A developer's Declaration notifies the purchaser of the property of a potential lien for unpaid assessments, but is not sufficient to create an assessment lien, according to a recent decision of the Maryland Court of Appeals--the top state appeals court.  A lien based on the contractual obligation to pay assessments is valid only if the party asserting the lien complies with the notice procedures of the Maryland Contract Lien Act. 

At issue, in Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, LLC, was a claimed lien as part of a deferred financing arrangement for the construction of the water and sewer infrastructure for a new home development in Prince George's County, Maryland.  To recover the construction cost, the developer executed a Declaration of Deferred Water and Sewer Charges which imposed an annual assessment of $700 for 23 years to be paid to a developer-affiliated utility financing company and stated the purchaser of each

residential lot granted a lien to secure a payment by accepting a deed to the lot.  The Declaration was recorded in the land records before initial conveyance of the lot and before the purchaser obtained a mortgage loan secured by the lot.

When the utility financing company commenced a foreclosure proceeding for delinquent water and sewer assessments, the owner of the mortgage loan secured by the property filed suit to obtain a judicial determination as to the priority of the liens asserted by the utility financing company and the mortgage company.

Although the trial court and intermediate appeals court ruled that the Water and Sewer Declaration created a lien for assessments which was superior to the mortgage loan lien, the Maryland Court of Appeals disagreed and ruled that an assessment lien can be created only after there is a default in payment of the obligation established by the Declaration.  Before the lien can attach to the property, the Maryland Contract Lien Act requires that the property owner must be given notice of the intent to create the lien and an opportunity to contest the lien. 

In the context of condominium and homeowner association covenants which require owners to pay assessments, it is common for the covenants to state that there is a lien on the property for the amount of the annual assessments and related charges. As with the water and sewer assessments at issue in Select Portfolio, no lien is created by the covenants.  An association assessment lien, may be recorded in the land records only after the owner is provided notice and an opportunity to contest the lien.