Front Foot Benefit Companies: Remember to Disclose


Builders and developers have long been responsible for providing disclosures to new homeowner buyers of any fees or assessments for which the buyer would be responsible. However, the Maryland legislature decided that the existing disclosure requirements were not adequate. Further, the Maryland legislature wanted to provide buyers additional remedies for violations of certain disclosures. Specifically, disclosures of the existence and details of any water and sewer assessment, called a front fee, for which the buyer will be responsible. In addition to making the initial builder or developer responsible for such a disclosure, the legislature also made the subsequent seller of the property liable for the same disclosure.

While this subsequent seller may be responsible for the disclosure, the lack of such a disclosure will most likely fall on the shoulders of a real estate agent or broker. Real estate professionals owe duties of disclosure of all known relevant and material information pertaining to the transaction. A real estate agent or broker could very well find themselves responsible in the event that a front fee was not disclosed in a real estate transaction.

Front Fee Benefit

A front fee is an annual fee that has been assessed to pay for the installation of water and sewer lines to connect a residence or a building to the city or county water and sewage infrastructure. In Montgomery and Prince George's Counties of Maryland, the Washington Suburban Sanitary Commission ("WSSC") is generally authorized to construct, maintain and operate systems for water supply and sewage conveyance and treatment in the Washington Suburban Sanitary District.

Private Water and Sewer Installations

The WSSC offers developers an alternative to WSSC installation of water and sewer systems under an agreement known as a memorandum of understanding ("MOU") between the developer and WSSC. Because the water and sewer systems in developments covered by an MOU are not installed by WSSC, front foot benefit (FFB) charges will not be imposed by WSSC against the lots in the development. That is not to say that a front foot benefit charge will not be assessed, but it will be assessed and collected by the builder or developer. Builders and developers have formed companies whose sole job is the assessment and collection of the front fees.

When the developer built the subdivision or development, they experienced a cash outlay in connection with the installation of the water and sewer systems. These monies can be recouped by means of an FFB company formed by the developer for this purpose. The costs, recouped over many years, generally 20-30, are assessed to each property for which the installation of water and sewer lines were constructed. For instance, a subdivision of 200 homes will have a portion of the installation cost for the entire subdivision divided among the homeowners.

Enforcement and Confusion

These fees are enforced by a lien on the property that was recorded in the county land records. Failure to pay the lien can result in foreclosure of the property. Some banks or mortgage companies will establish an escrow account to collect the FFB charge, but not all of them will and a wise property owner should confirm whether the fee has been paid or not.

In recent years, it became an on-going problem that home buyers were not informed of this extra fee when purchasing their home. Some homeowners discovered the additional fee shortly after purchasing their home and while unpleasant, they were at least afforded the opportunity to make arrangements for payment. However, other homeowners did not discover that a fee was due until there were foreclosure actions instigated against them. Still others found that the previous homeowner had failed to pay the fees and collection actions were in the process to make the new owners pay.

Disclosure

To address these problems, in October of 2016, Maryland passed a law to require sellers to notify purchasers of property of any FFB charges. (MD Prop. § 14-117 ) This disclosure requirement is only applicable to private FFB companies, not to public utility companies like the WSSC. If the FFB is assessed by the WSSC, then the charge will show up on the property tax bill, no disclosure is required by the October 2016 law. Again, property buyers and real estate agents need to confirm whether or not these front fees are applicable to the property they are buying.

Initial Sale Disclosure

Maryland's Real Property Code § 14-117 requires the developer who has installed water and sewer lines under an agreement with WSSC to disclose for the initial sale to a member of the public of the estimated cost of any applicable deferred water and sewer charges. This is the standard disclosure requirement for most counties.

However, in Prince George's County the initial sale disclosure is much more detailed and must include:

  1. The existence of the deferred private water and sewer assessments;
  2. The amount of the annual assessment;
  3. The approximate number of payments remaining on the assessment;
  4. The amount remaining on the assessment, including interest;
  5. The name and address of the person or entity most recently responsible for collection of the assessment;
  6. The interest rate on the assessment;
  7. The estimated payoff amount of the assessment; and
  8. A statement that payoff of the assessment is allowed without prepayment penalty. (MD Real Prop. § 14-117(a)(3)(i)).

Disclosure for Resale of Residential Property

A homeowner who subsequently sells the property to another homeowner is responsible for disclosing to the buyer the existence of any deferred water and sewer charges. The notice shall substantially provide the following information:

"NOTICE REQUIRED BY MARYLAND LAW REGARDING DEFERRED WATER AND SEWER CHARGES

This property is subject to a fee or assessment that purports to cover or defray the cost of installing or maintaining during construction all or part of the public water or wastewater facilities constructed by the developer. This fee or assessment is $___, payable annually in (___month___) until (___date___) to (___name and address___) (hereafter called "lienholder").

There may be a right of prepayment or a discount for early prepayment, which may be ascertained by contacting the lienholder. This fee or assessment is a contractual obligation between the lienholder and each owner of this property, and is not in any way a fee or assessment imposed by the county in which the property is located." (MD Prop. § 14-117(a)(5)(ii)).

Penalties for Failure to Disclose

If the developer during the initial sale of the property fails to disclose the existence of deferred FFB charges, they can be liable for two times the amount of deferred charges for a five year period following the sale of the property.

In a subsequent sale of the property, a seller who fails to disclose can be liable for the amount of amount of deferred charges the purchaser will be obligated to pay following the sale. The purchaser may also be entitled to rescind the real estate contract without penalty.

Other Disclosure Requirements

The Maryland Homeowners Association Act ("Act"), provides that a contract for the initial sale of a home of a residential development is not enforceable unless certain disclosures are provided, as specified in §11B-105 of the Act. However, the Act does not provide for the more extensive penalties that a violation of the FFB disclosures legislation does.

It would behoove developers when entering into contracts with purchasers of lots subject to FFB company charges to include not only the notice required under §11B-105 of the Act, but also notice under 14-117(a)(3)(i)) of the Real Property Article of the Annotated Code of Maryland. While the additional requirements in paragraph (a)(3)(i) are applicable only to Prince George County, they provide a framework for reasonable notice for a development in any county. Adoption of this style of notice would be a prudent step for developers.

Front Fee Benefit Company

In many cases the developer that establishes an FFB company is also selling finished lots to builders that will in turn construct the dwelling unit for sale to consumer purchasers. This means that the developer will not necessarily have a direct contractual relationship with the purchaser of the lot that is ultimately called upon to pay the charges imposed by the FFB company. However, it will still be the developer's responsibility to ensure that the proper notices are provided, as they will ultimately be responsible if they are not.

Thus, it is important for the developer to have input on the disclosures to be provided by the builders to its purchasers. The developer should include in its builder contracts a provision requiring the builders to provide their purchasers with a complete disclosure statement regarding the FFB company. The developer should provide its builders with the form of disclosure statement as well as any applicable contract notices that the builders are to provide to their purchasers.

Builder contracts include the contract notice and disclosures required under §11B-107 of the Act.

Take-Away

The take-away is that sellers of real property that have assessments for water and sewer installations are responsible for disclosing those assessments to buyers. Failure to disclose such assessment and provide the proper information carries substantial penalties. It is important for developers and real estate professionals to ensure that the proper disclosures are made.