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Rockledge Associates LLC v. Transamerica Life Insurance Co.

United States District Court, D. Maryland

February 3, 2017

ROCKLEDGE ASSOCIATES LLC, Plaintiff/Counter-Defendant,
v.
TRANSAMERICA LIFE INSURANCE CO., Defendant/Counter-Plaintiff.

          MEMORANDUM OPINION [1]

          Paul W. Grimm United States District Judge

         The parties to this case are landlord and tenant under a ground rent lease (“Ground Lease”), an archaic but still used real estate contract granting use of the property and ownership of any improvements to the tenant while allowing the landlord to retain ownership of the land. When Defendant/Counter-Plaintiff Transamerica Life Insurance Company, the tenant (“Transamerica” or the “Tenant”), elected to stop paying ground rent and attempted to walk away from the Ground Lease and allow Plaintiff/Counter-Defendant Rockledge Associates LLC, the landlord (“Rockledge” or the “Landlord”), to assume possession of the premises and to claim title to the buildings on the premises, Rockledge instead filed this suit for breach of covenant to recover the unpaid rent. Compl., ECF No. 1. Transamerica has moved for summary judgment, arguing that its default terminated the lease and the Landlord's only remedy was to acquire title to the buildings on the property, such that it is not entitled to damages for unpaid rent. Def.'s Mot., ECF No. 43. Rockledge has filed a cross-motion for summary judgment, insisting that it is entitled to judgment in its favor, based on Transamerica's undisputed failure to pay rent, because its option to terminate the lease, repossess the property and acquire title to the buildings on it (which it never exercised) was an alternative remedy to seeking damages for breach of covenant, not an exclusive remedy. Pl.'s Cross-Mot., ECF No. 44;[2] Pl.'s Opp'n & Mem. 9.

         I find that the plain language of the contract permits the landlord to seek damages for unpaid rent, and the undisputed evidence shows that Rockledge properly pursued its claim for breach of covenant. But, because the Complaint served as a written notice of default and Transamerica did not cure that default, I find that the Ground Lease terminated thirty days after service of the Complaint, and Transamerica is liable only for rent through that date. Accordingly, I will grant Rockledge's motion in part and deny it in part, and I will grant Transamerica's motion in part and deny it in part.

         Ground Rent Lease

         Before turning to the facts underlying the dispute in this case, a little historical context will go a long way in facilitating an understanding of the contrary positions that Rockledge and Transamerica assert. While most land in this country is acquired in fee simple, the ground rent lease, “a centuries-old home financing tool . . . [w]ith roots in feudal England” still is common in Maryland, “although little known elsewhere in the United States.” State v. Goldberg, 85 A.3d 231, 234 (Md. 2014) (citing Banks v. Haskie, 45 Md. 207, 218 (1876)).

A ground rent lease . . . is a renewable 99 year lease where the fee simple owner of a property receives an annual or semi-annual payment (“ground rent”) and retains the right to re-enter the property and terminate the lease if the leaseholder fails to pay. The fee simple owner retains a real property right in the land, but the leaseholder's interest is governed by the law of personalty.

Muskin v. State Dep't of Assessments & Taxation, 30 A.3d 962, 965 (Md. 2011) (citing Kolker v. Biggs, 99 A.2d 743, 745 (Md. 1953). Under this mutually beneficial scenario, the tenant “acquire[s] a perpetual interest in the leased premises, which would justify his making permanent improvements thereon, and enable him to avail himself of the value of the property thus enhanced, ” while the fee simple owner/landlord “secure[s] the prompt payment in perpetuity of the interest on a sum of money, equivalent to the value of the property.” Goldberg, 85 A.3d at 237 (quoting Banks, 45 Md. at 218).

         Pursuant to a ground rent lease, the landlord has “a bundle of vested rights” that “cannot be separated one from the other; together they are the essence of this unique property interest.” Goldberg, 85 A.3d at 241 (quoting Muskin, 30 A.3d at 971 (emphasis from Goldberg removed; emphasis added)). Those two rights are “the reversionary interest to re-enter the property in the event of a default or if the leaseholder fails to renew” and, significantly to this case, “a contractual right to receive ground rent payments.” Id. (quoting Muskin, 30 A.3d at 971 (emphasis from Goldberg removed)). Notably, “vested real property and contractual rights . . . have been almost sacrosanct in our history, ” as these rights “are some of our most fundamental rights and a long-standing tradition under our common law.” Muskin, 30 A.3d at 972.

         Typically, a ground rent lease “specifies . . . what action the lessor may pursue in court if the lessee is late paying rent, ” such as

(1) to make distress on the arrearage [i.e., to seize the tenant's property to ensure payment]; (2) after 60 days of nonpayment, to take over the premises by re-entry and hold them until the arrearage is paid up; and (3) after six months of nonpayment, re-enter the premises and possess them as if the lease had never been made.

Goldberg, 85 A.3d at 238 (internal citations omitted). A landlord also may pursue traditional common law remedies, which include (1) “accept[ing] a surrender of the lease and thereby terminat[ing] the tenancy”; (2) “reenter[ing] the premises” and “attempt[ing] to re-let the property for the tenant's benefit, and hold[ing] the tenant liable” for the difference between the rent due under the lease and the rent so obtained; and (3) “do[ing] nothing and hold[ing] the tenant liable for the entire amount of rent payable during the remaining term of the lease.”[3]Circuit City Stores, Inc. v. Rockville Pike Joint Venture Ltd. P'ship, 829 A.2d 976, 988-89 (Md. 2003).

         Thus, a landlord under a ground rent lease may hold the tenant liable for unpaid rent. See Donelson v. Polk, by her Husband, 2 A. 824, 826 (Md. 1886) (observing, in a case brought by landlord for payment of “arrearages of ground rent” and taxes due under a ground rent lease, that “it is a settled principle that a court of equity will never require that a party should insist upon a forfeiture as a remedy; and moreover, it is the absolute right of the [ground lease landlord] to insist upon the performance of the covenants of the lease, or compensation in damages for the breach thereof, by those upon whom such covenants are binding by reason of their relation to the estate”). Indeed, “[t]he right of re-entry is inserted into the ground lease principally as security for the payment of rents.” Goldberg, 85 A.3d at 238. Transamerica does not appear to challenge the availability of a suit for unpaid rent under other circumstances; it simply argues that the option is not available to Rockledge under the contract at issue in this case. See Def.'s Reply & Opp'n 10 (arguing that Rockledge cannot pursue its “common law right to sue a tenant for breach of the covenant to pay rent, ” because “the landlord-tenant relationship between Rockledge and Transamerica ceased upon the termination of the Ground Lease”).

         Factual Background[4]

         Rockledge became the Landlord under the Ground Lease for 6610 Rockledge Drive, Bethesda, Maryland 20817 (the “Property”) that its predecessor in interest entered into on August 27, 1980. Jt. Stmt. ¶¶ 1, 5, ECF No. 31. The original tenant, Two Rockledge Associates (“TRA”), used the property interest subject to the Ground Lease (the “Leasehold Interest”) to secure a $16 million promissory note (the “Loan”).[5] Id. ¶¶ 13-16, 21-23. Somewhat unusually, for lenders are not typically so accommodating, the Loan was made subordinate to the Ground Lease and subject to its terms. Id. Transamerica did not originate the Loan, but rather acquired it from another entity, along with an Indemnity Leasehold Deed of Trust, Security Agreement and Fixture Filing that secured the Loan with the Leasehold Interest. Id.

         In about June 2014, Transamerica issued a Notice of Default to the borrower, which had defaulted on the Loan, and Rockledge issued a Notice of Default to TRA, which had stopped paying rent under the Ground Lease. Id. ¶¶ 27, 31, 35, 36. After receiving the Notice of Default, TRA informed Rockledge that it did not “have sufficient funds to make the payment of Fixed Rent that is due” and did not “foresee having sufficient funds to pay the Fixed Rent in the future, ” and therefore it “waive[d] the right to receive any further notices of default under the Ground Lease.” Jt. Stmt. ¶ 43 (quoting July 14, 2014 Ltr., Jt. Ex. 12, ECF No. 34-2, at 118).

         Transamerica cured the default to continue the Leasehold Interest (in order to preserve its right to foreclose on it), and paid rent through December 2015. Id. ¶¶ 27, 31, 35, 36, 44-45, 49, 68, 72, 74. In October 2015, it foreclosed on the Deed of Trust and acquired the Leasehold Interest in the Property, thereby succeeding TRA as Tenant under the Ground Lease.[6] Id. But, after Rockledge declined its request to a reduction in ground rent and, instead, raised the ground rent, Transamerica “decided to walk away from its Leasehold Interest” and stopped making its monthly payments under the Ground Lease after December 2015. Id. ¶¶ 32, 34, 59, 64, 78-79, 82, 84.

         Relevantly, Article X of the Ground Lease provides:

DEFAULTS
10.1 Events of Default. If Tenant shall default in the performance of any of its obligations to pay the Fixed Rent or Additional Rent hereunder and if such default shall continue for thirty (30) days after written notice from Landlord designating such default or if within ninety (90) days after written notice from Landlord to Tenant specifying any other default or defaults Tenant has not commenced diligently to correct the default or defaults so specified or has not thereafter diligently pursued such correction to completion, then, and in any of such cases, this Lease shall terminate without further action of Landlord and this Lease shall be of no further force or effect and Landlord and the agents and servants of Landlord lawfully may, in addition to and not in derogation of any remedies for any preceding breach of covenant, immediately or at any time thereafter and without demand or notice and with or without process of law enter into and upon the Premises or any part thereof in the name of the whole and repossess the same as of Landlord's former estate and expel Tenant and those claiming through or under Tenant (with or without the institution of legal proceedings to evict) and remove its and their effects without being deemed guilty of any manner of trespass and without prejudice, to any remedies which might otherwise be used for arrears of rent or prior breach of covenant, and Landlord, without notice to Tenant, may store Tenant's effects, and those of any person claiming through or under Tenant at the expense and risk of Tenant, and, if Landlord so elects, may sell such effects at public auction or private sale and apply the net proceeds to the payment of all sums due to Landlord from Tenant if any, and pay over the balance, if any, to Tenant.
10.2 Exclusive Remedy. In the event that this Lease is terminated under any of the provisions contained in Section 10.1 or shall be otherwise terminated for breach of any obligation of Tenant, Landlord's sole and exclusive remedy shall be the acquisition of title to the buildings as provided in Section 7.4 above, free and clear of all rights of Tenant or those claiming by, through or under Tenant.

Ground Lease art. X, Jt. Ex. 1, ECF No. 34-1.

         During a phone call on January 6, 2016, Rockledge “advised … Transamerica[] that January 2016 rent for the Leasehold Interest had not been paid, ” after which the Landlord drafted, but did not send, a notice of default to Transamerica. Jt. Stmt. ¶¶ 85, 88; see also Jan. 6, 2016 Rockledge internal email, Jt. Ex. 25, ECF No. 34-3, at 78 (stating that, during a call with regard to “setting of the subsequent base lease year rent, ” Rockledge “inquired as to the rent for [J]anuary” and Transamerica stated that it “had instructed [its tenant] not to pay it, ” that “there was no way . . . [T]ransamerica[] could justify paying the existing ground rent of $94, 877.89, ” and that “without a substantial reduction in ground rent he didn't see how they . . . could go on with the property”). Instead, it filed this suit for breach of covenant to collect unpaid rent under the Ground Lease. Compl., ECF No. 1.

         Transamerica filed a Counterclaim, seeking a declaratory judgment that if it “has defaulted, the Ground Lease has terminated and Rockledge is only entitled to its exclusive remedy pursuant to Section 10.2 [providing for acquisition of title to the buildings on the Property].” Countercl. 7-8, ECF No. 12. Transamerica then notified Rockledge that it “agree[d] to the immediate relinquishment of its possession of all improvements on the Property to which it has title, and further agree[d] to immediately facilitate the transfer of title to such improvements to Rockledge.” Jt. Stmt. 93 (quoting Apr. 20, 2016 Ltr., Jt. Ex. 27, ECF No. 34-3, at 91-92). Additionally Transamerica stated that it “expressly waive[d] its rights to the receipt of any notice of default [from Rockledge] required under Section 10.1 of the Ground Lease.” Id. ¶ 94 (quoting Apr. 20, 2016 Ltr. 2). Rockledge responded that it did “not acquiesce in the assertions made in [the] letter.” Id. ¶ 95.

         The parties cross-filed motions for summary judgment, asking me to determine whether Rockledge could pursue damages for breach of the covenant to pay rent or whether, under the Ground Lease and based on its correspondence with Transamerica to date, its only remedy was to repossess the Property and acquire title to the improvements on it. See Def.'s Mem. 9; Pl.'s Opp'n & Mem. 1, 9.

         Standard ...


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