Is a Maryland 'covenant not to encumber' real estate subject to recordation tax, and can it even be recorded?

Plain-English summary

A lender will sometimes take, as security for a loan, a borrower's simple promise not to sell or mortgage a piece of real estate until the debt is paid off, called a "covenant not to encumber or convey." A 1966 Attorney General opinion had concluded this kind of promise counted as an instrument creating a lien, meaning it was subject to Maryland's recordation tax when someone tried to record it in the land records. A court clerk's office asked the Attorney General whether that 1966 opinion was still good law. The Attorney General concluded it was not: a 1980 Court of Appeals decision, Equitable Trust Co. v. Imbesi, held that this kind of covenant does not actually create a lien or any security interest in the property at all, it is simply a personal promise. Because Maryland's recordation tax and recording statutes both turn on whether a document creates or affects a security interest in real property, and this kind of covenant doesn't, the opinion concluded it is neither taxable nor recordable, and formally overruled the 1966 opinion.

Currency note

This opinion was issued in 1988. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Does Maryland charge recordation tax on a borrower's promise not to sell or mortgage their property while a loan is outstanding?
No, according to this opinion. It concluded that a covenant not to encumber or convey real estate does not create a security interest in the property, so it falls outside the recordation tax, which only reaches instruments that create or give notice of a security interest in real property.

Can a covenant not to encumber real estate even be filed in the land records?
No. The opinion concluded that because this kind of covenant does not affect title to the property, it is not eligible to be recorded under the statute governing what may be recorded, since Maryland's recording and recordation-tax categories are meant to line up: what isn't taxable generally isn't recordable either.

Why did a 1980 court case change the answer from an earlier 1966 opinion?
The 1966 opinion had reasoned that this kind of covenant amounted to a lien because it could "paralyze" the owner's ability to freely deal with the property. The Court of Appeals later held in Equitable Trust Co. v. Imbesi that such a covenant is nothing more than a personal promise not to do something, with no language purporting to convey or create a lien on the land, so the earlier reasoning no longer held up.

What happens to a lender if the borrower breaks this kind of promise and later goes bankrupt?
The opinion explained that because the covenant creates no security interest, the lender cannot seize or execute on the property without first suing on the debt and getting a money judgment, and if the borrower goes into bankruptcy, the lender would be treated as an unsecured creditor, just like the holder of a simple promissory note.

Background and statutory framework

The 1966 opinion being reconsidered here, 51 Opinions of the Attorney General 226, had addressed a covenant not to encumber or convey real estate given as loan security, under the recordation tax statute then in force, former Article 81, §277, which taxed "every instrument of writing conveying title to real or personal property, or creating liens or encumbrances." The 1966 opinion reasoned that because a lien "can amount to nothing more than the paralyzation of title as a security device," a covenant restraining the owner from encumbering or conveying the property functioned the same way, and so counted as an instrument creating a lien subject to the tax.

The opinion here explained that the Court of Appeals rejected that reasoning in Equitable Trust Co. v. Imbesi, addressing a nearly identical covenant securing a bank loan. The Court described the instrument as doing "nothing more than to recite that there is a debt ... and that in consideration of that debt [the borrower] will not encumber or convey specified land so long as the debt remains unpaid," finding it "barren of anything to indicate an intent to create a lien" and noting that commentators uniformly agree such covenants create no security interest. The Court found no equitable lien.

Applying Imbesi to the current recordation tax statute, §12-102 of the Tax-Property Article, which taxes only an "instrument of writing" as defined in §12-101 (a definition that reaches documents that "create or give notice of a security interest in real property"), the opinion concluded a covenant not to encumber or convey is not such an instrument: it does not let the creditor seize the property directly, only sue on the underlying debt. The opinion also tied recordability to taxability, explaining that Maryland's recording statute, §3-102 of the Real Property Article (covering instruments "affecting property"), has long been read to require the instrument itself affect title to land, the same threshold used for the tax, and that the two categories are meant to be congruent: what is not taxable generally is not recordable. Prior guidance from the Attorney General's office had applied that same principle to other documents lacking any direct effect on title, such as a building contract, a simple note, a death certificate, an annual-charge agreement, and a stock sale agreement. The opinion placed a covenant not to encumber in the same category and formally overruled the 1966 opinion.

Citations and references

Statutes:

• Former Article 81, §277
• Former Article 81, §277(a)(i)
• §12-102 of the Tax-Property Article
• TP §12-101
• TP §12-101(c)(1)(i)
• TP §12-101(c)(2)
• TP §12-101(f)
• §3-102 of the Real Property Article

Cases:

• Equitable Trust Co. v. Imbesi, 287 Md. 249, 271, 412 A.2d 96 (1980)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1988/Volume73_1988.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

TAXATION

Recordation Tax—Covenant Not To Encumber or Convey Real Estate Is Not Subject To Recordation Tax and Is Not Recordable.

July 5, 1988

Mr. Bolton H. Rankin
Assistant Deputy Clerk
Circuit Court for Anne Arundel County

You have requested an opinion concerning the continuing validity of a 1966 opinion of this office, 51 Opinions of the Attorney General 226, which concluded that a covenant not to encumber or convey real estate is subject to recordation tax when recorded.
For the reasons stated below, we conclude that a subsequent decision of the Court of Appeals has eroded the underlying premise of the 1966 opinion. Hence, the opinion is overruled. A covenant not to encumber real estate is neither taxable nor recordable.

                              I
                      The 1966 Opinion

In 51 Opinions of the Attorney General 226 (1966) the Attorney General was asked whether a "covenant not to encumber or convey real estate," executed as security for a loan, was subject to the Maryland recordation tax. The tax, then codified in former Article 81, §277, was imposed "upon every instrument of writing conveying title to real or personal property, or creating liens or encumbrances upon real or personal property, offered for record and recorded in this State." Observing that "the list would seem to be sufficiently broad to cover any voluntary instrument which could possibly convey title or create liens or encumbrances," the opinion considered whether a covenant not to encumber or convey real property came within this category. 51 Opinions of the Attorney General at 227.

The opinion concluded that it did, because a lien "can amount to nothing more than the paralyzation of title as a security device." 51 Opinions of the Attorney General at 229. Hence, the opinion advised, the covenant was "an instrument creating a lien or encumbrance, securing a debt, within the meaning of Maryland Code Article 81, §277, and is subject to the recordation tax." Id.

                                      II
               The 1980 Court of Appeals Decision

In Equitable Trust Co. v. Imbesi, 287 Md. 249, 271, 412 A.2d 96 (1980), the Court of Appeals was asked whether a covenant not to encumber or convey real estate was an equitable lien or mortgage.1 The covenant in question, like that addressed in the 1966 opinion, secured a bank loan. The Court observed that the instrument was "plain and unambiguous. It does nothing more than to recite that there is a debt to [the bank] and that in consideration of that debt [the borrower] will not encumber or convey specified land so long as the debt remains unpaid." 287 Md. at 270-71. This kind of instrument, the Court continued, does not "purport in any way to convey or to place a lien upon land. The agreement is barren of anything to indicate an intent to create a lien. We have nothing but an agreement not to do a particular thing." 287 Md. at 271 (emphasis in original). Hence, the Court concluded, "we find no equitable lien." Id. The Court also noted that "[w]riters who have discussed negative covenants seem to be in unanimous agreement that these covenants do not create a security interest." 287 Md. at 269.

                                     III
              Application of Imbesi to Current Law

Section 12-102 of the Tax-Property Article ("TP" Article) imposes recordation tax only on an "instrument of writing" as defined in §12-101. That definition extends to any document that "creates or gives notice of a security interest in real property." TP §12-101(c)(1)(i).2
Under Imbesi, a covenant not to encumber or convey real estate is not an "instrument of writing" because it does not "create or give notice of a security interest in real property." A covenant not to encumber or convey merely recites a debt and the promise not to encumber or convey a piece of real property until the debt is paid off. If the debtor fails to pay off his or her debt, the creditor has no right to seize or otherwise execute on the property unless the debt is first reduced to a money judgment. Should the debtor go into bankruptcy, the creditor would be an unsecured creditor similar to a holder of a simple note.
Because a covenant not to encumber or convey is not an "instrument of writing," it is not subject to the recordation tax. Moreover, it is not within the class of documents that may be recorded. This office consistently has advised that the two categories are meant to be congruent. Unless the General Assembly has provided otherwise in a specific instance, a document that is recordable generally is taxable, and a document that is not taxable generally is not recordable. This conclusion follows from the legislative intent underlying §3-102 of the Real Property Article. This section provides in relevant part that "[a]ny ... instrument affecting property, including any contract for the grant of property or any subordination agreement establishing priorities between interests in property, may be recorded." This provision, like similar predecessor language, has long been understood to require that the instrument itself affect the title to land.
Applying this interpretation, counsel to the clerks of the circuit courts have advised that a building contract, a simple note, a death certificate, an agreement to receive annual charges, and an agreement to sell capital stock are not properly recorded in the land records, because the instruments themselves do not affect real property. See letter from Assistant Attorney General Bonnie A. Travieso to the Honorable Frank W. Hales (March 6, 1981); letter from Assistant Attorney General Francis X. Pugh to Mrs. Dorothy B. Kucher (July 20, 1972). Properly viewed in light of Imbesi, a covenant not to encumber or convey real estate falls into this category as well.

                                   IV
                              Conclusion

In summary, it is our opinion that a covenant not to encumber or convey real estate is neither taxable nor recordable. We overrule 51 Opinions of the Attorney General 226 (1966).3

         J. Joseph Curran, Jr., Attorney General
         Julia M. Freit, Assistant Attorney General

Jack Schwartz
Chief Counsel
   Opinions & Advice

1
The question was certified from the United States District Court in a case involving priority among creditors.
2
TP §12-101(c)(2) illustrates the types of documents within the definition:
" 'Instrument of writing' includes:
(i) a deed or contract;
(ii) a mortgage, deed of trust, or other contract that creates an encumbrance on real property;
(iii) a lease of real property;
(iv) an assignment of a lessee's interest in real property;
(v) articles of transfer;
(vi) a security agreement;
(vii) articles of merger or other document which evidences a merger of foreign corporations; and
(viii) articles of consolidation or other document which evidences a consolidation of foreign corporations."
The term "security interest" is defined in TP §12-101(f):
(1) 'Security interest' means an interest in real property or personal property that secures payment or performance of an obligation.
(2) 'Security interest' includes a lien or encumbrance on real property or personal property."
Although these definitions are somewhat broader than the language used in former Article 81, §277(a)(i), because they cover any security interest, not just a lien or an encumbrance, the Court of Appeals' decision in Equitable Trust Co. v. Imbesi indicates that a typical covenant not to encumber does not create any security interest.
3
For a summary of the standards that we apply in considering whether to overrule a prior opinion, see 72 Opinions of the Attorney General 200 (1987).