MOUs and Private Utility Companies: A New Approach for Montgomery and Prince George's Counties

The WSSC now offers developers an alternative to WSSC installation of water and sewer systems pursuant to which developers assume responsibility for installation of such systems under an agreement known as a Memorandum of Understanding ("MOU") between the developer and WSSC. The MOU process in Montgomery and Prince George's Counties is in its infancy. Nevertheless, it does appear that it will allow developers greater control over the timing of site development.

One of the consequences of the installation of water and sewer systems by WSSC is the imposition of front-foot benefit charges on the lots within the development. These charges appear on the tax bill for the lots and are intended to cover a portion of the cost of the installation of the water and sewer systems. Front-foot benefit charges are not imposed by WSSC against the lots in an MOU development. The developer's installation cost may be recovered by imposing charges against the lots within the development by means of a recorded covenant and by creating a private utility company, whose purpose is to collect the charges.

Although private utility charges are still a novel concept in Montgomery and Prince George's Counties, this does not affect their enforceability. The ability to impose private charges against the owners of lots by means of recorded covenants is widespread and well accepted, and is, in fact, one of the major functions of virtually all homeowners associations established in Maryland. Although it is theoretically possible to impose such charges, however, it is prudent to structure them as closely as possible to the charges that would have been imposed by WSSC.

For example, the charges should be payable annually by the lot owner over a 23 year period, and the lot owners should have a right of prepayment. The developer should document that the private utility charges generally correspond to the amount necessary to compensate the developer for the costs associated with installation of the water and sewer systems, including a reasonable overhead and interest factor.

Collection of the private water and sewer charges is handled by the private utility company established by the developer. The private utility company should be a separate, single purpose entity, preferably organized as a limited liability company.

The developer must ensure that the existence of the private water and sewer charges and the collection of such charges by the private utility company are clearly disclosed to all lot purchasers. Most developers are familiar with the disclosure requirements imposed with respect to homeowner associations under the Maryland Homeowners Association Act ("Act"). It is prudent to provide all information regarding the private water and sewer charges and private utility company that would otherwise be required to be provided with respect to a homeowners association under the Act. This is typically accomplished by providing the purchasers with a disclosure statement that includes details regarding the private utility company and the private water and sewer charges, and that includes copies of the private water and sewer covenants.

In addition to a disclosure statement, a specific disclosure of the private water and sewer charges should be included in each contract for the sale of a lot subject to such charges. The developer that installs the private water and sewer systems often will be selling finished lots to builders that in turn sell these lots, improved with a dwelling, to consumer purchasers. In those cases, the developer should include a provision in its builder contracts that requires the builder to provide the necessary disclosure and contract notice.

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