Ground Rents – that quintessential Baltimore legal institution – have undergone tremendous change in the past decade. Although commonly described as the situation where an owner owns only the improvements on the property, while someone else (the Ground Rent owner) owns the land, it is, according to legal theory, more aptly defined as a “reversionary interest.” This means that the Ground Rent owner has the right to take back the property (both land and improvements) if the Ground Rent is not paid.
Ground Rents were very attractive to the developers who built-up northwest Baltimore City in the 1950s and 60s. By creating a Ground Rent simultaneously with the sale of the newly-built houses, the developers were able to retain a stream of income from these properties even after selling them, thus making Ground Rents particularly prevalent in our area.
However, when certain investors, looking for a windfall, started buying Ground Rent leases specifically to bring ejection actions for failure to pay the Ground Rent and thus become the owners of the property, Ground Rents acquired a bad name. As a result of a series of investigative articles highlighting this situation, the State launched an all-out attack on Ground Rents, in 2007, with the intention of completely eradicating them from the Baltimore legal landscape. Among its major changes, the new legislation prohibited the creation of new Ground Rents, eliminated the Ground Rent owners’ right to take back the property for non-payment of Ground Rent, and ordered that all Ground Rent owners register their Ground Rents by 2010 or lose them.
Although many Ground Rent owners did register by the deadline, some of the owners did not, and then sued the State for an unjustified taking of their property. In 2011, the Court of Appeals sided with the Ground Rent owners, declaring that the State did not have the right to cancel a Ground Rent for failure to register.
So if you are the owner of a property subject to a Ground Rent, the maximum that the Ground Rent owner can demand from you is three years of back Ground Rent, and his only remedy is to go to Court to create a lien on the property, similar to a mortgage. Accordingly, without the threat of losing their homes, for most people, it boils down to a financial calculation to determine – based on how much time they plan on owning the property – whether it makes sense to keep paying the Ground Rent or buy out the redemption amount and cancel it.
Because of this, Ground Rents have lost a big part of their attractiveness as an investment, and also require a big effort in management and administration, which usually does not pay for a small number of them. However, there are still investors who buy them, usually for a fraction of the redemption amount, depending on whether the property is occupied and whether the property owner is current on payments.
Accordingly, the final chapter on Ground Rents has not been written, and we will have to continue dealing with them in the foreseeable future.
Mr. Salazar is an attorney practicing real estate and general commercial law in Baltimore and New York.