DC Metropolitan Business Law Alert - Updates on Important Legal Developments that Impact the Business Community in DC, Md and Va.

The Virginia Supreme Court recently considered whether a municipal corporation has the authority to impose additional real property taxes against a tax paying entity which owns real property as a tenant in common with a tax exempt entity.  The court held that there is no such authority.

The City of Richmond sought to impose real property taxes (both prospectively and retroactively) on two properties that SunTrust Bank, a tax paying entity, and Richmond Redevelopment and Housing Authority (“RRHA”), a tax exempt entity, owned as tenants-in-common.  As a tax exempt entity, RHHA did not pay real property taxes on its interests in the properties.  Agreements between SunTrust and RHHA allowed SunTrust to use the entirety of the properties without paying rent to RHHA for use of its undivided interests in the properties.  The City contended that it had the authority to tax SunTrust for RHHA’s ownership interest because:

                i.  pursuant to the operating agreements, SunTrust had the exclusive right to use and possess the properties as if it were the fee simple owner;

                ii.  SunTrust did not use the properties for a "public purpose”; and 

                iii.  leasehold interests exempt from taxation of the owner are assessed to the lessee and the practical effect of the agreements between SunTrust and RRHA was to create a leasehold interest in RHHA’s undivided property interest.

The court held, however, that, as a tenant in common, SunTrust has the right to use and possess the properties without any agreement with RRHA; no Virginia law imposes a “public purpose” requirement to maintain RHHA’s exempt status; and the arrangement between SunTrust and RHHA do not constitute a leasehold because the parties are tenants-in-common.  Consequently, the City’s arguments did not prevail.  Throughout its opinion, the court indicated that holding title to the properties as tenants-in-common, rather than as joint venturers, was a significant factor in its decision. 

Buried within the Governor of Maryland’s budget is a proposal that eliminates the ability of a grantor, as guarantor of a loan, to defer payment of Maryland mortgage recordation taxes on an indemnity deed of trust (“IDOT”) until such time when the loan liability becomes directly payable by the grantor. Currently, based on a Maryland attorney general’s opinion, the grantor does not pay recordation tax at the time the IDOT is recorded because it only secures a contingent liability as the grantor, as guarantor of the loan, is not primarily obligated to pay the debt secured by the IDOT. In the past, various standalone bills that attempt to impose recordation taxes on IDOTs at the time of recordation have failed to pass; however, this is the first bill to be included in the Governor's budget. The current bill ties the IDOT provision directly to funding of teacher pensions. If enacted, the costs to most commercial borrowers in Maryland are expected to increase significantly because all new IDOTs in excess of $1 million would be subject to mortgage recordation tax. If the bill passes, the change would take effect on July 1, 2012.

Under the foreclosure rules in Maryland, interest may accrue on the unpaid balance of the foreclosure purchase price from the date of the foreclosure sale until final settlement.  The Court of Special Appeals of Maryland recently held in Zorzit v 915 W. 36th Street, LLC that a court may abate the accrued foreclosure sale interest only when third parties cause delays in the final settlement.  A court does not have discretion to abate accrued interest due to delays resulting from the judicial process or caused by the purchaser when the "Terms of Sale" set out in the foreclosure advertisement provide that the purchaser will pay interest through the date of final settlement.

The Circuit Court for Baltimore City recently concluded on November 22, 2010 that a residential sales contract prepared by a homebuilder (for new construction) violated the Maryland Consumer Protection Act (the “CPA”) by not properly preserving the buyer’s right to obtain consequential damages. The CPA provides that no “seller … of consumer realty [may use] … a clause limiting or precluding the buyer’s right to obtain consequential damages as a result of the seller’s breach or cancellation of the contract.” The facts of the case indicate that the contract used for the sale in this particular instance was a form contract for which little adjustment of inconsistent boilerplate was made. Although form contracts are attractive options since they may be cost effective, by choosing to use a boilerplate contract, one may risk serious damages. Homebuilders, and their real estate developer affiliates, should audit the contracts they use in connection with home sales to ensure that such contracts comply with, among other things, the Maryland CPA.

For more information, please contact Jennifer Kasman at jkasman@kelleydrye.com.

Lender liability law, which gained prominence during the savings and loan crisis of the 1980s, has again become an active area of litigation in recent years. Lenders in Maryland traditionally have had at least two ways to protect against plaintiffs seeking to challenge the enforceability of a commercial loan. First, lenders often include a confession of judgment clause in the agreement, permitting the lender to seek default judgment against a defaulting borrower immediately without trial. Second, the Maryland Credit Agreement Act, Md. Code, Cts. & Jud. Proc. § 5-408, requires all commercial (not personal) loan agreements to be in writing. By extension, the Credit Agreement Act prohibits the use of alleged oral promises to modify the terms of the commercial loan agreement.

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