Darnestown Valley-WHM Ltd. Partnership v. McDonald's Corp.

BLOOM, Judge. Appellant, Darnestown Valley-WHM Limited Partnership (Darnestown), which manages the Quince Orchard Shopping Center located in Gaithersburg, Maryland, leased premises in the shopping center to appellee, McDonald’s Corporation (McDonald’s). In September 1992, appellant initiated a summary ejectment action in the District Court for Montgomery County, seeking to evict appellee for an alleged breach of its lease. Appellee demanded a jury trial, and the case was transferred to the Circuit Court for Montgomery County.

On 12 May 1993, the court (Harrington, J.) denied appellee’s Motion for Summary Judgment or in the Alternative Motion to Dismiss. Subsequently, appellant’s Motion for Summary Judgment and appellee’s Motion to Dismiss were presented to a different judge, who denied appellant’s motion and granted appellee’s motion. In its appeal from that Order, appellant presents the following issues for our consideration: I. Whether a landlord has sufficient legal title, possession and authority to institute and maintain a summary ejectment action against a tenant for breach of lease, where the fully performing Deed of Trust, to which the tenant is not a party, requires the mortgagee’s approval to terminate a lease and such approval was not obtained at the time suit was filed, but was obtained and filed prior to trial.

II

Whether a landlord is entitled to summary judgment for breach of lease where it is undisputed that the tenant knowingly and wilfully breached its lease by expanding its use of the leased property without the consent of the landlord, in violation of a zoning ordinance and then knowingly and wilfully failed to cure said violation upon notice of default from landlord within the contractual cure period even after the Tenant was found to be in violation of the zoning ordinance by the Montgomery County Board of Appeals. Appellee filed a cross-appeal presenting the following additional issue for our consideration: ⁵⁸¹ Did the Circuit Court err in its May 12, 1993 Order denying McDonald’s Motion to Dismiss where: (i) Darnestown’s cause of action was premature and not ripe for adjudication? (ii) Darnestown, as the purported landlord, had not established a prima facie case for breach of lease under Section 8-402.1? (in) Darnestown was precluded from terminating the Lease under the doctrines of waiver and/or estoppel?

FACTS In February 1976, McDonald’s entered into an agreement with Quince Orchard Associates, Inc., to lease premises located in the Quince Orchard Shopping Center for the operation of a restaurant. In March 1984, appellant purchased the shopping center property from Quince Orchard Associates, Inc., and thus became appellee’s landlord. In September 1986, appellant executed a Deed of Trust conveying the shopping center property to Richard Lawson and Wendy Sharp as trustees for Perpetual Savings Bank, F.S.B. (collectively referred to as “Perpetual”) as security for a $7,800,000 debt owed by appellant to Perpetual.

Contained within the Deed of Trust was a provision (Paragraph 37) assigning all of the shopping center leases to Perpetual, with a covenant by appellant that it would not terminate any of the leases without the prior written consent of Perpetual. Appellant was permitted to continue to operate the shopping center and, pursuant to the provisions of the assignment of the leases, it also continued to collect the rents, being designated as a trustee for Perpetual for that purpose. Perpetual became insolvent, and the Resolution Trust Corporation (RTC) succeeded Perpetual as holder of the deed of trust note secured by the deed of trust with assignment of leases. In 1985, appellant and appellee began negotiating a modification of the lease that would allow appellee to expand its use of the leased premises.

Appellee asserts that it merely wanted to install an outdoor children’s playground on the property ⁵⁸² that it was leasing and that it only needed a fence permit from the Montgomery County Department of Environmental Protection to comply with the county’s zoning requirements. Appellant asserts that appellee planned to install additional patron seating, which would increase the number of parking spaces required to be available to restaurant patrons and thus would require a special exception to county zoning regulations. Although the parties never reached an agreement, appellee was granted a fence permit by the Department of Environmental Protection and proceeded with its construction plans. When appellant discovered that appellee had constructed improvements on the property, it sent appellee a letter requesting proof that the improvements complied with county zoning regulations.

After a hearing before the Montgomery County Board of Appeals, which appellant contends established that appellee violated zoning regulations, appellant notified appellee on 7 August 1992 that, because the improvements to the leased premises made by appellee violated county zoning regulations, appellee was in violation of Paragraph 12 of its lease agreement. Under the lease agreement, appellee had thirty days in which to cure the alleged breach. When appellee failed to cure in that time, appellant undertook to terminate the lease; on 30 September 1992, it initiated a summary ejectment action in the district court, pursuant to Maryland Code (1974, 1988. Repl.Vol.), § 8-402.1 of the Real Property Article, to repossess the premises.

At the time that action was filed, appellant had not obtained RTC’s written consent to terminate appellee’s lease. Upon appellee’s demand for a jury trial, the case was transferred to the circuit court and scheduled for trial on 25 May 1993. On 12 May 1993, the court denied appellee’s Motion for Summary Judgment or in the Alternative Motion to Dismiss. On the day of trial, the presiding judge heard oral arguments on appellee’s Motion to Dismiss and appellant’s Motion for Summary Judgment.

The court then dismissed the jury and directed appellant either to join RTC as a required party or to ⁵⁸³ obtain its written consent to terminate appellee’s lease. Although appellant obtained RTC’s written consent to terminate appellee’s lease on 25 June 1993, appellee once again filed its Motion to Dismiss, and appellant supplemented its Motion for Summary Judgment, which was still under advisement. On 4 January 1994, the court denied appellant’s Motion for Summary Judgment and granted appellee’s Motion to Dismiss. I. Appellant contends that the circuit court erred in granting appellee’s Motion to Dismiss because appellant was “vested with sufficient title, authority, and possession to maintain a possessory action against McDonald’s for breach of lease.” According to appellant, the Deed of Trust should be interpreted as a mortgage, since it was granted to Perpetual only as security for the debt owed to it by appellant.

Appellant argues that, if it is treated as mortgagor, the language of Paragraph 37 of the Deed of Trust acts as a redemise of the property to appellant, thus making appellant the beneficial owner of the mortgaged property as to all persons except the mortgagee. Consequently, appellant contends, it could maintain an ejectment action against appellee. Under Maryland Code (1974, 1988 Repl.Vol.), § 8-402.1 of the Real Property Article, if the tenant breaches the lease ... and the landlord desires to repossess the premises, and if the tenant or person in actual possession refuses to comply, the landlord may make complaint in writing to the District Court of the county where the premises is located. To qualify as appellee’s “landlord,” thus enabling it to maintain an action under this statute, appellant must establish that it has sufficient legal title and right of possession to the property under the Deed of Trust.

Appellant must then demonstrate that its legal title and possessory rights were not eliminated when it assigned all of the leases associated with the property to Perpetual. ⁵⁸⁴ A. Deed of Trust Initially, we must determine whether the Deed of Trust granted to Perpetual by appellant operates as a mortgage under Maryland law. Maryland Code (1974, 1988 Repl.Vol.), § 7-101(a) of the Real Property Article (R.P.) provides, in pertinent part: Every deed which by any other writing appears to have been intended only as security for payment of an indebtedness or performance of an obligation, though expressed as an absolute grant is considered a mortgage. The term “ ‘Deed’ includes any ... deed of trust ... pertaining to land or property or any interest therein or appurtenant thereto, including an interest in rents and profits from rents.” Maryland Code (1974, 1988 Repl.Vol., 1993 Cum.Supp.), R.P. § l-101(c). Thus, if a deed of trust transferring property is shown, under all the facts and circumstances, to have been intended merely as security for a debt, the court will go beyond the form and treat it as a mortgage conveying a security interest in the property.

Bailey v. Poe, 142 Md. 57, 69 , 120 A. 242 (1923) (citations omitted); see also In re Bethesda Air Rights Ltd. Partnership, 117 B.R. 202, 206 (Bankr.D.Md.1990) (interpreting Maryland law). In the case sub judice, the language of the Deed of Trust clearly demonstrates that it was intended to secure appellant’s debt to Perpetual, and was not meant to be an absolute conveyance of the property. This is illustrated by the language of the following clauses: WHEREAS, [appellant] is justly indebted to [Perpetual] (hereinafter referred to as the “Lender”) in the principal sum of SEVEN MILLION EIGHT HUNDRED THOUSAND DOLLARS ($7,800,000), or so much thereof as shall' have been advanced and remain unpaid, which indebtedness is evidenced by a Deed of Trust Note of even date herewith (hereinafter referred to as the “Note”) bearing interest from date on outstanding balances at the rate or rates set forth in the Note, interest and principal being payable as provided in the Note (said Note, which is identified as ⁵⁸⁵ being secured hereby by a certificate thereon, is incorporated herein by reference and made a part hereof); and WHEREAS, [appellant] wishes to secure the full and punctual payment of the Note and the indebtedness evidenced thereby, and interest thereon, and the full performance of all the provisions, conditions, covenants and agreements herein contained, and also to secure the reimbursement to the Lender and the Trustee for any and all money which may be advanced as herein provided for, and for any and all costs and expenses herein provided for or which may arise in respect of this Deed of Trust or the indebtedness hereby secured or the Property herein mentioned; .... (Emphasis added.) The actual purpose of the Deed is further evidenced by the habendum clause, which provides that once appellant paid off “the principal of and interest on the Note and all other indebtedness which this Deed of Trust by its terms secures ..., then [the Deed] shall be null and void and of no further force and effect and shall be released.... ” Because it is apparent from its language that the Deed of Trust was granted to secure the loan that Perpetual made to appellant and was not intended to act as a conveyance of the property, it is deemed to be a mortgage under Maryland Code (1974, 1988 Repl.Vol.), R.P. § 7-101(a).

In Maryland, “where property is conveyed by mortgage to secure the payment of a debt, ... the debt is the principal incident of the transaction, and ... the conveyance is no more than security for its payment, and accessory and appurtenant to it.” Mizen v. Thomas, 156 Md. 318, 318 , 144 A. 479 (1929) (citations omitted); see also Williams v. Safe Deposit & Trust Co., 167 Md. 499, 503 , 175 A. 331 (1934). Accordingly, there is usually incorporated in a mortgage of a leasehold estate ... a provision whereby the mortgagors, their personal representatives and assigns, may continue to hold and possess the mortgaged premises, and to receive the rents and profits thereof, upon paying in the meantime the ground rent, and all taxes levied or assessed ⁵⁸⁶ on the mortgaged property, with a covenant on the part of the mortgagors, their personal representatives and assigns, to pay the ground rent and taxes. The effect of this agreement on the part of the mortgagee, which is known as a redemise is to make of the mortgagor, in most respects, a tenant to the mortgagee. Through the right of possession until default under the mortgage, and the equity of redemption, the mortgagor is now regarded as the real and beneficial owner of the mortgaged premises as to all persons except the mortgagee and those claiming under him....

Williams, 167 Md. at 503-504 , 175 A. 331 (citations omitted). Although Williams involved a mortgage of a leasehold estate, the rule that permission by the mortgagee for the mortgagor to remain in possession until default constitutes a redemise to the mortgagor applies as well to mortgages of fee simple estates. See Richardson v. Baltimore and Delaware Bay R.R. Co., 89 Md. 126, 129 , 42 A. 938 (1899). Thus, although a mortgage technically conveys legal title to the property to the mortgagee, such title is not absolute, being merely for security for payment.

Id. A mortgage provision granting the mortgagor the right to continue to possess the property and to collect rents and profits, while paying the taxes and assessments on it, acts as a redemise of the property to the mortgagor until the mortgagor is in default. Id. In the case sub judice, the Deed of Trust executed by appellant granted the property to Perpetual.

Although it did not explicitly so state, the Deed of Trust by its language demonstrates that appellant was intended to remain in possession of the property. Paragraph 16 of .the Deed of Trust provides that, if appellant defaults under the Deed of Trust Note or the Deed of Trust and fails to cure the default within the specified time, Perpetual “may enter upon and take possession of the Property ... and may remove [appellant].” (Emphasis added.) Paragraph 8.2 states that appellant cannot permit or commit waste of the property, that appellant must ⁵⁸⁷ keep the property in good repair, and that appellant is expected to “manage and maintain the Property in a manner to insure maximum rentals.” Paragraph 37 states that appellant “shall collect and receive all rents and revenues of the Property as Trustee for the benefit of the Lender.... ” Appellant also was required to pay all taxes and assessments on the property and to maintain insurance on the property at its expense. It is obvious from these provisions and the fact that appellant did continue to possess and manage the property after executing the Deed of Trust that both grantor and grantee intended that appellant would possess and maintain beneficial ownership of the property after executing the Deed of Trust. Accordingly, we hold that Perpetual redemised the property to appellant.

When the mortgage provides for a redemise of the property, the mortgagor “is regarded, both at law and in equity, as the substantial owner of the property----” Richardson, 89 Md. at 130, 42 A. 938 (citing Chelton, v. Green, 65 Md. 276 , 4 A. 271 (1886)). In effect, the mortgagor is regarded as the real and beneficial owner of the redemised premises as to all persons except the mortgagee. Williams, 167 Md. at 504 , 175 A. 331 . If the mortgage contains an affirmative covenant “that the mortgagor shall possess and enjoy [the mortgaged property] until default,” these ownership rights are divested only if the mortgagor defaults in its performance of tiie mortgage