Mercantile-Safe Deposit & Trust Co. v. Mayor of Baltimore

ADKINS, Judge. Leases of two improved properties in Baltimore City included agreements requiring their common lessee to restore the demised premises to certain conditions prior to the termination of the leases. Before the leases had terminated, Baltimore City acquired both properties by “quick-take” condemnation. The Circuit Court for Baltimore City concluded that the lessee’s restoration obligations were not compensable property rights and excluded evidence of the substantial increase in value of the properties attributable to the agreements.

Because we shall hold that the restoration obligations were covenants running with the land, and property interests for which compensation must be paid, we shall reverse. I. Background For simplicity’s sake, we shall treat appellant, Mercantile-Safe Deposit & Trust Company (Mercantile), as the property owner/lessor. 1 The Mayor and City Council of Baltimore (the City) is appellee. The properties here involved are 202 North Howard Street and 308 West Lexington Street. At one time, these properties existed as separate and distinct parcels, each containing its own improvements.

Years ago, however, these properties, along with other lots, were leased to Hochschild, Kohn & Co., Incorporated (Lessee), 2 which combined all of them into a single, large department store complex, removing most, if not all, of the features that had once distinguished the separate properties. ⁶³⁰ On 20 April 1962 Mercantile and Lessee entered into extensions of two earlier leases covering 202 North Howard Street and 308 West Lexington Street. By the terms of the 1962 documents, each of the earlier leases was extended for an additional period of 16 years, beginning on 1 September 1965 and ending on 31 August 1981. Each new lease contained the following provision: “7. AND IT IS FURTHER COVENANTED AND AGREED by and between [Mercantile] and Lessee for themselves and their respective heirs, personal representatives, successors and assigns, as follows: * * * * “(f) That not less than ninety (90) days prior to the termination of this lease, or any extension thereof, the Lessee shall, at its own expense, ... commence so to restore the premises demised hereunder as to render them capable of occupancy, lease, or sale for mercantile purposes, as a separate and distinct structure by erecting or restoring walls, ...

(such walls to be erected and constructed on the boundaries of said lot established by the record title thereof); interior supports, entrance doors, and show windows; floors, stairways, and fire escapes; and plumbing, heating and electrical installations ____ In the event that such restoration is not completed within said period of ninety (90) days, whether such delay is or is not attributable to the fault of the Lessee, the Lessee agrees to make appropriate payment to [Mercantile], such payment to be calculated in the same manner as the rent and additional rent reserved hereunder, and to cover the period from the termination of this lease, to the time when such restoration has been completed____ “Lessee, in making restoration, shall have the right and option of either converting and restoring the existing structure, or constructing a new structure which shall be a building limited in height to three stories____” In November 1980, some nine months before the expiration of the terms of the extended leases, the City advised ⁶³¹ Mercantile of its intention to acquire the properties for urban renewal purposes. This advice indicated that “it will be necessary to have all properties acquired and vacated by May 1, 1981.” A similar notice was sent to Lessee. May 1981 came and went. The City took no action to condemn prior to that date, and Lessee continued to hold the premises.

On 12 June Mercantile wrote Lessee, reminding it of its obligations under paragraph 7(f) of the leases. Five days after that, the City filed “quick-take” condemnation suits as to each property. The two actions were consolidated. In the course of preparing for trial, appraisers for both Mercantile and the City agreed that if the restoration obligations of Lessee were compensable rights, they added materially to the value of the property.

There was disagreement, however, as to whether the obligations constituted compensable rights. This issue was presented to the trial court by a motion in limine on behalf of Mercantile and by a motion for separate trial on an issue of law (Md. Rule 2-502) by the City. The court (Hammerman, C.J.) denied Mercantile’s motion and granted the City’s. The effect of this was to exclude from evidence valuation testimony relying on the restoration agreements.

Mercantile thereupon stipulated that the value of 202 North Howard Street was $127,300 without consideration of the restoration obligations. As to 308 West Lexington Street, the City’s appraiser testified that its value (ignoring the obligations) was $135,000. Inquisitions were duly entered, and Mercantile appealed to the Court of Special Appeals. We granted certiorari while the appeals were still pending in that court.

II

Covenants running with the land The principal bone of contention here is whether the restoration obligations were covenants running with the land or, as the City contends and as Chief Judge Hammer-man held, merely personal to Lessee. The parties view determination of the appropriate category as pivotal to the question of compensability. We agree, and, before address ⁶³² ing the compensation dimension of this dispute, proceed directly to that contention. The Court of Special Appeals has recently had occasion to consider the nature of covenants running with the land.

In Gallagher v. Bell, 69 Md.App. 199 , 516 A.2d 1028 (1986), cert. denied, 308 Md. 382 , 519 A.2d 1283 (1987), Judge Wilner, writing for that court, traced the development of the concept from Spencer’s Case, 5 Co. Rep. 16a, 77 Eng. Rep. 72 (QB 1583) to the present day. Quoting 5 R. Powell, The Law of Real Property § 673(1), pp. 60-37, 60-38 (1986), he distilled the elements of such a covenant as “ ‘that: (1) the covenant “touch and concern” the land; (2) the original covenanting parties intend the covenant to run; and (3) there be some privity of estate’ ” and that (4) the covenant be in writing. 69 Md.App. at 208 , 516 A.2d at 1033 . In the case before us, the covenant, if it be one, is certainly in writing.

Privity of estate clearly exists; indeed, the City makes no argument to the contrary. The disagreement is over the existence of Powell’s first two elements. Maryland cases have alluded to both of those as being essential to a covenant running with the land. See, e.g., Md. & Pa.

R. Co. v. Silver, 110 Md. 510 , 73 A. 297 (1909); Whalen v. Balto. & Ohio R. Co., 108 Md. 11 , 69 A. 390 (1908); Com. Bldg. Assn. v. Robinson, 90 Md. 615 , 45 A. 449 (1900); Glenn v. Canby, 24 Md. 127 (1866); and Gallagher (the “touch and concern” element). See also e.g., Kirkley v. Seipelt, 212 Md. 127 , 128 A.2d 430 (1957); Turner v. Brocato, 206 Md. 336 , 111 A.2d 855 (1955); Union Trust Co. v. Rosenburg, 171 Md. 409 , 189 A. 421 (1937); and Gallagher (the “intent” element).

A. Touch and concern As we have already noted, this Court has explained that “a covenant to run with the land must extend to the land, so that the thing required to be done will affect the quality, value, or mode of enjoying the estate conveyed, and thus constitute a condition annexed, or appurtenant to it____” Glenn, 24 Md. at 130 . Applying this definition, Maryland cases have determined a variety of agreements to ⁶³³ be covenants running with the land: an undertaking, in a mortgage, to pay ground rent and taxes, Barron v. Whiteside, 89 Md. 448 , 43 A. 825 (1899); an agreement to keep mortgaged property insured and to make repairs or rebuild, Thomas v. Vonkapff, 6 G. & J. 372 (1834); a contract not to construct improvements without prior approval of external design and location, Kirkley, supra; and an agreement to share pro-rata the cost of installation of certain streets and utilities, Gallagher, supra. Whether a covenant touches and concerns the land may be considered in terms of the burdens or benefits it imposes. Thus, the test is met if the performance of the covenant will “tend necessarily to enhance [the] value [of the land] ...,” Whalen, 108 Md. at 20 , 69 A. at 393 ; see also Silver, 110 Md. at 516 , 73 A. at 300 .

Powell espouses the more comprehensive formulation adopted by Dean Bigelow: “If the covenantor’s legal interest in land is rendered less valuable by the covenant’s performance, then the burden of the covenant satisfies the requirement that the covenant touch and concern the land. If, on the other hand, the covenantee’s legal interest in land is rendered more valuable by the covenant’s performance, then the benefit of the covenant satisfies the requirement that the covenant touch and concern land.” Powell, supra, § 673[2], at 60-41. Another author explains: “Ordinarily, ... a covenant is regarded as touching and concerning the land if it is of value to the covenantee by reason of his occupation of the land or by reason of an easement which he has in the land, or if it is a burden on the covenantor by reason of his occupation of the land.” 3 H. Tiffany, The Law of Real Property, § 854, p. 455 (3d ed. 1939). See also Restatement of Property § 537 (1944).

It will be noted that the “benefit” and “burden” tests are stated in the alternative; if either is met, the covenant may be one running with the land. This analysis may be a complex one when the undertaking is contained in a fee ⁶³⁴ simple conveyance so that the two different tracts of land are involved. It is less difficult where, as here (and as in Spencer’s Case), a lease is involved, and consequently, only a single tract with two different estates in it. See II American Law of Property, supra, § 9.13.

Turning to the Powell/Bigelow formulation, it appears that both aspects of the “touch and concern” test are present here. The requirement of performance of the restoration agreements certainly rendered the covenantor’s (Lessee’s) interest in the land less valuable; that interest was encumbered by an obligation to restore the two properties to something akin to their original conditions, a substantial burden. As to the covenantee (Mercantile), that obligation surely rendered its interest in the land more valuable. The excluded testimony of the appraisers so concluded, and it seems plain enough that Mercantile’s contractual right to get the properties back in restored form, instead of as an undifferentiated part of a vacated department store, enhanced the value of the properties.

The City nevertheless argues that these covenants could not run with the land because they dealt with something not in esse — future restoration of the properties. This contention is based on Spencer’s Case. The agreement there was to build a brick wall. As our predecessors read that opinion in Lynn v. Mount Savage Iron Co., 34 Md. 603, 634-35 (1871), Spencer’s Case held: “1st.

That when the covenant extends to a thing in esse, parcel of the demise, the thing to be done by force of the covenant is in a manner annexed and appurtenant to the thing demised, and shall run with the land, and shall bind the assignee, although he be not bound by express words; as if the lessee covenant to repair the houses, this is parcel of the contract, and extends to the supporting of the thing demised; but, because the covenant in that case was in respect of a thing which was not in esse at the time of the demise made, but to be newly built after, and therefore bound only the covenantor, his executors or ⁶³⁵ administrators, and not the assignee, the covenant did not, by the law, annex. 2nd. But if the lessee had covenanted for himself and his assigns, that they would make a new wall upon some part of the thing demised, that forasmuch as it is to be done upon the land demised, that it should bind the assignee; for although the covenant doth extend to a thing to be newly made, yet it is to be made upon the thing demised, and the assignee is to take the benefit of it, and therefore shall bind the assignee by express words [emphasis in original].” In Lynn , the covenant to erect wharves and other improvements clearly referred to things not in esse and since it did not purport to bind the covenantor’s assigns, the Court held that it did not run with the land. On similar facts the same result was reached in Dawson v. Western Md. R. Co., 107 Md. 70 , 68 A. 301 (1907). On the other hand, in Whalen, 108 Md. at 20 , 69 A. at 393 , an agreement to construct and maintain a railroad turnout and siding at a certain location was held to be a covenant running with the land.

Although the facilities were not in esse when the covenant was made, the Court, relying on Spencer’s Case, found decisive the fact that the agreement expressly bound the covenantor, its successors and assigns. The rule was recognized again in Silver, supra, although there the covenant did not run with the land because it did not refer to anything in esse and there were “no words of limitation to the heirs and assigns to the grantor.” 110 Md. at 516 , 73 A. at 300 . And in Linthicum v. W.B. & A. Rd. Co., 124 Md. 263 , 92 A. 917 (1914), the Court suggested that an agreement relating to something to be done in the future was not technically a covenant running with the land, but would be given that effect because of express words binding successors and assigns.

The Maryland cases, therefore, give critical effect to the presence or absence of language binding successors and assigns. If these words are present, as they are here, the covenant is one running with the land or the functional ⁶³⁶ equivalent thereof. That is, when the performance of the covenant touches and concerns the land within the meaning of the “benefit or burden” standard, it is deemed one running with the land, even when it deals with something not in esse, when the agreement expressly binds successors and assigns. Indeed, this reasoning is entirely consistent with the majority American view that makes no distinction between affirmative and restrictive covenants for the purpose of determining whether a covenant runs with the land.

It is well established that an affirmative covenant, which imposes a burden on the covenantor for the performance of some future act, may be a covenant running with the land and an interest in real property. See Barron v. Whiteside, 89 Md. 448 , 43 A. 825 (1899); Thomas v. Vonkapff, 6 G & J 372 (1834); Gallagher v. Bell, supra. See also Adaman Mutual Water Co. v. United States, 278 F.2d 842 (9th Cir.1960); Burton-Jones Development, Inc. v. Flake, 368 Mich. 122 , 117 N.W.2d 110 (1962); Vinson v. Meridian Masonic Temple Building Assoc., 475 So.2d 807 (Miss. 1985); Mendrop v. Harrell, 233 Miss. 679 , 103 So.2d 418 (1958); Horst v. Housing Auth. of County of Scotts Bluff, 184 Neb. 215 , 166 N.W.2d 119 (1969); Old Dominion Iron and Steel Co. v. Virginia Electric & Power, 215 Va. 658 , 212 S.E.2d 715 (1975); Note, A New Phase in the Development of Affirmative Equitable Servitudes, 51 Harv.L.Rev. 320 (1937); II American Law of Property, § 9.16 (1952). In the present case, the restoration agreements are affirmative covenants, for they impose on the covenantor the future obligation to restore the altered premises.

That the covenants are to be performed in the future cannot, alone, defeat their characterization as covenants running with the land. The restoration agreements meet the “touch and concern” test; they are to be performed on the very land demised, they relate to the physical condition of that land; they burden the covenantor and benefit the covenantee, and they bind successors and assigns. Thus, they are covenants running with the land if the other elements of such a covenant exist. As we have seen, ⁶³⁷ two of those other elements, privity and the existence of a written agreement, are not at issue here.

The remaining element, the intent of the parties, is, however, a disputed issue, the resolution of which depends heavily on the “successors and assigns” language. We now turn to the question of intent. B. Intent A covenant that touches and concerns the land may be prevented from running with the land if the parties indicate an intent that it not do so. 3 Tiffany, supra, § 854, p. 461. See Gnau v. Kinlein, 217 Md. 43, 48 , 141 A.2d 492 , 495 (1958). “Unlike the ‘touch and concern’ test, which looks objectively at the nature and quality of the covenant and seeks to measure the relationship between its performance and someone’s enjoyment of the land, the intention requirement ‘focuses on the subjective state of mind of the original covenanting parties,’ ” Gallagher, 69 Md.App. at 212 , 516 A.2d at 1035 (quoting Powell, supra, § 673[2], at 60-49).

That intent “may be ascertained from the language of the conveyances alone or from that language together with other evidence of intent.” Gnau, 217 Md. at 48 , 141 A.2d at 495 . In the cases before us, there is no suggestion that any evidence of intent exists, other than that manifested by the leases. While subjective intent ordinarily is a factual question inappropriate for decision on motion, Berkey v. Delia, 287 Md. 302 , 413 A.2d 170 (1980), in the case before us, there are no disputed facts on the question of intent, and we think the reasonable inferences from those facts compel but one conclusion. Therefore, the intent question can be decided as a matter of law.

See e.g., Fenwick Motor Co. v. Fenwick, 258 Md. 134, 138-139 , 265 A.2d 256, 258-259 (1970); Tavel v. Bechtel Corporation, 242 Md. 299, 307 , 219 A.2d 43, 45 (1963); Gallagher, 69 Md.App. at 212-213 , 516 A.2d at 1035 . Did