Mercantile-Safe Deposit and Trust Co. v. Mayor and City Council of Baltimore

• Decision Date: 01 September 1986
• Docket Number: MERCANTILE-SAFE,No. 121,121
• Citation: 308 Md. 627,521 A.2d 734
• Parties: DEPOSIT AND TRUST COMPANY et al. v. MAYOR AND CITY COUNCIL OF BALTIMORE
• Court: Maryland Court of Appeals

Page 627

308 Md. 627

521 A.2d 734

MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY et al. v. MAYOR AND CITY COUNCIL OF BALTIMORE.

No. 121 Sept. Term, 1986.

Court of Appeals of Maryland.

March 3, 1987.

K. Donald Proctor (Virginia W. Barnhart and Miles & Stockbridge, on the brief) Towson, for appellants.

Sandra R. Gutman, Asst. City Sol. and Richard K. Jacobsen, Chief Sol. (Benjamin L. Brown, City Sol., on the brief) Baltimore, for appellee.

Argued before MURPHY, C.J., and ELDRIDGE, COLE, COUCH, McAULIFFE and ADKINS, JJ., and

CHARLES E. ORTH, Jr., Associate Judge of the Court of Appeals of Maryland (retired), Specially Assigned.

ADKINS, Judge.

Leases of two improved properties in Baltimore City included agreements requiring their common lessee to restore the demised premises to certain conditions prior to the termination of the leases. Before the leases had terminated, Baltimore City acquired both properties by "quick-take" condemnation. The Circuit Court for Baltimore City concluded that the lessee's restoration obligations were not compensable property rights and excluded evidence of the substantial increase in value of the properties attributable to the agreements. Because we shall hold that the restoration obligations were covenants running with the land, and property interests for which compensation must be paid, we shall reverse.

I. Background

For simplicity's sake, we shall treat appellant, Mercantile-Safe Deposit & Trust Company (Mercantile), as the property owner/lessor. ¹ The Mayor and City Council of Baltimore (the City) is appellee. The properties here involved are 202 North Howard Street and 308 West Lexington Street. At one time, these properties existed as separate and distinct parcels, each containing its own improvements. Years ago, however, these properties, along with other lots, were leased to Hochschild, Kohn & Co., Incorporated (Lessee), ² which combined all of them into a single, large department store complex, removing most, if not all, of the features that had once distinguished the separate properties.

On 20 April 1962 Mercantile and Lessee entered into extensions of two earlier leases covering 202 North Howard Street and 308 West Lexington Street. By the terms of the 1962 documents, each of the earlier leases was extended for an additional period of 16 years, beginning on 1 September 1965 and ending on 31 August 1981. Each new lease contained the following provision:

"7. AND IT IS FURTHER COVENANTED AND AGREED by and between [Mercantile] and Lessee for themselves and their respective heirs, personal representatives, successors and assigns, as follows:

* * * *

"(f) That not less than ninety (90) days prior to the termination of this lease, or any extension thereof, the Lessee shall, at its own expense, ... commence so to restore the premises demised hereunder as to render them capable of occupancy, lease, or sale for mercantile purposes, as a separate and distinct structure by erecting or restoring walls, ... (such walls to be erected and constructed on the boundaries of said lot established by the record title thereof); interior supports, entrance doors, and show windows; floors, stairways, and fire escapes; and plumbing, heating and electrical installations.... In the event that such restoration is not completed within said period of ninety (90) days, whether such delay is or is not attributable to the fault of the Lessee, the Lessee agrees to make appropriate payment to [Mercantile], such payment to be calculated in the same manner as the rent and additional rent reserved hereunder, and to cover the period from the termination of this lease, to the time when such restoration has been completed....

"Lessee, in making restoration, shall have the right and option of either converting and restoring the existing structure, or constructing a new structure which shall be a building limited in height to three stories...."

In November 1980, some nine months before the expiration of the terms of the extended leases, the City advised Mercantile of its intention to acquire the properties for urban renewal purposes. This advice indicated that "it will be necessary to have all properties acquired and vacated by May 1, 1981." A similar notice was sent to Lessee.

May 1981 came and went. The City took no action to condemn prior to that date, and Lessee continued to hold the premises. On 12 June Mercantile wrote Lessee, reminding it of its obligations under paragraph 7(f) of the leases. Five days after that, the City filed "quick-take" condemnation suits as to each property. The two actions were consolidated.

In the course of preparing for trial, appraisers for both Mercantile and the City agreed that if the restoration obligations of Lessee were compensable rights, they added materially to the value of the property. There was disagreement, however, as to whether the obligations constituted compensable rights. This issue was presented to the trial court by a motion in limine on behalf of Mercantile and by a motion for separate trial on an issue of law (Md. Rule 2-502) by the City. The court (Hammerman, C.J.) denied Mercantile's motion and granted the City's. The effect of this was to exclude from evidence valuation testimony relying on the restoration agreements. Mercantile thereupon stipulated that the value of 202 North Howard Street was $127,300 without consideration of the restoration obligations. As to 308 West Lexington Street, the City's appraiser testified that its value (ignoring the obligations) was $135,000. Inquisitions were duly entered, and Mercantile appealed to the Court of Special Appeals. We granted certiorari while the appeals were still pending in that court.

II. Covenants running with the land

The principal bone of contention here is whether the restoration obligations were covenants running with the land or, as the City contends and as Chief Judge Hammerman held, merely personal to Lessee. The parties view determination of the appropriate category as pivotal to the question of compensability. We agree, and, before addressing the compensation dimension of this dispute, proceed directly to that contention.

The Court of Special Appeals has recently had occasion to consider the nature of covenants running with the land. In Gallagher v. Bell, 69 Md.App. 199, 516 A.2d 1028 (1986), cert. denied, 308 Md. 382, 519 A.2d 1283 (1987), Judge Wilner, writing for that court, traced the development of the concept from Spencer's Case, 5 Co. Rep. 16a, 77 Eng.Rep. 72 (QB 1583) to the present day. Quoting 5 R. Powell, The Law of Real Property § 673(1), pp. 60-37, 60-38 (1986), he distilled the elements of such a covenant as " 'that: (1) the covenant "touch and concern" the land; (2) the original covenanting parties intend the covenant to run; and (3) there be some privity of estate' " and that (4) the covenant be in writing. 69 Md.App. at 208, 516 A.2d at 1033. In the case before us, the covenant, if it be one, is certainly in writing. Privity of estate clearly exists; indeed, the City makes no argument to the contrary. The disagreement is over the existence of Powell's first two elements. Maryland cases have alluded to both of those as being essential to a covenant running with the land. See, e.g., Md. & Pa. R. Co. v. Silver, 110 Md. 510, 73 A. 297 (1909); Whalen v. Balto. & Ohio R. Co., 108 Md. 11, 69 A. 390 (1908); Com. Bldg. Assn. v. Robinson, 90 Md. 615, 45 A. 449 (1900); Glenn v. Canby, 24 Md. 127 (1866); and Gallagher (the "touch and concern" element). See also e.g., Kirkley v. Seipelt, 212 Md. 127, 128 A.2d 430 (1957); Turner v. Brocato, 206 Md. 336, 111 A.2d 855 (1955); Union Trust Co. v. Rosenburg, 171 Md. 409, 189 A. 421 (1937); and Gallagher (the "intent" element).

A. Touch and concern

As we have already noted, this Court has explained that "a covenant to run with the land must extend to the land, so that the thing required to be done will affect the quality, value, or mode of enjoying the estate conveyed, and thus constitute a condition annexed, or appurtenant to it...." Glenn, 24 Md. at 130. Applying this definition, Maryland cases have determined a variety of agreements to be covenants running with the land: an undertaking, in a mortgage, to pay ground rent and taxes, Barron v. Whiteside, 89 Md. 448, 43 A. 825 (1899); an agreement to keep mortgaged property insured and to make repairs or rebuild, Thomas v. Vonkapff, 6 G. & J. 372 (1834); a contract not to construct improvements without prior approval of external design and location, Kirkley, supra; and an agreement to share pro-rata the cost of installation of certain streets and utilities, Gallagher, supra.

Whether a covenant touches and concerns the land may be considered in terms of the burdens or benefits it imposes. Thus, the test is met if the performance of the covenant will "tend necessarily to enhance [the] value [of the land] ...," Whalen, 108 Md. at 20, 69 A. at 393; see also Silver, 110 Md. at 516, 73 A. at 300. Powell espouses the more comprehensive formulation adopted by Dean Bigelow:

"If the covenantor's legal interest in land is rendered less valuable by the covenant's performance, then the burden of the covenant satisfies the requirement that the covenant touch and concern the land. If, on the other hand, the covenantee's legal interest in land is rendered more valuable by the covenant's performance, then the benefit of the covenant satisfies the requirement that the covenant touch and concern land."

Powell, supra, § 673, at 60-41. Another author explains:

"Ordinarily, ... a covenant is regarded as touching and concerning the land if it is of value to the covenantee by reason of his occupation of the land or by reason of an easement which he has in the land, or if it is a burden on the covenantor by reason of his occupation of the land."

3 H. Tiffany, The Law of Real Property, § 854, p. 455 (3d ed. 1939). See also Restatement of Property § 537 (1944).

It will be noted that the "benefit" a...