subsidiary, constructed water and sewerage facilities which were designed to serve Belair and ultimately, Bowie, as well. ³ This approach was dictated by the fact that Bowie had neither the resources nor the borrowing capacity to finance a project of this magnitude.

By 1961, Bowie had annexed Belair, by extending a corridor from the old town of Bowie, which became known as Huntington, to encompass the Levitt development, and as a result has become the largest city in Prince George's County, with a population of more than 31,000. At about the time of the annexation, negotiations were undertaken with Area Development which culminated in the execution of a lease in October, 1961, under which Area Development leased to Bowie for a 50-year term, the water and sewerage systems (the Systems) which were then under construction, and upon completion Bowie operated the Systems. ⁴

Article Third of the lease provided that commencing with the calendar year 1962, Bowie would pay to Area Development as rent for the Systems, a quarterly amount of $9.375 for each residence connected to the water system, and a quarterly amount of $9.375 for each residence connected to the sewer system, to which would be added 50% of Bowie's charges for water and sewer service furnished for uses other than residential.

The lease went on to provide in Article Third (B):

'The parties, recognizing that there will be significant ecomonic fluctuations during the term of this Lease, agree as follows:

'(1) Either party may, by giving written notice to the other party during the third calendar quarter of any year during the term hereof, commencing with the year 1966, request an appraisal of the repreoduction cost of that part of the demised properties then used and useful and not in excess of the reasonable requirements of the Lessee for providing service to users of either the water systems or the sewage systems, less physical and functional depreciation thereon.

'(2) Within ten (10) days after such notice, the parties shall jointly select a qualified appraiser. In the event that the parties are unable to agree on an appraiser within such period, then upon application of either party, after five (5) days' written notice to the other, the Dean of the College of Engineering of the University of Maryland shall designate such appraiser, or if the Dean agrees only to furnish a list of recommended appraisers, then such appraiser shall be selected therefrom by lot. The determination of such appraiser shall be binding upon the parties.

'(3) There shall be furnished to the appraiser the plans and specifications of the demised properties and all additions, changes and substitutions which are part thereof including all additional facilities provided for in paragraph (G) of Article Second of this Lease Agreement. The appraiser shall make his determination of depreciated reproduction cost by applying the then current costs applicable to the various components being appraised and deducting therefrom physical and functional depreciation. The value of cash working capital furnished by Lessor or other expenses capitalized by Lessor pursuant to this agreement, including any rent abated hereunder under the terms of paragraph (C) (1) of this Article, shall be included as components to be appraised. Such appraisal shall be rendered in writing to each of the parties hereto prior to the close of the quarter in which such appraisal is required to be made.

'(4) The cost of such appraisal shall be borne by the party requesting it.

'(5) As of the first day of January of the year next succeeding the year in which such request shall have been made, Lessee shall pay annually as additional rent hereunder, an amount which, together with the minimum rent specified in paragraph (A) of this Article Third, shall be equal to six per centum (6%) of said depreciated reproduction cost of said part of the demised properties. Such adjusted rental shall be payable for each calendar year thereafter until a new adjusted rental (either upward or downward) shall become effective prusuant to a further appraisal, which further appraisal may not be requested until the third quarter of the third year during which such adjusted rental has been in effect.'

In August, 1968 (during the third calendar quarter, as contemplated by the lease), Area Development requested that an appraisal of the Systems be made on which an adjustment of rental could be predicated, and suggested that the work be undertaken by the engineering firm of Whitman, Requardt and Associates, which had designed the Systems. Bowie acknowledged receipt of the request but rejected the selection of Whitman, Requardt and Associates. The City's letter said in part:

'Please be advised that the Mayor and Council of the City of Bowie do not agree with your selection of the firm of Whitman, Requardt and Associates as the qualified appraiser.

'On this basis we urge the referral of the selection of an appraiser to the Dean of the College of Engineering of the University of Maryland.'

In due course, Dean Robert B. Beckmann of the University selected Benjamin E. Beavin Company (Beavin) of Baltimore to make the appraisal. On 10 October 1968, Area Development's counsel requested Beavin to make the appraisal. In a letter dated 25 October addressed to Bowie and Area Development, Beavin accepted the assignment and outlined the procedure which would be followed. The letter stated in part:

'The results will be submitted first by letter report giving the result of our appraisal, broken down into the major categories estimated. Approximately six weeks later, we will submit twelve copies of a more complete report containing back-up data. The estimates will be arranged, insofar as possible, to permit updating them from time to time with a minimum of effort.

'We have started work on the project and will prosecute it vigorously, making every effort to have the letter report in your hands by December 21, 1968. Because there may be unforeseen complexities or conditions beyond our control, we cannot guarantee this date.'

'The City of Bowie is requested to forward to us any information it believes we should nave in order to perform our work properly. The City also should name a contact man to whom we may address any questions and arrange for inspections.'

Beavin prepared and submitted an appraisal report on 18 December 1968, which concluded that reproduction cost of the Systems as defined in the lease, less physical and functional depreciation, was $12,677,508. Area Development then notified Bowie that accounting from 1 January 1969, the annual rent would be increased to $760,650.48, i.e., 6% of $12,677,508. ⁵

As it turned out, Bowie designated no contact man and made no criticism of the appraisal procedure until 13 January, after the receipt of the letter appraisal but before the receipt of the back-up data. It notified Area Development that it would 'reject and repudiate' the proposed increase in rent 'as having no justification under the Lease Agreement and being contrary to the welfare of the citizens.' Area Development brought suit for declaratory and injunctive relief in the Circuit Court for Prince George's County. From a decree declaring the Beavin appraisal to have been made in accordance with the provisions of the lease; declaring Article Third (B) (the appraisal provision) of the lease to be binding on Bowie, and directing Bowie to pay a rent of $760,650.48 annually accounting from 1 January 1969, Bowie has appealed.

While Bowie fragments its argument, it is esentially this: because Bowie was without power to enter into a lease which delegated the fixing of rates to another, the lease is ultra vires, illegal and void. Bowie bottoms this contention on the theory that while the operation of the Systems may be a proprietary function, Lewis v. Mayor & City Council of Cumberland, 189 Md. 58, 66, 54 A.2d 319 (1947); Home Owners' Loan Corp. v. Mayor & City Council of Baltimore, 175 Md. 676, 680, 3 A.2d 747 (1939); Westminster Water Co. v. Mayor & Common Council of Westminster, 98 Md. 551, 563, 56 A. 990 (1904), the fixing of rates like any other governmental function can be neither delegated nor...