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In early 2008, I wrote a series of blogs about Transfer Fee Covenants.  Basically, it is the practice of including a covenant in a deed that purportedly requires each successive seller to pay a 1% transfer fee to the original owner who added the covenant to the property.  It’s the gift that keeps on giving; not only does the declarant of the covenant get paid when he sells the property, but each time the property is sold thereafter he gets another 1% of the purchase price.

To me, and many others, this practice seems a bit shady.  It has been referred to as a "scam."  Several states have proposed legislation to ban these types of covenants – Ohio is the latest to propose such a ban.

If you don’t recall the previous posts on the subject, a Texas-based company, Freehold Licensing, Inc. filed for a patent on the transfer fee covenant, which they call "Springing Interests Flowing From Benefits That Run With Land" (Patent Pending No. 11/176,724).  According to the patent application, "the device of the invention may be created by reciting language such as:"

 "Within, and for the benefit of, the subdivision and the Lots therein, Declarant has created a master subdivision plan, set aside parkland and common areas, and constructed streets, drainage and other improvements, (jointly and severally "Improvements"), which a party taking possession of any Lot stipulates all and singularly benefit said Lot. In consideration therefore, the Owner of any Lot in the development ("Owner"), by acceptance of a Deed therefore, whether or not it shall be express in the Deed, and for the foregoing benefits and other good, valuable and independent consideration, receipt of which is acknowledged by acceptance of the Deed, and as a covenant running with the land, is deemed to covenant, agree and shall be obligated to pay Declarant or assign(s), upon each transfer of title to a Lot in the Subdivision, a "Conveyance fee" equal to one percent of the Gross Sales Price of the Lot (including any improvements thereon). No Conveyance fee shall be levied upon the transfer of a Lot (a) by the Declarant; (b) by a Builder; (c) by a co-Owner of a Lot to a person or entity who was a co-Owner of the Lot immediately prior to such transfer; (d) by a Grantor to any entity wholly owned by Grantor; provided, upon any subsequent transfer of any ownership interest in such entity, a Conveyance fee shall become due; (e) by an institutional lender pursuant to a mortgage that is superior to Declarant’s lien or upon foreclosure of a mortgage that is superior to Declarant’s lien; (i) for transfers made on or before the first occurrence of (i) Jan. 1, 2010 or (ii) completion of improvements on ninety percent of the total Lots within the subdivision (g) if the Lot being conveyed is unimproved. For purposes hereof, the term "Builder" refers to a person or entity who purchases a Lot in the Subdivision from Declarant for the purpose of constructing a residential dwelling thereon and who is regularly engaged in the business of constructing homes for sale to individuals, and the term "Gross Selling Price" of a Lot shall mean the total consideration paid by the purchaser of the Lot, as is (or ordinarily would be) indicated on the title company’s closing statement or, if a contract for deed or similar instrument, as indicated in the contract for deed or similar instrument, including consideration paid for all improvements on the Lot."

The Florida Senate has aptly described transfer fee covenants and the problems they create in Florida SB 391 Bill Analysis.

Transfer fee covenants are a relatively new phenomenon that began in California and Texas.  A transfer fee covenant requires the payment of a transfer fee every time the property is transferred to a new owner.  The fee can be payable to any person or entity.  Fees are often 1 to 2 percent of the purchase price.  Private transfer fees are placed on new homes and constitute a private agreement between the homebuyer and either the homebuilder or the home owner and can theoretically fund anything.  They are often filed in the form of a permanent lien on a home’s title.  The transfer fee covenant is a covenant that is binding on all future owners of the real property, it does not appear that such covenants may be removed under current law.  Current statutory law does not specifically address transfer fee covenants.

Transfer fee covenants are used in many different ways.  They are used to fund homeowners’ associations, address environmental concerns associated with new housing developments, and help builders pay for parks, agricultural preservation, affordable housing and other benefits that are often required as conditions for projects approved by local governments.

Recently, private sellers of land have started to utilize transfer fee covenants as a means of additional future income for such sellers.  It is alleged that homebuyers are often not aware of a transfer fee on their property until they appear at closing because the existence of the fee is listed in fine print in the covenants, conditions and restrictions.  From an economic standpoint, transfer fee covenants reduce the future value of a homeowner’s property because of the economic burden that such covenants place on future sales.

Kansas Senator Jay Emler recently wrote about Kansas HB 2092 – Transfer Fee Covenants.

HB 2092 makes transfer fee covenants documented on or after July 1, 2009 non-binding and unenforceable against any successive owner, purchaser, or mortgage holder of real property.

The bill was formed as a result of a nationwide scam that targets property transactions and attaches transfer fee covenants to titles.  Transfer fee covenants are sophisticated pyramid schemes which steal property equity from the owner.  In states where this practice is more frequent, mortgage lenders and title insurance agencies are unwilling to participate in transactions where the title involves a transfer fee covenant.  HB 2092 passes 40 to 0 on Thursday, March 12.

I’m in agreement with these states, and the others, that have proposed or passed legislation to ban private transfer fee covenants.  As I stated in my first blog on the subject, Patently Stupid, "hopefully, [states] will pass legislation to protect homeowners and our already suffering real estate markets from these covenants requiring payment of private transfer fees." 

Ohio has proposed HB 292, which, with certain appropriate exceptions, states that a "transfer fee covenant recorded in this state on or after the effective date of this section does not run with the title to real property and is not binding on or enforceable against any subsequent owner, purchaser, or mortgagee of any interest in real property as an equitable servitude or otherwise."  Although I have spoken with at least one Ohio examiner that has seen such a covenant, I do not believe that the practice has been all that common here.  This legislation will go a long way to ensuring that we don’t see them gaining ground. 

But what about the covenants that have already been recorded on deeds?  The legislation will not help these unfortunate homeowners, but I do not believe that they will be stuck with the covenants for 99 years. In To Touch And Concern, I hypothesized that these covenants do not meet the standards to run with the land and become enforceable against subsequent purchasers.

These covenants, as the Florida Senate pointed out, are nothing more than a means to generate a future revenue stream for savvy sellers.  It is simply a covenant to pay a sum of money which has traditionally been held to be private in nature and such covenants do not run with the land to bind subsequent grantees.  In order to sufficiently touch and concern the land, there must be a benefit that goes along with the burden.  For example, if the transfer fee were paid to a homeowners’ association for maintenance of the common areas of a subdivision there would be little doubt that the covenant touches and concerns the land.  However, with nothing more than a sum of money paid to some previous owner with no ties to the land, the covenant should be held to be unenforceable against subsequent purchasers.

I’m still waiting for a subsequent purchaser of property burdened by a transfer fee covenant to challenge the covenant in court.  Until then, kudos to the Ohio legislature for taking up this cause and protecting Ohioans from these private transfer fees.

Robert A. Franco
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