Heritage Realty, Inc. v. City of Baltimore

• Decision Date: 09 January 1969
• Docket Number: No. 112,112
• Citation: 252 Md. 1,248 A.2d 898
• Parties: HERITAGE REALTY, INC., et al. v. Mayor and CITY Council OF BALTIMORE et al.
• Court: Maryland Court of Appeals

Page 1

252 Md. 1

248 A.2d 898

HERITAGE REALTY, INC., et al. v. Mayor and CITY Council OF BALTIMORE et al.

No. 112.

Court of Appeals of Maryland.

Jan. 9, 1969.

Joseph S. Kaufman and Herbert M. Brune, Baltimore, for appellants.

Clayton A. Dietrich, Chief Asst. City Solicitor and Thomas P. Perkins, III, Baltimore (George L. Russell, Jr., City Solicitor and Richard W. Emory, Baltimore, on the brief), for appellees.

Before HAMMOND, C. J., and MARBURY, McWILLIAMS, SINGLEY and SMITH, JJ.

SINGLEY, Judge.

A ground rent, while not entirely unknown elsewhere in Maryland ¹ and in other states, ² is almost as peculiar to the City of Baltimore as the espantoon. ³ The legal characteristics-which are both a typical and indigenous-of Baltimore ground rents have been the subject of extensive consideration by Judge Frank A. Kaufman, The Maryland Ground Rent-Mysterious But Beneficial, 5 Md.L.Rev. 1 (1940) and by Mayer, Grounds Rents in Maryland (1883).

Starting in about 1750, owners of fee simple property commenced to lease building sites to persons who would undertake the construction of improvements on the lots. From the outset, the leases were essentially identical in form and usually were for a term of 99 years, renewable forever at the option of the lessee. The payment of taxes and of other public charges was made the responsibility of the lessee by covenant. The annual rent reserved was small, usually an amount which, if capitalized at a reasonable rate of interest, represented what was conceived to be the value of the land. Since the rent was categorized as a rent service, the remedy of distraint was available to the lessor. Ehrman v. Mayer, 57 Md. 612 (1882). The lessor also had a right to re-enter in the event that the rent was six months in arrears. 4 George II, Chapter 28, recodified by Chapter 346, Laws of 1872, Maryland Code (1957, 1965 Repl.Vol.) Art. 75, § 27; Campbell v. Shipley, 41 Md. 81 (1874).

The legal origins of such arrangements are uncertain. Certainly of some significance is the fact that the charter ⁴ granted to Lord Baltimore provided that the statute of quia emptores 18 Edw. I c 1 (1290), which had originally been enacted to prevent subinfeudation, should not apply to the lord proprietor and his immediate grantees, ⁵ and that from the early days of the colony, the proprietor granted manors in fee, sometimes reserving quit rents in perpetuity and sometimes for 99 years without provision for renewal. Others have traced the origin of the leases to agricultural tenancies in Ireland. ⁶ Those leases had avoided quia emptores by being for stipulated terms, usually 99 years, which at the time represented three lives, and were renewable.

As the years passed the whole ground rent system acquired a gloss under statutory provisions and to a lesser extent from custom and case law. This Court first dealt directly with a lease creating a ground rent in Banks v. Haskie, 45 Md. 207 (1876), involving a lease dated 18 January 1772 by which a quarter-acre lot had been leased for an annual rent of L2 10s. As the 99 year terms of the leases which had been entered into in the last years of the eighteenth century commenced to expire, the Court began to hear cases which offered opportunity to refine further the nature of the relationship created by the leases.

The leasehold interest was recognized as personal property, Craig v. Craig, 140 Md. 322, 117 A. 756 (1922) and cases there cited, although it had to be conveyed like realty, Bratt v. Bratt, 21 Md. 578 (1864); Code (1957, 1966 Repl.Vol., 1968 Cum. Supp.) Art. 21, § 1. The interest of the owner of the reversion had long been held to be an interest in real property. Myers v. Silljacks, 58 Md. 319 (1882); Coombs v. Jordan, 3 Bland 284, 22 Am.Dec. 236 (1831). The holder of a mortgage on the leasehold could be held responsible for the payment of the rent and taxes, whether or not he foreclosed. Williams v. Safe Deposit and Trust Co., 167 Md. 499, 175 A. 331 (1934); Mayhew v. Hardesty, 8 Md. 479 (1855). Fluctuations in the value of the property inured to the benefit of the owner of the leasehold or conversely worked to his detriment. Whiting-Middleton Const. Co. v. Preston, 121 Md. 210, 88 A. 110 (1913); Mayor & C. C. of Balto. v. Canton Co., 63 Md. 218 (1885); Banks v. Haskie, supra. So long as the covenants contained in the lease were observed, the leaseholder was the substantial owner of the property, Holland v. Mayor & C. C. of Balto., 11 Md. 186 (1857) and his interest was perpetual. Mayor & C. C. of Balto. v. Latrobe, 101 Md. 621, 624, 61 A. 203 (1905).

For more than a century there was no way in which the leasehold owner could absolve himself of the necessity of paying the rent in the absence of appropriate provisions in the lease. Commencing in 1884, however, by a series of statutes which were only prospective in their operation, Trustees of Sheppard & Enoch Pratt Hosp. v. Swift & Co., 178 Md. 200, 13 A.2d 174 (1940), ground rents were made redeemable at the option of the leasehold owner; but redemption could not, and to this day cannot be exacted by the owner of the reversion. By Chapter 485 of the Laws of 1884, Code (1957, 1966 Repl.Vol.) Art. 21, § 103, leases made on and after 8 April 1884 for a term of more than 15 years could be redeemed at any time after the expiration of 15 years by the payment of an amount computed by capitalizing the annual rent at a rate of six per cent, unless some other rate, not exceeding four per cent, was stipulated in the lease. Chapter 395 of the Laws of 1888, Code Art. 21, § 103 reduced the period during which redemption could not be effected to 10 years with respect to leases made after 5 April 1888, fixed the rate of capitalization at not more than six per cent, but required six months' notice. Chapter 207 of the Laws of 1900, Code Art. 21, § 104, effective 5 April 1900, reduced the period during which a rent could not be redeemed to five years, fixed the notice period at one month, and left the six per cent rate unchanged. As a result, ground rents created prior to 8 April 1884 are irredeemable unless the lease creating them provides otherwise; ground rents created between 8 April 1884 and 5 April 1888, and between 6 April 1888 and 5 April 1900 are redeemable in the manner provided by the applicable statute; and rents created after 5 April 1900 are subject to redemption at the option of the leaseholder on one month's notice at a capitalization rate not to exceed six per cent.

It is in the context of this historical background that the controversy before us must be viewed. The appellants, who are 11 individuals and corporations (the Owners) owning both irredeemable and redeemable reversions in Baltimore, sought declaratory relief in the Circuit Court of Baltimore City against Mayor and City Council of Baltimore (the City), by filing a petition alleging that the City, in the course of acquiring property for public purposes, had adopted a procedure which was not only invalid, but was depriving the Owners of their property without just compensation. The City answered, as did Housing Authority of Baltimore City, which had been granted leave to intervene.

The practice of which the Owners complain is essentially this: The City, once it takes title to leaseholds subject to redeemable ground rents, is acquiring the reversions through negotiated purchase in lieu of condemnation, or by condemnation, rather than by exercising the right of redemption provided for by the lease and by statute. The whole point, of course, is that in a period when interest rates are high, the rents have a market value less than the amount which a leaseholder not having the power of condemnation would be required to pay to extinguish the rent by redeeming it at a capitalization of six per cent.

That the reverse of this situation may also be true was observed in Mayor & C. C. of Balto. v. Latrobe, 101 Md. 621, 61 A. 203 (1905) when the Court, speaking through Judge Boyd, said at 629, at 205 of 61 A.:

'* * * We cannot close our eyes to the fact, which is frequently before us, that ground rents, especially in Baltimore City, are constantly being sold and have market values (resembling somewhat those of bonds and stocks), depending upon the manner in which they are secured and the length of time they are to continue. As under our system the taxes are paid by the owner of the leasehold interest, when well secured they are in demand and frequently realize prices far beyond what they could have been capitalized at when the leases were originally made.'

Judge Boyd, in this case, was speaking of irredeemable rents, but redeemable rents can fluctuate in value, too, depending on market conditions. James F. Miller, who testified below as an expert for the City, pointed out that in the period 1945-1950, top quality redeemable rents sold on a six per cent basis, or even at prices in excess of redemption value, while less desirable rents sold at rates of between eight and twelve per cent. By about 1960, first quality redeemable rents were selling at a capitalization of seven to seven and one-half per cent, while the lower level of the market was in the eight to fifteen per cent range. It was this change which caused the City to acquire reversions by purchase or condemnation rather than by redemption.

The Owners would have us reverse the declaratory decree upholding the procedure followed by the City and dismissing their petition. The thrust of the Owners' argument is that a reversion is a first lien on the property, superior to that of any mortgage, the amount of the lien being fixed, in the case of a redeemable rent, by the redemption formula contained in the lease or ordained by statute. In the case of an irredeemable rent, the Owners say, the amount may be fixed by adopting a figure obtained by capitalizing the rent at the six per cent rate used in the statute. It is the Owners' argument that to permit the City, as leasehold owner, to acquire the...