Commercial Building & Loan Ass'n v. Robinson

Boyd, J., delivered the opinion of the Court. - This appeal was taken from a decree sustaining a demurrer and dismissing the bill of complaint filed by the appellant against the appellee. The facts alleged in the bill which are material to the questions involved, are as follows : Robert A. Blay, who was the owner of the leasehold interest in twelve lots of ground, which had been assigned to him by the original lessee, conveyed said lots to the appellant, subject to the terms of the lease, by a mortgage dated December 9', 1895, to secure the moneys and payments mentioned in said mortgage “by the terms of which, among other things, said Blay covenanted to pay all taxes, ground rents, public dues and charges as and when the same became due and payable.” On the 2nd of April, 1896, Blay and the appellant entered into an agreement by which they *617 agreed to apportion the amount of money advanced by the association between the several properties and that the lot known as 1210 Guilford avenue, should be held liable and subject only to the sum of $1,100.00, and the proportionate payments according to the plan of the association. On the 5th of May, 1896, Blay assigned that lot to the appellee “subject to the payment of the annual rent of one hundred and forty-three dollars, payable semi-annually on the first days of January and July in each year, and to the operation and effect of a mortgage from said Blay to said Commercial Building and Loan Association of Richmond, Virginia, to secure the loan of eleven hundred dollars.” The bill also alleges that the appellee entered into and remained in possession of the premises until the 8th day of July, 1897, upon which day a trustee, appointed in a cause wherein the appellant was complainant and Blay was defendant, sold said lot for default in the conditions of the mortgage for the sum of seven hundred dollars, “ which sum was grossly insufficient to pay the mortgage debt, costs and accumulated expenses upon the propertythat during the time of his possession the appellee allowed the city and State taxes on said property for the year 1896 and due on the 1st day of January, 1897, to remain unpaid, amounting with interest and charges to $58.42, and also two instalments of ground rent due by and issuing out of said lot on the first day of January, 1897, and the first day of July, 1897, amounting to $71.50 and interest, and that the appellant was obliged to and did pay said sums of money. It then prays for a money decree against the appellee for the amount of said rent, taxes and interest so paid and for further relief. The questions presented are important, and by reason of some differences of opinion between the members of this Court, who sat in the case, which have been for the most part reconciled, it has not been decided as soon as would otherwise have been done. Neither the lease, the assignment to Robinson, nor the mortgage, was filed as an exhibit, and in passing on the de *618 murrer we are confined to such references to them as are in the bill. Although it is alleged that Blay, by mortgage, conveyed the lots subject to the terms of the lease, it does not state that there was any provision in it permitting him or his assigns to retain possession of the property until default and we would not be justified in assuming that there was or may have been such a provision. In this State, unless the mortgage does contain some provision to that effect, the legal title is vested in the mortgagee and he has the absolute right of possession in the premises until the mortgage is paid. Jamieson v. Bruce, 6 G. & J. 72 ; Duval v. Becker, 81 Md. 537 ; Richardson v. B. & D. R. R. Co., 89 Md. 126. Such a mortgage on leasehold property is an assignment' of the term. In Mayhew v. Hardesty, 8 Md. 479, Hardesty, who was the holder of an overdue mortgage on the leasehold interest, was held liable on a covenant to insure, which was in the lease, the Court saying “ that when a party takes an assignment of a lease, as in the present case, the whole legal estate passes and he thereby becomes liable on the real covenants, whether he became possessed or occupied the premises in fact or not." That case has been followed in Lester v. Hardesty, 29 Md. 50, and other decisions in this Court, and the principle thus announced as to the effect of a mortgage on leasehold property after defaidt is equally applicable to a mortgage that does not contain a provision for the mortgagor to remain in possession. In both instances the legal title and right of possession are in the mortgagees. The term being assigned to the mortgagee, he is responsible on covenants running with the land, and the assignee of the mortgagor is not responsible for defaults not occurring while he still held the leasehold interest. The liability of an assignee of the term to the original lessor, or his assignee, grows out of the privity of the estate, in the absence of some contract between them, and as long as that continues he is liable upon all covenants that run with the land, but when that relation to the land ceases his liability for future breaches of the covenants is at an end. Donelson v. *619 Polk, 64 Md. 501. It is true the bill alleges that the appellee “thereupon entered into possession of said premises and did remain in possession of the same until the 8th day of July, 1897,” but that is not sufficient to make him liable, as we have seen from the above quotation from Mayhew v. Hardesty. In this State it has been determined that a suit at law cannot be maintained against the assignee of a lessee, after an assignment of the term by him, for breaches of a covenant which took place while he still held the leasehold interest, the remedy in such cases being in equity alone. Hintze v. Thomas, 7 Md. 346 ; Donelson v. Polk, supra. For that reason this proceeding in equity was doubtless taken, but, although Courts of Equity do not regard mortgages in just the same light as Courts of Law do, when the legal effect of a mortgage on leasehold property is to vest the title and the right of possession in the mortgagee, and thereby take them from the assignee of the mortgagor, the latter is not responsible either at law or in equity for breaches occurring after the title so passes to the mortgagee. There was no privity of contract between the appellee and the appellant, and hence, irrespective of the question as to whether the covenants in a mortgage on leasehold property for the payment of rent and taxes run with the land, the appellee would not be liable after the assignment of the term to the mortgagee. The bill therefore, as it stands, is defective, and the demurrer was properly sustained for the reasons we have given. There is another defect in it which should be mentioned. If, as alleged, there was default on the first day of January, 1897, for non-payment of the taxes and ground rent then becoming due, unquestionably under the decision of Mayhew v. Hardesty, the appellee was not responsible for the alleged default on the first of the succeeding July, as the term was then vested in the appellant, even if there is a provision in the mortgage such as we have referred to above. The appellant and not the appellee was then liable for the ground rent, as the term had then passed out of the appellee into the appellant. *620 Although the mortgage was not filed with the bill, and hence we cannot consider it in passing on the demurrer, what purports to be a copy of it is in the appellant’s brief. •As we have authority under section 36 of Art. 5 of the Code, to remand the cause for further proceedings, without reversing or affirming the decree, if we be of the opinion that the purposes of justice will be thereby advanced, we will now consider the case as if the mortgage was before us. In the copy we find that there is a provision referred to by which it was agreed that until default was made the mortgagor or his assigns might retain possession of the mortgaged property. From what we have already said it. can be seen that we are of the opinion that the ground rent falling due on the first of July, 1897, cannot be recovered, for the reasons stated, and hence we will confine further inquiry to the taxes and ground rent which matured on the first of January of that year. As between the owner of the reversion and the holder of the leasehold interest- there is no doubt that covenants for the payment of rent and taxes run with the land. It has been so decided in a number of cases in this State, among which are Donelson v. Polk, supra; Lester v. Hardesty, supra; Worthington v. Cooke, 52 Md. 297. In Thomas v. Von Kapff, 6 G. & J. 372, it was held that a covenant in a mortgage on real estate to effect insurance and apply the proceeds in case of loss by fire to the reparation of the insured property was a covenant running with the land, as-it was in effect a covenant to repair and rebuild. The insurance money had been collected by the mortgagor who deposited it in bank and died before he rebuilt. A bill having been filed by the executors of the mortgagee against the administrator of the mortgagor, and the proceeds of the sale of the property and the insurance money together not being sufficient to pay the mortgage debt, the Court below decreed that the complainant had a specific lien upon the insurance money and the Court of Appeals affirmed the decree, holding that the mortgagee had a qualified lien in preference to general creditors, and *621 also that it was a covenant running with the land. In Barron v. Whiteside, 89 Md. 448, this Court said that a covenant in the mortgage on leasehold property by the mortgagor for himself and his assigns to pay the ground rent and taxes on the premises when legally demandable, was a covenant running with the land. It is true that was a case between the mortgagee and the assignee of the mortgagor for the benefit of the creditors of the latter, and there were circumstances in that case which materially differ from those in this, but the general principle was clearly recognized that such a covenant in a mortgage did run with the land. There is a covenant in this mortgage to the same effect and almost in the same language as in that. We think, therefore, that this covenant must be treated as running with the land and so long as the mortgage was in force, and the appellee held the term, he was liable for the taxes and ground rent. There can be no doubt that he was liable to the owner of the reversion for the ground rent, and if he had paid him it would have been a discharge of that part of the covenant. But his failure to pay the ground rent and taxes added to the burden of the property and subjected the mortgagee to the risk of the loss of his security, unless he paid them. The owner of the reversion could, in due course of time, have proceeded to recover the property and the tax officer could have sold it for taxes, unless the appellant had paid the rent and the taxes due. The appellee did not assume the payment of the mortgage debt, and is therefore not responsible for it,- or any part of it. That is not a covenant running with the land because the performance of it would at once divest the appellant of all interest in the mortgaged premises. Glenn v. Canby, 24 Md. 127. But the non-performance of the covenant to pay taxes or ground rent would “affect the quality, value or mode of enjoying the estate conveyed.” It certainly would affect the value, to the extent of the taxes and rent accruing, and it would affect the mode of enjoying the estate by casting on the mortgagee the leasehold interest and thereby making it *622 liable to the owner of the reversion for future rent and also for the taxes. The liability of the appellee to the appellant cannot be affected by the fact that when there was a default by him the term vested in the appellant. If the appellee was .the owner of the term and in possession when the default occurred it was his default, and recovery is sought for the damage the appellant sustained by the breach' of the covenant by which the appellee was then bound. It can, therefore, make no difference that immediately after the default the term passed to the appellant. If the appellee had at the end of the first day of January, 1897, assigned the term to some one willing to take it, it would not have relieved him of liability for the rent and taxes which became due while he still held it and a fortiori it ought not to relieve him against one upon whom he cast the term by reason of his default. The only other question we need consider is the effect the foreclosure of the mortgage had upon the appellant’s right to recover these taxes and rent. That has given us more difficulty than any other question involved in the case. The property was sold by the trustee to a third person for less than the amount necessary to pay the mortgage indebtedness. As we have seen, the appellée is not responsible for the balance due on that indebtedness, as he had not assumed it, but is he relieved of the payment of taxes and rent which became due while he still held the leasehold interest in the property, and hence owed it, simply because the mortgage has been foreclosed ? It is true that neither he nor the appellant had .any further interest in the property after the sale, and its ratification, but when the breach occurred there was a privity of estate between them, and if, as we have said, the covenant ran with the land, the appellee was then responsible to the appellant for the breach. The reason that a Court of Equity takes jurisdiction, after the assignee of the term has parted with it, is because there is no longer any privity of estate (Donelson v. Polk, supra), but as there was such privity at the time of the breach, and *623 hence the one was liable to the other, a Court of Equity grants the relief. Indeed, in England and some of the States of this country, an action at law is permitted even after the assignment of the term, but the contrary doctrine has been adopted in this State. The question is what was the relation of the parties when the breach occurred, not what it was or is afterwards. If the appellant had not paid the rent undoubtedly the owner of the fee could have proceeded against the appellee for it, and he was also liable for the taxes. Inasmuch as the appellant was required to pay the rent and taxes to protect as far as it could the property on which it held the mortgage, it should at least be subrogated to the rights of the parties entitled to the rent and taxes, even if there was any difficulty in proceeding on the ground that the appellee is still liable on the covenant running with the land. Milholland v. Tiffany, 64 Md. 460; Barron v. Whiteside, supra. One objection to allowing the appellant to recover the taxes that suggested itself wras that section 64 of Art. 81 of the Code, as amended, requires the party selling “under judicial process or otherwise” to pay all sums due and in arrears for taxes upon the property so sold, but the object of that statute is primarily to secure the payment of the taxes, and it also protects the purchaser, and in this case the bill alleges that the appellant had paid them. They were due by the appellee, and if they are distributed out of the proceeds of sale, it would, if the original mortgagor is financially responsible, work a hardship on him, as it would increase the balance due by him. They would add that much to his indebtedness, although the appellee was responsible for them and ought to have paid them. In Barron v. Whiteside, supra, it was said that the mortgagee was entitled to be subrogated to the rights of the State and city and the owner of the ground rent for taxes and rent paid out of the proceeds of sale under her mortgages. See also Orem v. Wrightson, 51 Md. 34. The mere fact that the lien of the mortgage is extinguished *624 does not destroy the binding force of the covenants in it and so far as the appellee was bound by them, or was liable by reason of the privity of estate, a Court of Equity can compel him to perform the covenants for which he is liable. It could not be done at law, but we find no authority that would justify us in refusing the relief in equity. The case of Hitchcock v. Merrick, 18 Wis. 357, cited by the Court below, differs from this as there the mortgage was paid in full— the mortgagee having accepted the balance of the purchase money after the sale—and the whole mortgage debt was extinguished. Then, too, the mortgagee-had purchased the property subject to the taxes. But the covenants in a mortgage do not necessarily fail because the lien of the mortgage is extinguished. The mortgagor is still liable on his covenant to pay the balance of the debt and why should not the .appellee be still liable on the covenant for which he was bound, as assignee of the mortgagor? The owner of the reversion at the time of the breach is entitled to sue on a covenant running with the land, although he conveyed the property before he sues. On the same, principle a mortgagee can sue for a breach on such a covenant, which took place while he still held an existing mortgage, although it is foreclosed before suit was brought. The case of Thomas v. Von Kapff, supra (if still followed in this State and we know of no reason for not doing so), would seem to be conclusive of this point. There the mortgage had been foreclosed and the proceeds of sale distributed to it, yet, by virtue of the covenant in it- to keep the property insured and in the event of a loss by fire- to apply the insurance money to rebuilding the property, a Court of Equity held that the fund was liable to the mortgagee’s executors, although the bill was filed after the foreclosure sale and after the proceeds of sale had been distributed. In Barron v. Whiteside, supra, the mortgages were foreclosed before the amounts paid by her for taxes and ground rent were distributed to her, although she did file her petition to require the trustee to pay them before the sale under .her mortgages, but it was after she had *625 commenced the foreclosure proceedings. It is true those cases were against the representatives of the mortgagors, but that can make no difference in considering this branch of the case, as we have determined that the appellee was responsible as the owner of the leasehold interest when the covenant, by which he was bound, was broken. The question is what was the relation of the parties on January 1st, 1897, and that relation determines the liability vel non, unless, of course, something was done afterwards to discharge the party who was then liable. The mere sale of the premises cannot operate as such discharge, whether it be by the deed of the party bound by the covenant or by a trustee authorized to sell by reason of the default. The mortgage debt is not only not paid, but the mortgagee to save what it has gotten out of the wreck has been compelled to pay what the appellee in equity and good conscience ought to have paid. (Decided February 9th, 1900). We are of the opinion, therefore, that the cause should be remanded, without reversing or affirming the decree, to the end that leave may be given to the plaintiff to amend its bill. As the bill is defective, but the principle contended for is correct, we will direct that each party pay half the costs in this Court and that the costs below abide the re.-, suit of the case. Cause remanded without reversing- or affirming the decree, each' side to pay one-half of the costs in this-Court, and the costs below to abide-the final result of the cause.