Maryland's highest court tossed out Wednesday the heart of an ambitious legislative effort to stop homeowners from losing their property over unpaid rent on the ground beneath their houses.
The Court of Appeals ruled that the law violated the rights of "ground-rent" owners by taking away their ability to seize and sell the homes of tenants who don't pay, then keep the proceeds. Allowing owners to bring foreclosure proceedings instead was not a reasonable substitute, the court said.
The decision throws into doubt sweeping 2007 changes to a Colonial-era system under which many homes in Baltimore and around the state sit on ground that is owned by a leaseholder. Homeowners on those properties are legally required to pay rent, usually twice a year, to the holder of the ground rent.
In the wake of a Baltimore Sun series detailing how ground-rent holders had seized hundreds of homes, sometimes over debts as small as $24, the state legislature banned the practice and ordered other changes to the system.
Before 2007, ground-rent owners seeking to collect unpaid rents could seize homes through "ejectment," sell them and keep all the money, regardless of the amount in arrears.
Under the new law, ground-rent owners were allowed to foreclose on homeowners to collect unpaid debts, but any sale proceeds left after the debt was paid would go to the homeowner.
The ruling by the Court of Appeals upholds a 2011 decision by an Anne Arundel County circuit judge. In a 5-2 decision, the appeals court found that the 2007 law amounted to an illegal taking of ground-rent owners' constitutional rights.
Ejectment "must be viewed as an inextricable part of the bundle of vested rights which the Legislature may not abolish retrospectively," wrote Judge Glenn T. Harrell Jr. on behalf of the court's majority. Judges Sally D. Adkins and Shirley M. Watts dissented.
Those who crafted the ground-rent changes expressed disappointment at the court's ruling.
A spokeswoman for Gov. Martin O'Malley said administration officials are reviewing the decision "to see what our next steps will be" and that they plan to continue to "fight on behalf of Maryland homeowners."
Owners of ground rents and their lawyers, who have long disputed the extent or severity of abuses, hailed the appellate decision.
"What they've done is uphold the sanctity of property rights in Maryland," said Edward J. Meehan, a Washington lawyer for several dozen ground-rent owners who brought the case. "That's going to benefit every person in Maryland."
Meehan said he was disappointed that it had taken years of litigation to reach this point. He said he believes that lawmakers were sincere in their attempt to fix perceived flaws in the system, but called the overturned law a "flawed approach" that ground-rent owners had warned against.
Meehan said he and others representing ground-rent owners attempted to negotiate with lawmakers but had been rebuffed in an emotion-driven push to protect homeowners.
"Every person has constitutional rights, whether they're likable or not likable, whether they've done something wrong or right," Meehan said. "You can't take people's rights away based on what is popular. That's what we're hoping is the lesson here."
A spokesman for Attorney General Douglas F. Gansler, whose office defended the law, said only that state attorneys are reviewing the decision.
Sen. Brian E. Frosh, the Montgomery County Democrat who chairs the Judicial Proceedings Committee, said it was probably too late in the 90-day legislative session, which ends in early April, for lawmakers to try to address the court's decision. He noted that homeowners still have some protections from potential abuse.
"It's as if they considered this in a vacuum," said Frosh, who worked on the reform effort. "The fact that somebody can lose their house and all of the equity over a debt in the tens of dollars or hundreds of dollars, I think, is a travesty."
This is the second legal blow to changes in the ground-rent system. In 2011, the Court of Appeals overturned part of another law that required leaseholders to register with the state by a deadline or lose their ground rents.
Lawmakers responded two years ago by passing a new law requiring ground rents to be registered before owners could collect them.
Since the registry was established in 2007, more than 80,000 ground rents have been logged, most in Baltimore.
"But the system the Court of Appeals leaves in place has led to and will continue to lead to great inequities," Frosh said. "The irony of the decision is that they are reinstating what is supposed to be an equitable remedy, and we know that its application ... leads to gross inequity, namely that a homeowner can lose everything for owing a few dollars."
Of ground-rent owners, he added, "the Court of Appeals in effect held that they're entitled to a windfall if they can find an unwary ground rent tenant."
"I don't know what the General Assembly is going to do in response to this," said Charles Muskin, a court master in Annapolis who oversees a family trust with 300 ground rents.
But if lawmakers do take another look at changing the law, he added, "I hope the ground-rent owners are included in the discussion. The ones I know want to be fair as much as they want to get paid. Nobody is taking advantage of homeowners."