Courtesy of University of Missouri Law School
With the U.S. housing market remaining stagnant, property owners are wary of anything that will make it difficult for them to sell their homes. A new legal device called a private transfer fee covenant, which requires property owners to pay a fee to the original developer when they sell their house, has concerned realtors and land title industry advocates that these fees might slow the recovery of the housing market. Wilson Freyermuth, the John D. Lawson Professor of Law and the Curators Teaching Professor at the University of Missouri School of Law and a real estate law expert, believes these transfer fee devices not only hurt the housing market, but the community as a whole.
Many housing developments have community association fees attached to each lot; these fees pay for neighborhood pools, parks, facilities, etc. The owner of the property is obligated to pay these fees and since they go toward the maintenance of shared facilities, they are commonly accepted as legitimate. However, some housing developers are now imposing private transfer fee covenants to land under new development. This covenant requires the owner of the property to pay the developer a fee (commonly, one percent of the sales price) every time the property is sold. For example, when owner A sells his house to owner B for $200,000, owner A must pay the developer a $2,000 fee. When owner B then sells the house five years later to owner C for $250,000, owner B must also pay the developer $2,500. This cycle can continue for as many as 99 years, depending on the language of the original covenant. Freyermuth says there are several reasons why these transfer fees should not be allowed.
“Private transfer fee covenants create an unjustified impediment to the transfer of real estate,” Freyermuth said. “Because the covenant imposes the obligation on the buyer to pay a transfer fee in the future, the buyer should insist upon paying less to acquire the property than if the buyer were obtaining an unrestricted title. Yet most consumers don’t have the financial sophistication to be able to price the effect of the covenant accurately, because they don’t know precisely when they might resell the land and how much it may appreciate in value in the future.”
Freyermuth also notes that these private transfer fee covenants can negatively affect an entire community, even those who are not obligated to pay any covenant.
“By lowering the value of the affected land, a private transfer fee covenant effectively decreases a county’s tax base by lowering taxable property values, and all without a vote of the affected county residents.”
As of early 2011, 15 states have adopted legislation to limit private transfer fees. Freyermuth is advising the American Land Title Association, which is working to introduce legislation in several more states to ban these types of private transfer fee covenants. So far in the 2011 session, bills have been introduced in at least 20 states, including Michigan. While many states are working to end these fees, Freyermuth says courts also should take part in limiting their enforcement when developers try to collect transfer fees.
“These covenants do not benefit ownership of land and are contrary to public policy,” Freyermuth said. “Courts should take this into account and refuse to enforce such covenants.
Freyermuth discussed the legal aspects of private transfer fee covenants, and provided model legislation to limit them, in the Real Property, Trust and Estate Law Journal.
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