Do You Know the New Disclosure Requirements in Maryland for Private Deferred Water and Sewer Assessments?
How to Avoid A Rescinded Contract and Substantial Costs To Sellers.
Our law firm continues to see cases where sellers fail to disclose private deferred water and sewer assessments to buyers. Sometimes the seller notifies the buyer for the first time at the settlement table, a move potentially fatal to closing and which gives rise to significant monetary penalties in which the seller is liable. To protect all parties and prevent surprises at settlement or thereafter, below is a quick review of Maryland’s new disclosure requirements in the form of frequently asked questions from our clients:
- What are private deferred water and sewer assessments and why are they important to disclose when selling residential real estate?
- Private deferred water and sewer assessments, or “front foot” benefit charges, are initially assessed on a developer when a private utility company installs the public water and sewer lines leading to residential real estate. The developer enters into an agreement (a Declaration of Deferred Water and Sewer Charges) with the private company, which specifies the properties subject to the charges, and the agreement gets recorded as a lien. Therefore, each purchaser of the identified properties thereafter is subject to this lien and must pay the assessments according to the payment schedule outlined in the Declaration for as long as they own the property. These assessments have an annual rate payable over the course of approximately fifteen (15) to twenty (20) years in the range of Five Hundred Dollars ($500.00) to Two Thousand Dollars ($2,000.00) per year, a substantial charge to many buyers and to some, a deal breaker. As one might assume (correctly), a simple review of the property tax bill will not reveal these charges, making disclosure that much more significant.
Inasmuch as private front foot benefit charges are a material fact that needs to be disclosed to a buyer of residential real estate, Maryland has specific statutory requirements for the seller to disclose these fees in the sales contract when applicable. In the event that a seller fails to disclose, the statute (discussed below) permits the buyer to terminate the contract or compel the seller to pay all or part of the remaining assessment.
- What are the disclosure requirements? Do any addenda to the sales contract comply with the new law?
- Section 14-117 of the Real Property Article, which addresses the initial sale of residential real estate, was recently changed to cover resales of residential property as well. See 14-117(a)(2), (a)(5)(ii). The disclosure requirements in both cases are similar and instruct that private front foot benefit charges be disclosed early on in the sales contract. For example, in a resale:
A contract for the resale of residential real property that is served by public water or wastewater facilities for which deferred water and sewer charges have been established by a recorded covenant or declaration shall contain a notice in substantially the following form:
NOTICE REQUIRED BY MARYLAND LAW REGARDING DEFERRED WATER AND SEWER CHARGES
This property is subject to a fee or assessment that purports to cover or defray the cost of installing or maintaining during construction all or part of the public water or wastewater facilities constructed by the developer. This fee or assessment is $___, payable annually in (___month___) until (___date___) to (___name and address___) (hereafter called “lienholder”).
There may be a right of prepayment or a discount for early prepayment, which may be ascertained by contacting the lienholder. This fee or assessment is a contractual obligation between the lienholder and each owner of this property, and is not in any way a fee or assessment imposed by the county in which the property is located.
(emphasis supplied) (requirements effective October 2016). Both MAR and GCAAR have Addenda that satisfy the statutory requirements. MAR’s “Notice and Disclosure of Deferred Water and Sewer Charges” (See [link to form]), requires the seller to disclose the amount of the assessment, the payment schedule including the date of final payment, and the lienholder’s name and address. In fact, a Seller and Buyer acknowledge in Paragraph Seventeen (17) of the MAR Residential Contract of Sale that a Seller is obligated to disclose deferred water and sewer assessments and Paragraph Eighteen (18) provides for the inclusion of the MAR Notice Addendum. GCAAR’s “Regulations, Easements and Assessments (REA) Disclosure and Addendum” (See [link to form]), provides a similar disclosure of these charges in Paragraph Nine (9).
- What are the limitations on a Buyer’s right to rescind a contract when a Seller fails to disclose private front foot benefit charges?
- If a Seller provides written notice of private deferred water and sewer charges after the sales contract is signed, a Buyer has five days to rescind in writing the contract without penalty or liability. Upon rescission, the Buyer is entitled to a full refund of any deposits made on the contract. See Md. Code. Ann., Real Property Sec. 14-117(b)(3).
- If disclosure is made after the sales contract is signed and before settlement, can a Buyer who still wants to purchase the property recover any part of the remaining assessment from the Seller?
- Yes. A Buyer can recover from the Seller two times the amount of deferred charges the purchaser would be obligated to pay during the five (5) years of payments following the sale. See Sec. 14-117(b)(1).
- What if disclosure happens after settlement? Is a Seller liable to pay any part of the remaining assessment?
- In that case, the Buyer can compel the Seller to pay the full amount of any fee or assessment not disclosed, unless the Seller was never charged a private deferred water or sewer fee. See Sec. 14-117(b)(3)(i)(3).
Become familiar with the MAR and the GCAAR forms (linked above) that will satisfy Sec. 14-117’s disclosure requirements for private front foot benefit charges, and ensure that the proper addendum is attached to the sales contract, if applicable. For listing agents, ask Sellers at the time of the listing whether they pay charges to a private utility company on an annual, quarterly, monthly, etc. basis and report this information to the Buyer. Do not rely on the property tax bill to include these charges. Moreover, recognize that while Sec. 14-117 entitles a Buyer to monetary penalties paid by the Seller for nondisclosure, Buyers may face a challenge when trying to collect these monies. Therefore, it is much easier (and less costly) for the parties to work together and communicate all property liens and payments beforehand, than try to put back together Pandora’s box when its opened too late and may be fatal to settlement.