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Ground rent owners sue for compensation

Dozens of Maryland's largest holders of ground rents sued the state yesterday, seeking compensation that could exceed $400 million, contending that ground rent reform laws effectively seized their property.

The 23-page lawsuit, filed in Anne Arundel Circuit Court, alleges that the laws make ground rent leases worthless by making it too costly and cumbersome to collect rent or seize houses if rents aren't paid. The laws effectively are an unconstitutional taking of property for public use without just compensation, the suit contends.

The new system "will prevent land owners from receiving the rents owed on their leases and make it impossible for them to sell their properties at anywhere near their prior fair market value, if at all," the lawsuit alleges.

"The governor and legislature made a decision with which we are not quibbling," Edward J. Meehan, an attorney with Skadden, Arps, Slate, Meagher & Flom LLP in Washington who is representing the ground rent owners, said in an interview yesterday. "It was public policy to overturn 400 years of history and to change the economics of the system. We accept that, and ask only for what the federal and state constitutions require, which is just compensation.

"It's not fair that our clients should bear the burden of the changes to the system that the governor and legislature decided to make," he said. "In essence, they've lost their property and they only want just compensation."

This year, the General Assembly overhauled the state's system of ground rents, which has existed since Colonial times, after an investigative series in The Sun showed that a small group of investors had used their power under the law to seize hundreds of homes in Baltimore over unpaid rent as meager as $24. Several of those investors -- but not all -- are among the plaintiffs.

Tens of thousands of homeowners in Baltimore City and Baltimore and Anne Arundel counties must pay rent on the land under their houses unless they buy out their leases.

The reform bills signed by Gov. Martin O'Malley abolished ejectment, the legal process that ground rent owners used to seize houses; barred the creation of new ground rents; and required ground rent owners to register their holdings with the state by September 2010 or lose them. The exact number of ground rents is not known because there has been no central registry. The lawsuit cites estimates of 116,000 to 212,000. Based on those numbers, the state owes ground rent owners and their entities $114 million to more than $400 million, the lawsuit contends.

State Sen. Brian E. Frosh, a

Montgomery County Democrat and chairman of the Judicial Proceedings Committee, who helped lead ground rent reform, said the legislation makes clear that ground rent owners are entitled to a return on their investment and that they can still take homes for nonpayment of rent.

"They testified that they're not in this for the windfall," Frosh said. "They never had the nerve to stand up in public and say, 'This is a property right to which we're entitled. We're allowed to go take people's houses.' It looks like they have summoned it up in this complaint."

The lawsuit filed yesterday is the second to challenge ground rent reform. In June, Charles J. Muskin, a trustee for his grandfather's estate, which includes about 300 ground rents, filed and then withdrew a challenge to the registry requirement in Anne Arundel Circuit Court.

Muskin, a master in the Circuit Court, said he had decided that the lawsuit was "premature" and that he wanted to wait for the reforms to launch.

Ground rent owners had argued during the legislative session that homeowners would refuse to pay their rent without the threat of losing their homes.

"Tenants will no longer have any incentive to pay the rent they are contractually obligated to pay, and property owners will have no adequate means of enforcing their vested contractual and property rights," the lawsuit alleges. Frosh said yesterday that he does not buy that argument. "Unless we can take your house, you're not going to pay us $80?" Frosh said. "That's just unbelievable. Ask any credit card company."

Maryland Attorney General Douglas F. Gansler "is very comfortable that there are no sound legal arguments against it and that the bill will be upheld by the court," said spokeswoman Sandy Brantley. "He will vigorously fight any challenge brought by those who may have unjustly benefited."

During the General Assembly session, legislators said they tried to balance the interests of homeowners with those of ground rent holders. All of the bills were examined for constitutionality by the attorney general's office, and ground rent owners had the opportunity to comment on the bills during the hearings.

"These folks ought to get a grip," said Sen. George W. Della Jr., a Baltimore Democrat who worked for ground rent reform. "They need to get real. They were taking advantage of people, and now they're screaming?"

The law abolishing ejectment took effect July 1. As ground rent owners anticipated the change, they filed about 600 ejectment lawsuits in the first half of 2007 in Baltimore Circuit Court -- more than were filed in any full year before 2005.

Rather than filing an ejectment lawsuit to seize a property, leaseholders now have to file a lien against the home to recover their debt. Homeowners have 45 days to challenge that action in court and can recover any equity remaining after the debts are repaid through a settlement or foreclosure. Under the old law, a ground rent owner could seize a house through an ejectment process, resell it and keep all the proceeds.

To settle lawsuits and keep their homes, homeowners routinely were required to pay ground rent holders 20 to 50 times the amount of back rent owed.

Del. Maggie L. McIntosh, a Baltimore Democrat and chairwoman of the House committee that helped to shepherd ground rent bills through the Assembly, said none of the new legislation did away with existing ground rents.

"In fact, we accepted it as a legitimate investment option, and we simply modernized the practice of ground rents because, unfortunately, one or two bad eggs out of the whole hen house were causing a problem," she said.

Ground rent owners have every right to file a legal challenge, Della noted.

"This is America," he said. "But they aren't going to succeed."

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june.arney@baltsun.com

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Sun reporter Laura Smitherman contributed to this article.

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MAJOR ALLEGATIONS

Here are the major allegations in a lawsuit contending that ground rent reform legislation passed by theGeneral Assembly this year effectively took private property without just compensation.

• The lawsmake ground rent leasesworthless by making it too costly and cumbersome to collect rent or seize houses if rents aren't paid.

• The value of "taken" property is $114 million tomore than $400 million, depending on howmany leases exist.
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