It is good to see that the ground rent owners in Maryland are finally having their day in court.( "Court to hear challenge to ground rent law," June 7)
The ground rent system in Maryland was abused by a small number of investors as exposed by The Sun some years ago. However, the fact that many ground rents may now have been "extinguished" by state legislation, in my opinion, amounts to taking of private property without just compensation.
Peculiar to Maryland and Louisiana, ground rents were inherited from English law. The terminology "rent" is misleading and cause for much misunderstanding. While written as a 99 year "lease" renewable forever, they are "rents"; yet rents are most always paid in advance, whereas ground rents are paid in arrears as is interest on a mortgage. Therein lies the confusion.
Ground rents can best be understood as a mortgage on which the property owner pays interest only at a fixed rate semi-annually and is never obligated to pay the principal, but has the legal right to pay the principle ("redeem the rent"), at any time on 30 days written notice to the ground rent owner.
In order of priority, the ground rent represents a first lien on the property coming in front of any mortgages and is only subordinate to property taxes. Perhaps if they were known as "ground mortgages" instead of "ground rents," the owner of the house (leasehold owner) would have a better understanding of their legal obligation and exposure.
Like a mortgage, the ground rent owner has the right to foreclose on the property for nonpayment after due process. The cost of "foreclosure" far exceeds the small amount of the typical ground rent, and it is this fact which creates an out of proportion burden on an unknowing property owner.
Similarly the law enacted several years ago further regulating the collection process of ground rents in Maryland created such an additional burden on the ground owner it has resulted in a significant loss in market value of ground rents, a legislative loss to private property without just compensation.
As recently as the building boom following World War II ground rents were a meaningful financial aid to home ownership. When many homes were selling for $10,000 to $15,000 on lots with values of $1,000-$2,000 the creation of an annual rent of from $60 (6 percent of a lot value of $1,000) to $120 (lot value of $2,000) enabled the home buyer to make the purchase with a lower down payment and lower monthly payments. In addition, the creation of ground rents enabled many builders to hold their profits in ground rents.
As home prices increased ground rents became less of a factor in financing and more of a nuisance. Moreover, the recent prolific sale of mortgages in the marketplace, together with lenders unfamiliar with the Maryland ground rent system, added to collection difficulties and delinquencies.
While having outlived their original purpose as a financial aid to home ownership, ground rents have represented a secured 6 percent investment to individuals and endowments.
Benedict Frederick Jr., Pasadena