Private Transfer Fee Covenants

A “private transfer fee covenant” (sometimes called a “reconveyance fee” or a “capital recovery fee”) refers to a covenant attached to real property that requires a fee to be paid to a third party (frequently the property developer) upon each re-sale of the property, generally for a period of 99 years.   For example, the Dupaix of Eagle Mountain, Utah were shocked to learn that the home they purchased was burdened with an undisclosed 13 page Declaration of Covenants on record, which required them to pay a resale fee based on a percentage of the price when they next sell the home (New York Times, 9/11/2010, “Fees that Only Developers Could Love,” Janet Morissey). 

Such fees are not new  – in the public sector, realty transfer taxes are collected on real estate resales throughout the United States.  In California, many disputes between environmentalists and developers were settled by the establishment of such a resale fee, with the proceeds to be applied to the benefit of the non-profit environmental issue or concern.  The Boston Redevelopment Authority charges such a fee in at least 25 of its condominium projects throughout the City of Boston, and the revenue is paid to the BRA for its operating costs.  However, recently finance groups and developers are using the fee to offset reductions in home values and the need for additional capital– this profit motive, combined with the lack of disclosures to consumers regarding the fees, is inspiring a public outcry against the practice.

The Federal Housing Finance Agency on August 12 published proposed guidelines prohibiting any FNMA or FHMLC purchases or investment in mortgages on real estate bound by such a covenant or securities backed by mortgages bound by such a covenant.  The guidelines will go into effect on or about October 12, 2010, subject to any modifications resulting from public commentary.  Many states have enacted legislation restricting such private transfer fees (Arizona, Florida, Kansas, Iowa, Maryland, Minnesota, Missouri, Oregon, Texas, and Utah. In California, sellers must disclose private transfer fees. Bills are pending in Hawaii, Illinois, Louisiana, Alabama, North Carolina, Rhode Island, and South Carolina).   The American Land Title Association has published underwriter concerns regarding the validity of the covenants, such as: unlawful restraint on alienation; rights that do not touch, concern or run with the land; public policy concerns; and illegal private transfer taxes.

A developer considering such a fee is well advised to research not just the practicality of the proposed fee structure (and any proposed third party structure put in place for collection), but also the current legal and title concerns regarding the enforceability of such a covenant on real property.  The attorneys and staff at Maiello, Brungo & Maiello are available to assist if you have any questions regarding such a fee structure.