MAGRAW v. DILLOW, 341 Md. 492 (1996)

671 A.2d 485

No. 19, September Term, 1995.Court of Appeals of Maryland.
February 8, 1996.

Appeal from the Circuit Court, Cecil County, Edward D.E. Rollins, Jr., J.

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Certiorari to the Court of Special Appeals, Circuit Court, Cecil County; Edward D.E. Rollins, Jr., Judge.

Franklin T. Caudill (C. Thomas Brown, Albright Brown, on brief), Baltimore, for petitioner.

Robert F. Kahoe, Jr. of Bel Air, for respondent.

Argued before MURPHY, C.J., and ELDRIDGE, RODOWSKY, CHASANOW, KARWACKI, BELL, and RAKER, JJ.

KARWACKI, Judge.

We are presented here with the question of the scope and application of the special covenant against encumbrances, which is described in Maryland Code (1974, 1988 Repl. Vol.), § 2-110 of the Real Property Article. Because the Court of Special Appeals properly construed the covenant under the circumstances of the instant case, we shall affirm.

I.
At issue are four adjoining properties that together comprise 5.09 acres of land located in Cecil County. Prior to 1983, James S. Magraw (James) owned an undivided 5/6 interest in those unimproved properties. The outstanding 1/6 interest was vested in the heirs of Ms. Helen Squires, who died intestate on January 12, 1947. The record does not reveal how this fractional ownership of the properties originated.

James, apparently realizing that his title to only a fractional interest was probably unmarketable, sought to acquire the remaining 1/6 interest. To do so, James allowed his[1] property tax payments to fall into arrears and eventually Cecil County was forced to institute tax sale proceedings to satisfy the taxes.

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At tax sale, James and his wife, Deborah L. Magraw (the “Magraws”), purchased the property. After the statutory period prescribed in Md. Code (1957, 1980 Repl. Vol.), Art. 81, § 100, on October 31, 1983, the Magraws filed a “Bill of Complaint to Foreclose Equity of Redemption” against “James S. Magraw and ALL Persons having or claiming to have any interest in the property
located in Cecil County, Maryland, described as 5.09 acres of land, more or less, with improvement thereon situated Rock-Battle Swamp Road, S/W of Woodlawn, District EQUITY NO. 7, adjoining the property of or formerly owned by John Carson.”[2] As part of the

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foreclosure proceeding, the Magraws’ attorney filed an “Affidavit of Search” required by Md. Code (1957, 1980 Repl. Vol.), Art. 81, § 105, alleging “that he had made the search of title to the subject property for the past forty years, and that the owner or owners of said property are listed in this case, and that he did make a search of all Orphans’ Court, Equity Land Records, Judgment Records, etc., in order to ascertain whether or not there were any other owners, or owner to said property.” This affidavit proved to be inaccurate in that the records of the Orphans’ Court at the time showed that Helen Squires died intestate leaving six heirs. Since the heirs of Helen Squires were not properly notified of the foreclosure, the proceeding failed to foreclose the equity of redemption which they possessed as owners of the 1/6 undivided interest in the properties Dillow v. Magraw, 102 Md. App. 343, 355-364, 649 A.2d 1157, 1163-67 (1994).

In 1988, the Magraws sold the still unimproved properties to Robert M. Dillow (Dillow). Dillow planned to build single family homes on each of the parcels and then to resell the individual parcels. The properties were conveyed by two deeds, one dated August 2, 1988, and the other dated November 7, 1988. The deeds contained identical covenants:

“And the parties of the first part [the Magraws] hereby covenant that they have not done or suffered to be done an act, matter or thing whatsoever, to encumber the property hereby conveyed;[3] that they will warrant specially the property hereby granted;[4] and that they will execute such further assurance of the same as may be requisite.”[5]

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Industrial Valley Title Insurance Company examined the land records and guaranteed that the Magraws were conveying good and marketable title to the properties. Dillow began construction.

In early 1989, however, trouble arose. Dillow sought financing to complete construction of the homes he was building on the properties. His loan application was denied due to a determination by a second title insurance company that Dillow lacked good and marketable title. The Magraws’ attempt after tax sale to foreclose the equity of redemption belonging to the heirs of Helen Squires was deficient and consequently Squire’s heirs retained their right to redeem 1/6 of the property.

Dillow brought suit in the Circuit Court for Cecil County against Industrial Valley Title Insurance Company, its agent, Fidelity Title Company, Inc., and the Magraws. The suits against the title company and its agent were voluntarily dismissed for reasons not revealed by the record. Thereafter an amended complaint was filed alleging the facts set forth above and claiming damages for an inability to refinance or sell the properties and for expenses incurred in improving the properties, lost profits, the amount of the purchase price and other expenses. Dillow claimed that the Magraws breached the special warranty contained in the deeds; that they breached the covenant against encumbrances; that they breached express and implied covenants of merchantable title; and, finally that they were negligent in conducting the proceeding to foreclose the equity of redemption held by the heirs of Helen Squires.

The Magraws moved to dismiss the first amended complaint for failure to state a claim upon which relief could be granted. The trial court granted that motion after hearing arguments from counsel for the parties.

Dillow appealed to the Court of Special Appeals. The Court in a well-reasoned opinion affirmed the trial court except with respect to the alleged breach of the special covenant against encumbrances. The court found that Dillow’s complaint alleged a sufficient breach of the special covenant against encumbrances

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and remanded the case to the Circuit Court for Cecil County for further proceedings. The Magraws petitioned this Court for a writ of certiorari which we issued.

II.
The relevant statute, § 2-110, as well as §2-111 with which it should be contrasted, is found in Title 2 of the Real Property Article. Sections 2-104 through 2-112 of this title provide rules of construction for the interpretation of covenants by a grantor in a deed of realty. Judge Wilson K. Barnes, speaking for this Court in Marathon Builders, Inc. v. Polinger, 263 Md. 410, 283 A.2d 617 (1971), recognized the legislative purpose in enacting these statutes:

“By the Laws of 1864, ch. 252, the General Assembly provided a shorter form for all of these covenants of title so that thereafter conveyancers in Maryland could use the shorter form without the burden of the rather ponderous form in use by the common-law conveyancers who, quite naturally, were unwilling to eliminate a single word of the long form of covenant generally in use and theretofore construed by the courts. The provisions of the Laws of 1864, ch. 252 now appear as [Title 2 of the Real Property Article].”
“The General Assembly by providing for the abbreviated form of covenant, however, did not intend either to enlarge or to diminish the meaning and scope of the common law forms. The legislation states that the short form `shall have the same effect’ as the old long form. This is reinforced by the provisions of § 9 of ch. 252 of the Laws of 1864 (Art. 21, § 94)[[6] ], as amended, that all deeds executed in pursuance of the prior provisions `shall be as valid and effectual as if the covenants in said deed had been expressed therein, in full.'”

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Marathon Builders, 263 Md. at 414, 283 A.2d at 620; see also
4 Herbert Tiffany, The Law of Real Property § 999 (3rd ed. 1975).

Sections 2-110 and 2-111 explain the proper construction of covenants against encumbrances:

Ҥ 2-110. Effect of covenant that grantor has done no act to encumber.
A covenant by the grantor in a deed, “that he has done no act to encumber the land,” has the same effect as if he had covenanted that he had not done, executed, or knowingly suffered any act or deed whereby the land granted, or intended to be, or any part of it, is or will be charged, affected, or encumbered in title, estate, or otherwise.”
Ҥ 2-111. Effect of general covenant against encumbrances.
A covenant by the grantor in a deed, “that the land is free and clear of all encumbrances” has the same effect as if he had covenanted that neither he nor his predecessors in his chain of title had done, executed, or knowingly suffered any act or deed whereby the land granted, or intended to be granted, or any part of it, are or will be charged, affected, or encumbered in title, estate, or otherwise.”

Section 2-110 has been a part of Maryland law since the Civil War period.[7] Section 2-111 is of much more recent

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vintage.[8] But regardless of the age of the respective provisions, they do no more than serve as interpretive guides for covenants that have long existed under the common law.[9]

Before exploring the differences between the special covenant against encumbrances defined in § 2-110 and the general

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covenant against encumbrances defined in § 2-111, it is first necessary to describe those features they share.

The covenants against encumbrances generally may be described as present covenants in that they are breached, if ever, upon delivery of the deed. Marathon Builders, Inc. v. Polinger, 263 Md. at 414, 283 A.2d at 620.[10] They do not usually run with the land, but serve only to benefit the covenantee. Levine v. Hull, 135 Md. 444, 447, 109 A. 141, 142 (1919). See also Eli Frank, Title to Real and Leasehold Estates and Liens (1912) 98. There is no precise definition of an encumbrance:

“An encumbrance is any right or interest held by someone other than the grantee or grantor which diminishes the value of the estate but not so much that it leaves the grantee with no title at all.[11] The word [encumbrance] has no precise meaning but includes security instruments, leases, mechanics’ liens, property tax assessment liens, easements, future interests and covenants running with the land at the time of conveyance, other than those specifically set forth in the deed.”

11 Thompson on Real Property, Thomas Edition § 94.07(b)(1)(ii)(3) (David A. Thomas ed. 1994 Supp. 1995). Other treatises agree that there is no precise definition of an encumbrance but list those interests held to constitute encumbrances.[12] Maryland courts have also avoided a strict

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definition of an encumbrance. The Court of Special Appeals in the instant case, undertook to analyze the Maryland cases that define an encumbrance. 102 Md. App. at 369-372, 649 A.2d at 1170-71, (citing Levine v. Hull, 135 Md. 444, 109 A. 141 (1919) (“suggesting” that a preexisting right of way constituted an encumbrance); Tri-State Properties, Inc. v. Middleman, 238 Md. 41, 207 A.2d 499 (1965) (holding that a suit to determine zoning jurisdiction did not constitute an encumbrance); Manor Real Estate Co. v. Joseph M. Zamoiski Co., 251 Md. 120, 246 A.2d 240
(1968) (holding that an unpaid utility benefit charge is an encumbrance); Marathon Builders, Inc. v. Polinger, 263 Md. 410, 283 A.2d 617 (1971) (holding that zoning is not an encumbrance)).[13]

Beyond the similarities, there is an important difference between the two covenants against encumbrances. A general
covenant against encumbrances, expressed either in the abbreviated form of § 2-111, or in the traditional common law forms, warrants that the land conveyed is absolutely free of encumbrances. Accordingly, the grantor is responsible to the grantee for any encumbrances created either by the grantor or his predecessors in title. The special covenant against encumbrances, expressed either in the abbreviated form of §2-110, or in the traditional common law forms, warrants that the land conveyed is free of encumbrances

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created by the grantor. Therefore, if a special covenant against encumbrances is given, a grantor will not be held liable for the acts of a predecessor in title who encumbered the property. It is clear from the text of the deeds, “[a]nd the parties of the first part [the Magraws] hereby covenant that they have not done or suffered to be done an act, matter or thing whatsoever, to encumber the property hereby conveyed” (emphasis added), that the Magraws gave Dillow a special covenant against encumbrances.[14]

III.
We now turn to the two central questions presented in this case: is the property actually encumbered, and if so, did the Magraws create the encumbrance and thereby violate their covenant? We will answer yes to both questions.

Petitioners’ claim that the status of ownership of the subject properties was unchanged by the improperly conducted redemption proceedings is not persuasive. In fact, everyone’s rights in the land were modified.

A. James Magraw
Prior to the tax sale, James owned an undivided 5/6 interest in the property. That interest was clouded by the tax sale, and he retains two distinct groups of interests: those rights he obtained as a tax sale purchaser, and those rights he retains as the previous owner.[15]

As a tax sale purchaser, James Magraw is the holder of a tax sale certificate, § 83, and has the right to institute foreclosure proceedings to take title to the property, § 100.

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“The interest of a tax sale purchaser is . . . that of a lien against the property which, through the process of foreclosure, ripens into title.” Voge v. Olin, 69 Md. App. 508, 522, 518 A.2d 474, 481 (1986) (citing Prince George’s Homes, Inc. v. Cahn, 283 Md. 76, 85, 389 A.2d 853, 857 (1978); Stewart v. Wheatley, 182 Md. 455, 458, 35 A.2d 104, 106 (1943)). We have also analogized the rights of a tax sale holder to a mortgagee Hardisty v. Kay, 268 Md. 202, 212, 299 A.2d 771, 776 (1973). In this way, the tax sale purchaser holds an inchoate right of ownership, which vests upon successful foreclosure.

In his other capacity, as the previous owner, James Magraw holds the statutory right of possession granted by § 95 and the statutory right of redemption under § 92. These rights that James holds after tax sale are qualitatively different from those that he held prior to the tax sale. His possessory rights in the property are no longer the natural consequence flowing from his ownership of the property, but are a privilege granted by § 95, and are subject to the appointment of a receiver. The right of redemption after tax sale also differs from the right to discharge a tax obligation that exists prior to tax sale. Before tax sale, James could have discharged his tax obligation with a payment to Cecil County of the taxes owed, interest and penalties. After tax sale, James must use the redemption procedure outlined in § 93, first paying the county tax collector the whole amount of money received by the collector (the purchase price of the property), and interest on that amount, plus any subsequent taxes that have accrued. James Magraw’s rights in this property are thus modified because the right of redemption he now holds is different than the right of discharge he held before tax sale.

B. Deborah Magraw
Deborah Magraw, who had no ownership interest before the tax sale, now holds rights identical to those rights her husband holds as a tax sale purchaser.

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C. The Heirs of Helen Squires
Finally, the rights of the heirs of Helen Squires are modified. Previously they held between them an undivided 1/6 interest in the property. By operation of the tax sale, their rights as owners of the undivided 1/6 interest includes a right to redeem pursuant to § 92.

Under § 92,

“[t]he owner or other person having an estate or interest in the property sold by the collector may redeem the said property at any time until the right of redemption has been finally foreclosed under the provisions of this subtitle, by paying to the collector the amount required for redemption. . . .”

The amount required for redemption and paid to the collector is “the whole amount of money received by such collector from the sale of the property, together with interest. . . .” § 93. If the property has been purchased by a party other than a county

“there shall be added to the amount required for redemption any taxes, together with interest and penalties thereon accruing subsequent to the date of sale which have been actually paid by the holder of the certificate of sale . . . and the total disbursements of the holder of the certificate of sale . . . made in accordance with the provisions of [the Tax Sales] subtitle.”

Id. Thus, the redemption amount required to be paid by a person having an interest in the property, where the county did not buy in at tax sale, includes all of the taxes, interest, and penalty assessed against the property from and after the original tax delinquency.

It follows that redemption benefits all interests in the property, and that the heirs could not redeem simply their 1/6th interest. Accordingly, if redemption is effected by one tenant in common prior to foreclosure of the right of redemption, the legal title to the property would not be changed, and the tenant who paid the full taxes would have a right to contribution. It is not until entry of a valid final decree of foreclosure

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of the right of redemption that there “vest[s] in the plaintiff [i.e., the holder of the tax sale certificate] an absolute and indefeasible title in fee simple in the property.” § 112.

Significantly, the heirs of Helen Squires may at any time petition the Circuit Court for Cecil County to set aside the final decree foreclosing their right of redemption. That petition will have merit because a right of redemption created in a tax sale exists in perpetuity until such time as that right of redemption is foreclosed by a proper legal proceeding. See Brashears v. Collison, 207 Md. 339, 351-54, 115 A.2d 289, 295-96 (1955) (holding that a right of redemption not barred by laches) Heill v. Staniewski, 265 Md. 722, 725, 291 A.2d 449, 451 (1972).

A right of redemption was thus created and continues to exist to this day. We must determine if this right of redemption is a sufficient burden on the property to constitute an encumbrance.

Our research of the Maryland cases, and those of our sister jurisdictions, discloses but a single reported decision on this point: Roy v. F.M. Martin Son, 16 Ala. App. 650, 81 So. 142
(1919). The Roy Court stated simply, “We are of the opinion that the statutory right of redemption is an incumbrance on the land, within the meaning of the covenant against incumbrances, and that any effort on our part to further define the meaning of the term would be a work of supererogation.”[16] Roy, 16 Ala. App. at 651, 81 So. at 143. While we agree with the result of the Roy Court, its failure to justify its result requires us to search elsewhere. We therefore undertake to review the Maryland cases on encumbrances.

In Levine v. Hull, 135 Md. 444, 109 A. 141 (1919), this Court had occasion to determine if a right of way across the deeded property violated a covenant against encumbrances. The Court was unable to reach the question because it was unable

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to determine when the right of way was established. Nonetheless, the case makes clear that if the right of way existed prior to the conveyance, it would constitute an encumbrance. Id. at 446-47, 109 A. at 142.

Covenants running with the land have also been determined to be encumbrances on title:

“It is settled law that restrictions which limit the use which an owner may make of his land are incumbrances which are inconsistent with an absolute and unfettered title thereto, and that one who agreed to purchase land upon the condition that the vendor convey to him a good and merchantable title is not, unless he had notice of them when the contract was made, required to accept a title burdened with restrictions.”

McKenrick v. Savings Bank of Baltimore, 174 Md. 118, 120, 197 A. 580, 581 (1938). See also Halle v. Newbold, 69 Md. 265, 271, 14 A. 662, 664 (1888).

An unpaid utility benefit charge was held to constitute an encumbrance in Manor Real Estate Co. v. Joseph M. Zamoiski, Co., 251 Md. 120, 246 A.2d 240 (1968), despite the fact that it was not yet due. “[P]resent liability [for] an eventual lien may be sufficient to establish an encumbrance.” Id. at 130, 246 A.2d 240. The Court of Special Appeals correctly limited this holding in Strass v. District-Realty Title Ins. Corp., 31 Md. App. 690, 704, 358 A.2d 251, 258 (1976), to present and not future liabilities.

By contrast, we have found zoning not to constitute an encumbrance. Marathon Builders, Inc. v. Polinger, 263 Md. 410, 283 A.2d 617 (1971). We have also held that a suit to determine the appropriate agency to zone a property is not an encumbrance Tri-State Properties, Inc. v. Middleman, 238 Md. 41, 207 A.2d 499 (1965).

This Court has also held that “the transient storage of alcohol” occupying less than 2% of the space in a warehouse

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did not constitute an encumbrance. Baltimore Trust Co. v. Canton Corn Products Co., 140 Md. 557, 118 A. 139 (1922).[17]

Our survey of the relevant Maryland case law discloses six factors[18] which have been given weight when determining if a cloud on title constitutes an encumbrance. Those factors are:

1) A right or interest in land;
2) subsisting in a third party;[19]
3) diminishing the value of the property purchased;
4) but not so much that the grantee received no title at all;[20]

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5) but must have preexisted the contract of sale[21] and be breached, if at all, at the time of conveyance;[22] and
6) the subject property must be in the hands of the covenantee and not a remote purchaser.[23]

We apply the factors to the facts of this case. The right of redemption is a “right or interest in land.” Not every “right or interest” necessarily rises to the level of an encumbrance. This element requires a subjective judgment as to the “degree” of encumbrance. To make the determination we have only the traditional method of common law development, reasoning by analogy, to guide us. We find that a right of redemption is more similar to an easement, lien, or the like, than it is to zoning or a suit to determine zoning jurisdiction.

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The right of redemption exists in a third party, here the heirs of Helen Squires. By third party it is simply meant that the right exists in someone other than the covenantor or the covenantee. The third person may be an individual, a group of individuals, a corporation, or any other group capable of holding property.

The third factor, the diminution of the value of the estate Mr. Dillow purchased, is obvious. He owns an undivided 5/6 share of the estate, rather than the entirety for which he bargained. Dillow has been unable to secure additional financing and will be unable to sell the parcels he has improved.

The fourth factor, that the diminution of the value has not rendered the vendor without title whatsoever, serves merely to distinguish an encumbrance from a failure of seisin. The Magraws did have some aspects of ownership to transfer, namely their rights as tax sale purchasers and James’ right of redemption.

The time sequence, listed as the fifth factor, is clearly met in this case. The interest of the heirs of Helen Squires predates the Magraws’ ownership, and the creation of the right of redemption in the heirs predates the contract of sale. Moreover, it is not alleged that any acts subsequent to the conveyance created this encumbrance.

Factor six is satisfied because the plaintiff here is Dillow, the covenantee, rather than a remote purchaser. A remote purchaser from Dillow cannot reap the benefit of the covenant because a covenant against encumbrances, unless the parties have contracted otherwise, does not run with the land. Levine v. Hull, 135 Md. 444, 447, 109 A. 141, 142 (1919).

Because all of the factors are met in the instant case, we hold that the right to redeem that exists in the heirs of Helen Squires continues unabated and is an encumbrance on the property.

The Magraws, the covenantors, by their own acts, encumbered the property. James allowed the real estate taxes to lapse. He let the property go to tax sale in an

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attempt to acquire clear title. He had the option of forcing a sale through partition, but this method would have required him to notify the heirs of Helen Squires, and run the risk of someone outbidding him for the property. Instead, the Magraws attempted to use the tax sale procedure. This had the effect of creating the right of redemption in the heirs of Helen Squires. The Magraws then instituted the foreclosure proceedings, which resulted in a decree, and a deed from the treasurer of Cecil County, ostensibly vesting fee simple title in the property in James S. and Deborah L. Magraw. It is that title, acquired in foreclosure, that the Magraws sought to convey to Dillow.

The encumbrance on that title existing by virtue of the continuing possibility that the heirs may appear and meritoriously assert their right to redeem is not an encumbrance that preexisted the foreclosure proceeding. A redemption effected before foreclosure would not have affected the title held by James and the heirs. A redemption by the heirs after an ineffective foreclosure, however, would have to be, under § 92, a redemption of all of the fee simple interest. Such a redemption would restore, at least equitably, the title to the heirs and to James, as tenants in common, thus encumbering the foreclosure title of James and Deborah as tenants by the entireties. Chavez v. Chavez, 56 N.M. 393, 396, 244 P.2d 781, 782 (1952) (“[i]t is a well settled principle of law that a redemption from a tax sale by one cotenant operates as a redemption for all cotenants”) Kuklo v. Starr, 660 So.2d 979, 979 (1995); Truver v. Kennedy, 425 Pa. 294, 302, 229 A.2d 468, 472 (1967); Poenisch v. Quarnstrom, 361 S.W.2d 367, 372 (1962).

Because James and Deborah created the defect in the foreclosure proceeding that produces the encumbrance on the property, they have “committed the very act they covenanted against.” Dillow,
102 Md. App. at 374, 649 A.2d at 1172.

JUDGMENT OF THE COURT OF SPECIAL APPEALS AFFIRMED WITHDIRECTIONS TO REMAND THE CASE TO THE CIRCUIT COURT FOR CECILCOUNTY FOR FURTHER PROCEEDINGS CONSISTENT WITH

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THIS OPINION.COSTS IN THIS COURT TO BE PAID BY PETITIONERS.