Daily Development Tuesday, November 13, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

SERVITUDES; DEVELOPMENT AGREEMENTS: A development agreement entered into as resolution of a zoning dispute, capping sewage connection fees, will benefit subsequent owners of the developer's property if the intent of the parties that the benefit of the agreement run with the land, and no other assignment of rights under the agreement need occur.

County Commissioners of Charles County v. St. Charles Associates Limited Partnership, 2001 WL 1382674 (Md. 11/8/01) (Opinion not yet released for final publication)

In 1970, Developers filed a plat for a "new town" planned unit development district pursuant to then existing HUD programs. County built a sewage treatment plant to support this development. Over time, Developers gradually either sold or "built out" this project, and were engaged in doing so in 1989, when it became apparent that additional sewage capacity was necessary to support the development in the area. The County elected to expand substantially the sewage treatment facility adopted a resolution substantially increasing sewage connection charges.

Developers objected the increase in charges as to properties that were part of their original "new town" because a prior agreement committed the capacity of the original plant to support their project, and the new capacity being added, they argued should be charged entirely to others who added to the sewage requirements for the area.

In settlement of this dispute, the parties entered into an agreement in 1989 that was incorporated into a Consent Decree by the trial court. The agreement provided a cap on sewage connection charges, which could be increased only through a specified cost analysis process, and established, in return, a number of controls on the development process by Developers.

Within a year, the County hired a CPA firm to prepare a rate study. Developers contested the procedures being used in the rate study, and the battle continued on. In the late 1990's Developer obtained a trial court ruling favorable to its position limiting the imposition of fees in excess of the cap. During the course of this decade, Developer had, through outright sale and corporate reorganization, transferred substantial holdings within the PUD to other entities. The County took the position that it had no obligation to honor the agreement with respect to properties no longer owned by Developer.

The Agreement contained the following language pertaining to the rights of transferees:

"It is intended and determined that the provisions of this Agreement shall constitute covenants which shall run with said Real Property and the benefits and burdens hereof shall bind and inure to the benefit of the parties hereto and their respective assigns and successors in interest."

At a later point in the Agreement, additional language appeared relating to transfer of rights under the Agreement:

"The rights and obligations of [Developer] under this Agreement may be transferred or assigned, in whole or in part, provided such transfer or assignment is made as part of the transfer, assignment, sale or lease of all or a portion of the property subject to this Agreement . . . [Developer] shall not transfer or assign its right or obligations under this Agreement to other projects that are not located within the [PUD]."

The County contended that the subsequent purchasers of Developers properties either had received no assignment of rights at all or had received them subsequent to the transfer of property, and not "as part of the transfer . . ." of PUD property.

The Maryland Court of Appeals (Maryland's highest appellate court) made short work of this argument. The Court of Appeals noted that, although covenants pertaining to land might be interpreted narrowly, because they affect alienability of the property, courts nevertheless will uphold clear language indicating the intent of the parties that covenants will run. Here, the language expressed the unequivocal intent that the benefits of the covenant would run to assignees. The court noted that the second paragraph, above, was phrased permissively ("may be transferred" ) and in any event did nothing to detract from the notion that the covenants of the Agreement ran automatically to successors.

The court went on to conclude that the seven month delay between transfer of the deed to the property and the execution of express assignment agreements would not have meant, in any event, that the assignments were not made "as part of" the transfer of the property. But that issue, of course, had been rendered moot by the court's first ruling.

The court took the opportunity to engage in some general rumination about servitudes law in Maryland, discussing the Rule in Spencer's case (requiring that there be an express statement of intent if the thing affected by the covenant is not "in esse") and apparently, by inference, concluding that the Rule no longer applied. It is hard to be sure about this conclusion, since of course there was an express statement of intent in this Agreement. The court also cited with apparent approval case law stating that a servitude need not appear in a deed to run with the land, so long as it appeared in an instrument recorded in the burdened owner's chain of title.

The court also stated that a general statement of intent that covenants will run to assigns can be negated by other language in an agreement indicating that specific elements of the agreement will not run, but concluded that the second paragraph concerning assignment, set forth above, did not negate the general intent here.

The court did affirm that there remains a "touch and concern" requirement in Maryland. (Not a breath about the Restatement of Servitudes.) It concluded that the covenant here did so "touch and concern" the benefited property even though it dealt with the limitation on an obligation to pay money, since the purpose of the payment was related directly to the use of the land.

The court makes no mention of the fact that there was no "horizontal privity" between the County and the Developers, indicating, at least by inference, that such requirement is not necessary for a covenant to run, although arguably the relief here being sought was equitable in character, in which case privity would not be necessary.

Perhaps the most interesting part of the case is the court's conclusion that the covenant "benefits the County" and therefore satisfies the touch and concern requirement with respect to the County, even though, of course, there is no specific property of the County that is benefitted. The Court discusses the fact that the overall settlement resulted in substantial benefits to the County, including financial support (from HUD) for its infrastructure work.

Comment 1: Why bother with a touch and concern analysis concerning a covenant with a public agency? Such analysis clearly departs from the traditional analysis in this area. Although the Editor supports some recognition of the test or a functional equivalent in private covenants, many courts have not required that both sides touch and concern in order for one side to run. There is no question about the covenant running on the County side, so there should be no touch and concern analysis at all there.

Comment 2: Note that the court, in a footnote, cites to a Kansas case suggesting that public agency will not be bound by rate limit covenants when such covenants would hamper the agencies in meeting their responsibilities to provide infrastructure. The court refuses to adopt that restriction, but in any event apparently does not feel that the problem would affect this case.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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