By M. Kevin McCusty, Margaret "Ann" Ann Brown, R. Craig Fitzenreiter, Kimberly Hargrove and Jackson W. Prentice
On May 22, 2012, Maryland Governor Martin O'Malley signed into law the State and Local Revenue and Financing Act of 2012 which, among other things, makes indemnity mortgages (that term also includes indemnity deeds of trust) securing $1,000,000 or more subject to recordation tax. The new law takes effect July 1, 2012, and will be applicable to all instruments of writing recorded on or after that date. Lenders and borrowers contemplating transactions that would be affected by the new law should, where possible, close those transactions in time to ensure the recording of any indemnity mortgages on or before Friday, June 29, 2012.
An indemnity mortgage is a security instrument given by a guarantor, rather than the borrower or other primary obligor on a debt, and secures the guarantor's obligations under its guaranty. Such instruments have long been used in Maryland to defer indefinitely the obligation to pay recordation tax.
Under Maryland law, a grantor of a security instrument may elect, upon recordation of the instrument, to pay recordation tax on either the maximum amount secured by the instrument or on the amount of the secured indebtedness which is then incurred. Long-standing interpretations of the recordation tax law by the Maryland attorney general's office had held that a guarantor does not incur the guaranteed debt at the time the guaranty is given if the terms of the guaranty provide that a condition (usually a default under the guaranty or the underlying loan documents) must occur before the guarantor becomes liable for payment. According to these interpretations, until a default or other occurrence triggering the guarantor's liability, recordation tax would not become due on an indemnity mortgage securing the guaranty.
Under the new law, if an indemnity mortgage secures an obligation in the amount of $1,000,000 or more, the guarantor under the secured guaranty is deemed, for purposes of recordation tax, to have incurred the guaranteed debt to the same extent that such debt is incurred by the borrower or other primary obligor. Recordation tax is applicable as if the guarantor were the primary obligor on the secured debt.
Although there has been much discussion as to how modifications of indemnity mortgages will be treated under the new law, it is unclear at this time whether the recording on or after July 1, 2012, of a modification of an indemnity mortgage for which recordation tax had been deferred will result in the deferred recordation tax becoming due. For the time being, at least, lenders and borrowers contemplating modifications of transactions involving previously recorded indemnity mortgages should consult with counsel and carefully consider whether modifying the indemnity mortgage is necessary or whether an alternative transaction structure could be used to accomplish the parties' goals.
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