Recent meetings of the Executive Committee of the Real Property Law Section of the State Bar of Georgia addressed proposed legislation, now going through the Bar’s legislative approval process, to prohibit so-called “transfer fee covenants” except in certain prescribed circumstances. These covenants are a hot-button issue, as evidenced by this New York Times article, recent guidance proposed by the Federal Housing Finance Agency for Freddie Mac and Fannie Mae, proposed amendments to RESPA and the defensive maneuvers of their proponents.
Transfer fee covenants provide that, upon each sale of a parcel of property subject to the covenants (e.g., each lot in a subdivision), a transfer fee (typically equal to 1% of the sales price) must be paid to a private third party (typically the property’s developer or its trustee), who otherwise has no connection to the property or the transaction. The developer or other seller establishes the covenant by either recording a covenant in the local public records or including the covenant in the deed for the property. The typical covenants last for 99 years and are applied to residential properties, but they are also of concern in regard to commercial properties.
The Executive Committee’s proposed bill, drafted in close consultation with representatives of the title insurance industry and attorneys who represent condominium and homeowner and property owner associations, exempts from its proposed prohibition legitimate fees and assessments payable to those associations, requiring, for example that any fees and assessments be utilized to pay the operating costs of the association and the affected property. Interestingly, the proposed FHFA guidance and RESPA amendments make no exception for association fees. The FHFA news release is pretty clear as to the reasoning:
Although proponents of the private transfer fees advocate that they are beneficial when used to fund projects that enhance community investments, FHFA is concerned that the fees fund purely private streams of income for select market participants and do not benefit homeowners. Further, even if the fees are dedicated to homeowners associations, they are not proportional or related to the purposes for which the fees were to be collected. . . . The risks and uncertainties for the housing market that come with the use of private transfer fee covenants do not appear to be counterbalanced by sufficient positive effects .
The status of these covenants under existing law is unclear. Proponents of the covenants argue that they constitute “covenants running with the land” and are therefore enforceable. Critics argue that they do not satisfy the requirements for “running with the land” and therefore do not bind successors in ownership. Since the use of these covenants is relatively new, to my knowledge dispositive case law does not exist. Eighteen states have restricted or prohibited transfer fees to prevent consumers from being exploited. Sixteen states ban them outright, while California and Texas impose restrictions. I understand that opponents of the covenants in Texas will push for a full ban next year.
Proponents of these covenants, such as Freehold Capital Partners, argue that these transfer fees represent a future income stream that can be monetized, and perhaps eventually pooled together for securitization (just as mortgages have been), enabling land owners to sell their transfer fee interests in the securities markets and thus create a source of capital that can be used to pay off mortgage loans, other debt, develop infrastructure and so on. Opponents, including the American Land Title Association (“ALTA”), counter that these covenants:
force consumers to pay more to own property in a less secure land transfer system. These covenants require consumers to pay thousands of dollars to third parties that hold no ownership interest in the property for the right to buy or sell real estate. These covenants provide no benefit to consumers or the public, but rather cost consumers money, complicate the safe, efficient and legal transfer of real estate and depress home prices. (quoted from ALTA Private Transfer Fee Covenant One Pager).
As noted above, the responses of the states that have considered the matter range from prohibiting the fee covenants outright to prescribing specified limitations and requiring certain disclosures. The Executive Committee concluded that transfer fee covenants, if not curbed by legislation to prohibit them or at least to prescribe adequate limitations and requirements on their use, are likely to impose increased and unnecessary risk upon title examiners and title attorneys; increase the cost and complexity of, and the time required to close, real estate transactions; as restraints on alienation, adversely affect the ability of subsequent sellers to sell their property unrestricted; and create the opportunity for sellers to hide and camouflage fees to which they would ultimately be entitled for decades upon the subsequent resale of the same property.