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Source of Title Blog

Freehold Licensing, NKA Freehold Capital Partners, At It Again
by Robert Franco | 2010/02/27 |

For more than two years, I have been blogging about private transfer fee covenants and the group that is promoting them, Freehold Licensing.  Freehold has actually attempted to patent their business strategy of creating private transfer fee covenants (a separate act that I find offensive).  The group now has a new name and a new strategy, all evolving while several states and trade organizations are trying to put a stop to private transfer fee covenants.

Source of Title Blog ::

To summarize, a private transfer fee covenant is a covenant that purports to run with the land and bind subsequent owners of property to pay a 1% fee to the original covenantor.  Freehold, of course, gets to share in the fee for their assistance in setting up the covenant.  To briefly recap my previous blogs, In Patently Stupid, I explained the covenant and my opinion of their attempt to patent the practice as a "business strategy."  In Freehold Licensing Defends Covenants, I addressed comments posted by a representative of Freehold and the Texas legislation aimed at banning private transfer fee covenants.  And in a third blog, To Touch and Concern, I hypothesized that such covenants are unenforceable under common law. 

After I suggested in my blog that states should pass legislation, as they had in Texas, to ban private transfer fee covenants, four states did just that - Florida, Missouri, Kansas and Oregon. I followed up with a blog about Ohio's pending legislation, Banning Transfer Fee Covenants in Ohio

After the blog about Ohio's legislation, I started to get calls from people across the country with an interest in these covenants.  I was contacted by an attorney in South Carolina who was referred to me by a national underwriter that issued a bulletin stating that they would no longer insure property subject to a private transfer fee covenant.  He was representing an organization of homeowners' associations concerned about transfer fee covenants commonly used to fund their members' associations.  I responded with a blog about the importance of legitimate uses of transfer fee covenants to fund homeowners associations and not-for-profit groups that actually provide a benefit to the property and their communities,  Underwriters Refuse to Insure Transfer Fee Covenants

I was later contacted by the American Land Title Association (ALTA) which is working with the National Association of Realtors (NAR) on model legislation to assist states with banning the Freehold-type covenants.  (See The American Land Title Association Opposes Private Transfer Fee Covenants). 

Just last week, I was interviewed by a journalist with the Washington Post who is working on an article for consumers about private transfer fee covenants.

With all the activity centered around prohibiting private transfer fee covenants, I thought I'd see what Freehold was up to these days.  I was surprised to find out that they are still quite active and even more aggressive in their marketing of private transfer fee covenants.

Freehold Licensing issued a press release a couple of weeks ago to announce the move of its corporate offices from Austin, Texas to Midtown Manhattan.

Bringing the Freehold team to the heart of the financial markets is important for the Company's continued growth.  The move will provide close proximity to major investment banks, will allow the Company to attract top talent, and further illustrates Freehold's focus on strengthening its growing portfolio of financial instruments.

It has also apparently changed its name to Freehold Capital Partners.  Maybe because of the extensive bad press associated with "Freehold Licensing."  If you Google Freehold Licensing, the search results include such listings as "Closing the Door on Freehold Licensing" and "Is this a scam..."  In fact, when you enter the search term "Freehold Licensing" in Google, they suggest the search term "Freehold Licensing Scam." 

But, the name isn't all that has changed.  What Freehold used to refer to as "Transfer Fee Instruments" on its old Web site is now called "Reconveyance Fee Instruments" on its new Web site.  Again, could this possibly be because of the negative press associated with the former?

If this isn't enough to make you cringe, Freehold is now touting the benefits of pooling and securitizing the covenants into securities that can be sold to provide a lump sum payment to the covenantor, usually a developer, of the present value of the covenants.  We are now familiar with Mortgage Backed Securities (MBS) that contributed to the financial crisis.  It was once thought that there was no risk associated with MBS.  Freehold makes the bold statement that "Reconveyance Fee Instruments represent a fully-collateralized financial instrument with no meaningful risk of default... Investors acquiring shares of the pool would own a long-term income-producing asset secured by a real property interest, and which carried no meaningful risk of default."  

Of course, it states in the small print that "this is not an offer to sell, buy, market, offer, broker or securitize Reconveyance Fee Instruments.  There is no assurance that any particular Instrument will be suitable for sale or securitization or that public market for Reconveyance Fee Instruments will develop, mature or persist."  Even so, I think the Securities and Exchange Commission should keep a close eye on Freehold's marketing material. 

And what of their claim that there is "no meaningful risk of default" on such instruments?  Could that be true?  I don't think so.  In fact, in my opinion there is a very real and substantial risk of default.  A handful of states have already banned private transfer fee covenants.  Though they only apply to attempts to create such covenants after the passage of the legislation, there seems to be a general sense that private transfer fee covenants violate public policy and there is a concern that they may be held unenforceable under common law.  Should that happen, investors would likely stand to lose their entire investment.

Freehold realizes the controversy surrounding private transfer fee covenants and has provided a page in its brochure dedicated to "Reconveyance Fees Rights & The Law: A Primer for Lawyers."

  • Filing the Freehold Reconveyance Fee Instrument in the public records obligates future sellers to pay a 1% fee at the time of sale.  The process is analogous to deed restrictions and common subdivision restrictions, though the Freehold instrument has been crafted with particularity to Reconveyance Fees.

  • In order to constitute an UNREASONABLE RESTRAINT ON ALIENATION, the restraint must (a) be unreasonable and (b) actually restrain alienation.  The mere obligation to pay money will generally not suffice to unreasonably restrain alienation because the sales price will adjust to account for the restraint.  This is particularly true when the restraint is limited to a de minimus fee (e.g. 1%).

  • The Freehold Reconveyance Fee Instrument does not violate the RULE AGAINST PERPETUITIES because the term is limited of 99 years and because the rights VEST immediately upon recording.

  • If a state passes laws to ban Reconveyance Fees, not only must they ban them for charitable purposes (or run afoul of the constitution) but they must "GRANDFATHER" existing Reconveyance Fee Instruments or it would be an impermissible "TAKING." 

Freehold also provides several "representative cases" and claims that "the Freehold system is based upon sound legal principals."  Poppy-cock!  Freehold cites cases and picks precise quotes that appear to support its position.  However, the cases are not "representative" of the Freehold system.  All of the cases clearly involve covenants that "touch and concern" the land in some way.  Some involve restrictive covenants prohibiting certain types of buildings (e.g. multi-family), fences or tree lines. Others deal with affirmative covenants requiring the payments of fees for recreational purposes (e.g. to support a recreational facility), upkeep of dams, roads and other improvements, or homeowner's association dues.  All of these clearly touch and concern the land and benefit the property owners in some fashion.

By contrast, the Freehold covenant does not provide any benefit to the property owners or their community.  It is, as Freehold says, "a mere obligation to pay money."  The only party that benefits from the fee is the original covenantor/developer, who is likely to be out of the picture before the payments are due.  The funds collected do not go toward supporting common areas, recreational facilities, or homeowner's associations; it merely creates "a long-term income stream" for the covenantor or investors.

The Supreme Court of Florida explained this distinction in Palm Beach County v. Cove Club Invs., 734 So. 2d 379 (Fla. 1999).

A covenant running with the land differs from a merely personal covenant in that the former concerns the property conveyed and the occupation and enjoyment thereof, whereas the latter covenant is collateral or is not immediately concerned with the property granted. If the performance of the covenant must touch and involve the land or some right or easement annexed and appurtenant thereto, and tends necessarily to enhance the value of the property or renders it more convenient and beneficial to the owner, it is a covenant running with the land.

. . .

A personal covenant creates a personal obligation or right enforceable at law only between the original covenanting parties whereas a real covenant creates a servitude upon the reality for the benefit of another parcel of land. A real covenant binds the heirs and assigns of the original covenantor, while a personal covenant does not.

See also, Regency Homes Ass'n v. Egermayer, 243 Neb. 286, 295 (Neb. 1993).

Generally, in the United States the three essential requirements for a covenant of any type to run with land are (1) the grantor and the grantee intend that the covenant run with the land, as determined from the instruments of record; (2) the covenant must "touch and concern" the land with which it runs; and (3) the party claiming the benefit of the covenant and the party who bears the burden of the covenant must be in privity of estate.

. . .

If the covenant at issue is personal, it is not binding on [subsequent owners]; if the covenant is real, it runs with the land, and the [subsequent owners] are bound by the terms of the Declaration.

And, to put it even more simply, see Beeter v. Sawyer Disposal LLC, 2009 ND 153, P9 (N.D. 2009).

If a covenant or deed restriction benefits the grantor personally, and serves no real benefit to the land, then the covenant is personal in nature and does not 'run with the land' upon a subsequent sale of the property.

Of course, none of these case, including those cited by Freehold, are exactly on-point.  I have not been able to find a published case that has addressed the type of covenant being promoted by Freehold.  That will not likely happen for some time.  It will take a property encumbered by a Freehold covenant transferred to a subsequent purchaser who desires to challenge it in court.  These covenants are still fairly new and there haven't likely been many re-sold yet.

It will be interesting to see what legislation develops and the effect that has on transfer fee covenants.  With the new efforts of ALTA and NAR to raise awareness among state legislators, it is likely that the bans will spread to more states soon.  Of course, most of the laws on this issue, including those proposed by ALTA and NAR, contain exceptions for non-profit organizations.  Freehold contends that this "runs afoul of the constitution."  We could see some litigation in the near future, but I suspect that such laws would be upheld. 

Whether Freehold calls them "transfer fee instruments" or "reconveyance fee instruments," they just don't pass the smell-test.  Clearly, many organizations and state legislatures do not favor them.  One state senator called them "sophisticated pyramid schemes which steal equity from the owner."  Public sentiment is against Freehold on this one.

Imagine what would happen if everyone were to sell their property with such a covenant?  If this type of covenant were allowed, theoretically, any seller who is not satisfied with the sales price he is able to get could just include a covenant in the deed to the buyer that required him to be paid 1% every time the property sells for the next 99 years.  And, what would happen when the property had been sold two or three times with each subsequent owner reserving such payment rights by covenant?  That would create a terrible mess and would, of course, be absurd.  But, what would prevent it from happening (other than common sense)?  

But, I digress.  Freehold has continued to get my dander up... first by coming up with this ridiculous concept, then by attempting to patent it, and now... trying to securitize the covenants in to an investment.  Where will it all end?

Robert A. Franco
SOURCE OF TITLE




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Categories: General Interest, Huh?, Land Title Associations, Legislation, Title Problems

3242 words | 8515 views | 18 comments | log in or register to post a comment


A Different Perspective

I am a real estate attorney with clients that include commercial and residential developers and owners as well as equity funds.  In the past two years, I have represented clients who have surrendered projects to lenders, renegotiated loans, restructured partnerships, purchased distressed debt/assets, etc .  After reading your article, I thought it may be helpful to your readers to reply with a real world event that has occurred within the last few weeks.  I have a client who owned a residential development that has approximately 400 single family residential lots and a golf course.  Half of the lots have been sold and residences have been constructed. The primary amenity for the community is the golf course.  In June 2008, the remaining 200 Lots and golf course had an appraised value of approximately $70M.  In June of 2009, the appraised value dropped to $34M (only three lots had sold), which is approximately the same amount as the debt.  The asset was taken by the lender and the golf course closed.  It will likely be sold by the lender, and I have heard that cash bids in the range of $10M to $15M are being entertained.  This is real.  The result caused homes then under contract of sale to fall out of contract.  The homeowners in the community have no way of exiting at this point, as nobody wants to buy into such a failed community.  Home values have plummeted, which will undoubtedly trigger more defaults and more foreclosures.  When the bank sells the property, it will realize a $20M loss, which will likely ultimately be absorbed by taxpayers.   The foregoing represents a real world example of our system as it works today. The only person that will benefit will be the cash buyer at the foreclosure sale.  I can say without reservation, qualification or hesitation that if a transfer fee monetization had been available to my client, none of the foregoing would have occurred.  The transfer fee funds could have been used to pay down the loan and operate the project through this downturn.  Home values would have been maintained, pending purchases would have closed, and taxpayer losses would have been avoided.   So, say what you want about transfer fees, but there is no ignoring the FACT that they have a very real application that would be HELPFUL to the real estate industry right now.

As long as foreclosures are occurring, values will continue to erode and the market will continue to remain spooked.  In order to stop foreclosures, troubled projects must have a liquidity infusion that is not debt.  Until then, the devastating cycle will continue, taxpayers will continue to absorb losses and only a certain few (cash buyers at foreclosures) will benefit.

I understand that nobody likes fees of any sort at closing.  I personally believe the “standard” 6% real estate commission is egregious and should be legislatively curtailed to protect unsophisticated consumers, but I also recognize that freedom of contract is a basic tenet of our legal system and should not be disrupted.

I would be remiss if I didn’t comment on your following statement: “We are now familiar with Mortgage Backed Securities (MBS) that contributed to the financial crisis.  It was once thought that there was no risk associated with MBS.”  The historical performance of MBS was clearly a derivative of the underlying borrowers’ ability to pay, and when borrowers (mostly subprime) started defaulting, the MBS market collapsed.  Since most of the major institutions’ portfolios were laden with some form of MBS, their net worth sank precipitously. However, a transfer fee is merely a fee paid at closing.  It does not rely on the creditworthiness of a borrower.  So, while it is theoretically possible for a seller to default on its obligation to pay closing costs, it is unlikely.  I would venture to say that you have rarely closed a transaction where a party has failed to pay your premiums or escrow costs.  The same would hold true with the transfer fee.  Suffice it to say, your analogy is inapplicable.

Also, this is not a “pyramid scheme”.  The transfer fee model involves the original owner creating an encumbrance on its property to generate an income stream that can be sold today for a net present value.  The model clearly shows an exchange of consideration among all parties involved and would not come close to violating any guidelines of the Federal Trade Commission.  To suggest that the business model is a “pyramid scheme” is at best false and at worst libelous.

I also believe your “touch and concern” commentary is incomplete.  As you know, the doctrine has been the source of much confusion, which is why the American Law Institute eliminated the “touch and concern” requirement in the Restatement (Third) Property: Servitudes.   In its place, the ALI instituted a largely contractual regime under which the covenant will run with the land if such is the intent of the original parties.

Look, the reality is that our country is in crisis, and it all stems from real estate.  I have clients that own tracts of land that they would like to commence developing, but alas, there is no debt available.  A transfer fee could be used to generate cash today to allow this infrastructure to proceed, which would create a massive surge in jobs.   There are other applications as well.  For example, it is estimated that approximately 25% of all home loans are underwater.  What if the lenders used transfer fees to work out these loans with their borrowers?  Wouldn’t that be better than simply foreclosing and looking to the taxpayers to absorb the losses?  Or the first time homebuyer tax credit?  What if a transfer fee had been imposed to allow taxpayers to recoup some of the expense of that program rather than allowing it just to be a handout?

To be sure, Freehold also has some negatives.  For one, I believe their fee is too high.  However, it is negotiable, and if the parties cannot come to terms, the owner can simply refuse to participate in the Freehold program.  I am also critical of their network of agents.  I have found that many are not well informed of the intricacies of the transfer fee covenant - a legal instrument.  I saw one post where an agent purportedly informed a church that it could impose a transfer fee on its church property, receive an enormous windfall and then never construct a church.  The notion is laughable and is entirely unrealistic for a number of reasons, including the fact that the Freehold covenant expressly EXEMPTS nonprofits from paying a transfer fee.  However, it appears that Freehold does a good job of encouraging participants to seek independent legal advice, which is always important when making a legal decision.

The irony here is that we all want the same thing – a prosperous real estate market.  I understand that realtors and title companies want to protect their fees and do not want a third party encroaching on the seller’s statement.  However, if you shut out Freehold and programs like it, you are shutting down one of the few paths owners have today to get liquidity.  That would be shortsighted.

For business reasons (including a desire to avoid being overwhelmed with phone calls for information), I have posted this anonymously.  However, I will monitor replies closely and will endeavor to give prompt and objective responses.  To be clear, I’m just a lawyer (and taxpayer) attempting to offer a different perspective.  I am not a Freehold agent or employee.  I am not paid by Freehold or any lobbyist.  In short, I have no vested interest in the success of Freehold or others like them except that if successful, (i) it will allow my clients to continue to exist and give me work and (ii) it will limit further taxpayer bailouts, to be funded by me and my children… and their children.. and so on…

 
by dirt lawyer | 2010/03/01 | log in or register to post a reply

Covenants

 

I find it interesting that covenants, conditions and restrictions are the type of thing that can state almost anything and in doing so, become both private law while relying upon public enforcement thereof.


 

Certainly, Homeowners Associations, have taken advantage of such things in recent decades, abusing their power by charging criminal fees for $20 dues and repossessing homes under such exhorbitant charges. This sort of activity, supported by the title industry as they continually collected fees for years from the recording of HOA defaults was not a problem, despite condo owners losing their homes for tens of dollars. Yet, now the industry and the rapscallions that represent them, rally to block the small guy, the individual homeowners, the common man, from exercising his property right, proving again that the law is on the side of those with the money, not the side of those with the Rights.


 

We can also see that the courts have responded to racist CC&R's by revocking their enforcability, so if the will exists, it can be accomplished. Indeed, the State of California finally enacted laws to limit the HOA's from forelosing willy nilly, but only after years of lost homes and bad public relations forcing the vote.


 

At the same time, Reverter Rights in CC&R's have, mostly tended to stand the test of time and for a longer duration in America than any of the former. If any type of covenant should be offensive to the sensibilities of the title industry, why are these not on the front-burner of their legislative agenda?


 

Could courts or legislative bodies step in and regulate “Freehold” declarations? Certainly. Should they do so? This is unclear.


 

Regulation is opening the door to the state to step into your home and affect your property rights. The rights of the homeowner should remain at the forefront of our systems of political democracy and economic capitalism. The nanny state is not welcome in my backyard, nor on my front porch.


 

The slippery slope argument is not to be dismissed in this arena, as it deals with fundamental rights that the Common Law is meant to protect and defend. The twisting of the Common Law as invocked by Robert as a tool for dismissing Freeholds, is an artificial manipulation of the concepts thereof and not one which the common man would ever have the convoluted horse sense to conceptualize on his own. It is not common sensical to offend against the property rights of land owners.


 

This is the very reason that elected representatives and our fellow men as jurors are so slow and reluctant to enact widesweeping changes in the rights of propery owners. This affects the private, fundamental, Natural Rights that our systems of Common Law and federalist, republican elected governance is intended to protect and defend.


 

After all, once the state and it's thin sheen of elected governors feel that it can regulate what you can and can't do on your land, then how much longer before they regulate what property you can possess on your land: pets, guns, food stocks, number of people you can invite, number of cars you own, and more? What about activities? Do you have a permit for that dinner party? Why not bring back laws that bar unmarried people from cohabitating? More blue laws anyone?


 

I repect that the commerical profiteering rights of large, international insuranve tce firms might eventually be adversely affected by “Freehold” covenants. These protected, insulated, well-defended corporations which are indemnified by the people of the various states might be less able to give out golden parachutes to their executives, if they can't hire bottom tier workers at minimum wage who can read and understand a Freehold sufficiently to protect them against claims. The cost of having legislatures draft codes to regulate this is clearly in their best interests, so their actions are not surprising.


 

I assure you that this is not a fight that is over. Convince me otherwise, as I am not yet in the big money pockets. I doubt you can.

i

 
by William Pattison | 2010/03/01 | log in or register to post a reply

Thank you, Dirt Lawyer, for your comment...

I guess I don't share your optimism that transfer fee covenants are the savior of our troubled real estate market.  In your "golf course" example, you said that only 3 lots had sold.  I don't see where there would have been any transfer fees generated to save the project.  Are you suggesting that you could "monetize" covenants that don't yet exist in anticipation that lots will be sold with the covenant in the future?  That seems a bit much to hope for.  And... certainly too creative for me to buy in to.

As for your contention with the "pyramid scheme" comment, you would have to take that up with Kansas Senator Jay Emler. 

Regarding the "touch and concern" analysis, you must also be aware that the American Land Institute (ALI) doesn't make law.  However, even if you choose to see the covenant as more contractual in nature, I fail to see what would give anyone the right to enter into contracts on behalf of subsequent property owners who were never a party to the agreement.  Clearly, if the covenant touches and concerns the land the obligation would be enforceable because the subsequent owner would inure to the benefits of the covenant.  Here, there are no benefits to that owner.  It really is a mere personal covenant to pay a sum of money which should never be enforceable against future owners.

Under your contractual approach to covenants, are there any covenants that could be held to be unenforceable?  Just because a buyer and seller happen to have a real estate transaction in common, why should they be able to obligate subsequent owners to any provision they can dream up?  Where would you draw the line? 

Suppose I sell my home with a covenant that requires the owner to pay my income taxes every April 15th?  What if I want to include a covenant requiring the homeowner to drive me to church every Sunday morning?  Clearly, these are areas which could be agreed to in a contact between willing parties, but I assume we can all agree that it would just be absurd to bind unknown subseqent owners of my home to such provisions.  Clearly, the common law as it exists draws the line at covenants that touch and concern the land, which seems most appropriate.

Ultimately, this is going to be an issue for the legislatures and courts to work out.  I have expressed my opinion based on the common law of covenants and I believe that the courts would hold that these "mere obligations to pay a sum of money" would be unenforceable against future owners.  Only time will tell.

 
by Robert Franco | 2010/03/01 | log in or register to post a reply

I'm not following you, William...

The twisting of the Common Law as invocked (sic) by Robert as a tool for dismissing Freeholds, is an artificial manipulation of the concepts thereof and not one which the common man would ever have the convoluted horse sense to conceptualize on his own. It is not common sensical to offend against the property rights of land owners.

I don't think I understand what you mean by "twisting of the common law" or "artificial manipulation."  Property rights are defined largely by common law and you have to look at it to determine whether a covenant is "real," which will run with the land, or "personal," which does not run with the land. 

A determination that a covenant is personal in nature does not "offend against the property rights of land owners," it merely defines what those property rights are to begin with.  I'm certainly not advocating taking any property rights away from owners - my position is that property owners simply do not have the right to obligate future owners to pay them money for which there is no corresponding benefit to the property.  In essence, you can't "offend against" rights which never existed.

 
by Robert Franco | 2010/03/01 | log in or register to post a reply

Restatement 3d of Property: Servitudes

It has been pointed out that the American Law Institute (ALI) has suggested eliminating the "touch and concern" requirement for servitudes.  While that is correct, it does not appear that the ALI is suggesting that "a mere obligation to pay a sum of money" is enforceable against subsequent landowners, notwithstanding the contractual nature of the agreement and intent that it run with the land.

§ 3.7 Unconscionability

A servitude is invalid if it is unconscionable.

Illustration 3.  The declaration of covenants for Greenacres, a residential subdivision, includes a provision obligating the owner of each lot to pay the developer, or its assigns, a royalty of one percent of the gross sales price on each resale of each lot in the subdivision in perpetuity. In the absence of unusual circumstances, the conclusion would be justified that the provision is unconscionable. If not unconscionable, the covenant would be subject to termination under the rule stated in § 7.12.

In another illustration, the payment of a transfer fee is not considered unconscionable where the "owners receive contemporaneous services of value roughly equivalent to the required payments."   Whether examined under the common law or the ALI Restatement, it would appear that the Freehold-type covenant is not one that would run with the land and bind subsequent owners.

 
by Robert Franco | 2010/03/01 | log in or register to post a reply

Selective Argument

Good morning Robert,

I have just read your most recent blog regrading Freehold Capital Partners and the various replies.  It is obvious that you have had a problem with Freehold Capital Partners for quite some time now.  I have read some previous posts and your responses to those whose support the concept and two things become clear. One is that you have a very limited knowledge of Freehold and the covenants you are blogging about and two,  you don't let the law or the facts get in the way of your opinions.

I have practiced law for over twenty years and there is a saying: when the law is against you pound the facts, when the facts are against you, pound the law, when both are against you, pound the table. In this instance, your blogs are the keyboard equivilant of pounding the table. The law and the facts are against your argument yet you pound away.

For example in the illustration given above regarding sec. 3.7 on servitudes, you point out that a perpetual fee could be considered unconscionable.  You nelect to tell your readers that the Freehold fee is not perpetual so this illustration has no relevance to this discussion.  You also, acknowledge, then skip over the notion that the law has moved away from strict  "touch and concern" requirements in favor of contractual consideration to support them. An investigation of these requirements and of the Freehold covenant shows that the covenants are valid. It must be pointed out that every person who ulitmately pays this fee does so on property that they purchased knowing that the fee was in place and that this fee was an important part of teh consideration when they purchased the property .  The fee is less then the cost of most title policies and certainly less then the fee charged by a realtor.  It is even less the the amount typically siphoned off by the broker who has no connection with the sale at all other then to have an agent working under his license.

Importantly, there are benefits arising from the Freehold covenant that do touch and concern the land. The covenant is an important financing tool for the developer that is used to enhance the property, pay for infrastructure and effect its sales price favorably for the intial and subsquent buyers.  Additioanlly  there is a valulable charitable component that benefits the community where the land is located. All of these would make the covenant permissable and not run afoul of section 3.7.

Allow me to correct a portion of your post.  Texas hasn't banned these covenants. The Texas statute only provides that a buyer cannot pay the fee in residential transactions.  The statue has no applicability to commercial property and since the Freehold covenant provides that the fee is paid by the seller in the transaction it doesn't apply to  these covenants.  Depsite your call to arms in your blogs for the legislture to pass legislation banning these covenants, an attempt to modify this statue was defeated in the last Texas legislative session.  In the discussions regarding the statute which was supported by the Texas realtors, it seemed that their concern for the Texas consumers was misplaced when it was pointed out that they get paid 6% every time the property sales when they have done nothing to create or enahnce the property's value yet the covenants they were trying to ban were only 1% payable to the person who actually did create the value.

Your mention of the national underwritng memo is out of date.  The concerns of the  underwriters have been addressed and the major underwriters in the industry have agreed to close properties with these covenants recognizing that they need to treat these covenants just as they treat every other restrictive covenant that is placed on property.

Finally,  your comments and innuendos relating to Freehold changing its focus and now promoting the benefits of these covenants in the securitzation market and comparing them to the mortgage backed securities are simply wrong.   As has been pointed out, these covenants do not face the same risk of default as mortgage backed securities because their payment is not based upon the credit worthiness of borrowers.  Any attempt to nullify them through the legislature would be unconsititutional and invalid.

Dirt lawyer correctly expressed the plight of developers and homebuilders in our current economy.  The economic model provided by Freehold and the securitization of these covenants provides a valuable alternative to conventional financing and an ablility to salvage the projects that they already have.  When the benefits of teh covenants and the program itself are explained most individuals recoginze their value and support them.  It seems that only those who have a vested shortsighted interest to control closing costs and fees paid at closing are opposed.

R. Wilson

 

   

 

 
by Robert Wilson | 2010/03/02 | log in or register to post a reply

Response to Robert and ALTA

Hey Robert, i don't mean to pile on, but here is what I wrote last night as I considered your most recent post in response to me:

1.       Monetization.  When the owner records a transfer fee covenant on its property, it creates an instrument that gives the beneficiary a right to the income stream from the transfer fees.  (Note: some critics state that the covenant will require title companies to search for beneficiaries, but this is untrue – all fees are paid to an institutional trustee on behalf of the beneficiary).  The initial beneficiary is the owner that creates the covenant.  The owner can then sell the right to its transfer fees to a third party, but arriving at a price on a single asset will be difficult.  This is where Freehold comes in.  They can pool the owner’s covenant with covenants of many other owners across the country, covering a variety of product types in various stages of development.  The result is to create a vast pool from which an actuarial analysis can be performed to predict the income stream generated by the pool.  A buyer would then purchase the pool of instruments, generating cash today for each individual owner.  So, in my example, my client would have recorded the transfer fee covenant on its project and would have sold same to the buyer of the pool.  The proceeds from that sale are what my client would have used to pay down debt and fund further development costs.  While you may think it is a “bit much to hope for”, in many instances, it’s the only hope the owner has.   And it is not without basis – Freehold’s pool has grown by 3000% percent (30x) in the last year, and (on behalf of one of my clients) I have spoken with a large fund interested in purchasing the instruments. 

2.       Touch & Concern.  With respect to touch and concern, there is no bright line test, as you intimate.  For decades, scholars and courts have struggled to define the meaning of “touch and concern” and have failed, which is why the ALR has proposed abandoning common law and following contractual law.  I am no expert in servitude law by any means, but I did review a legal opinion from a top rated national firm that was retained to evaluate the covenant from an enforceability perspective, and it concluded that the covenant was enforceable.  Obviously, if the covenant were an illegal servitude, there would be no need for a legislative ban.
 

3.       Responses to Your Questions.  (These are my personal opinions set forth for discussion purposes.)


Under your contractual approach to covenants, are there any covenants that could be held to be unenforceable?” 
My personal opinion is that I would prefer the Restatement approach rather than some 500 year old common law principal that was concocted before the title records system that we have today.  It has outlived its usefulness.


Just because a buyer and seller happen to have a real estate transaction in common, why should they be able to obligate subsequent owners to any provision they can dream up?”
Because those subsequent owners have AGREED to assume that obligation when they purchased the property and the price they paid contemplated their assumption of that obligation.  If courts start interfering, a buyer that previously paid less for his or her property and expressly assumed the obligation would be allowed a windfall.  That is unfair.


“Where would you draw the line?”
Personally, I prefer the Restatement approach that follows contractual principles.


“Suppose I sell my home with a covenant that requires the owner to pay my income taxes every April 15th?”
Enforcement would be a challenge under contractual principles due to the uncertainty of your taxes, but I suppose that if the risk could be quantified and contemplated in the purchase price between buyer and seller, there is no reason why such a covenant should not be enforced against that buyer.  If you sell your $1M home for $1 + the tax obligation, do you think it would be fair to allow a buyer to avoid the obligation?
 

“What if I want to include a covenant requiring the homeowner to drive me to church every Sunday morning?”
This may constitute a personal services covenant that can’t be specifically enforced, but putting enforceability aside, if you sell me your $1M home for $1 + my promise to drive you to church, why should I be able to get a windfall by arguing the covenant doesn’t touch and concern the land?  That wouldn’t be fair to you.


Clearly, these are areas which could be agreed to in a contact between willing parties, but I assume we can all agree that it would just be absurd to bind unknown subseqent owners of my home to such provisions.”
I absolutely do not agree.  A subsequent owner has a choice to assume the obligation or not when he purchases the property.  He will price the property accordingly.  I think it would be absolutely unfair for him to pay less and then avoid the obligation by arguing some archaic “touch and concern” principle.


“Clearly, the common law as it exists draws the line at covenants that touch and concern the land, which seems most appropriate.”  
 
The line is not as bright as you suggest (see 2 American Law of Property § 9.13 (A.J. Casner ed. 1952)) and has been the subject of much debate and confusion.  The “touch and concern” requirement was first conceived in the English courts by Spencer’s case in 1583, and to quote the California Law Revision Commission: “… is an unnecessarily formalistic relic of a bygone era and is inconsistent with modern concepts of construction of instruments.”
 
4.     Unconscionability.  Section 3.7 speaks to a royalty paid in perpetuity with no relationship to the original purchase.  Here, we are speaking of a transfer fee expressly assumed by the purchaser and with a limited period of 99 years.  As you mention, “the payment of a transfer fee is not considered unconscionable where the ‘owners receive contemporaneous services of value roughly equivalent to the required payments.’  Under the Freehold program, the original owner would sell the transfer fee and invest the proceeds in the property, thereby benefitting successors.  Plus, the successor owner would pay a lesser purchase price because of the existence of the 1% transfer fee.
 
5.     Conclusion.  Fundamentally, I think it is absurd for anyone to interfere with a parties right to contract.  I have studied the Freehold instrument and am aware of its mechanics.  I have also read the paper recently published by the American Land Title Association (ALTA) and was surprised by their inaccurate portrayal of the facts to support their position.  However, I understand their agenda in to make their job easier and limit their liability, which dictates in favor of a ban on transfer fees.  Indeed, if transfer fees were initiated universally, it would require title companies to do more work in reviewing title to properties and identifying exceptions to earn their premium.  I was very amused by their statement that the 3 page covenant was “confusing” – Have they read one of their title policies lately?  And the assertion that the transfer fee is a confusing concept, is equally ridiculous.  If a seller can calculate 6% of the sales price, surely he can calculate 1%. 
 
The hypocrisy of ALTA in taking a “pro-consumer” approach has really (to steal your phrase) “got my dander up.”  For those in the real estate industry, it is fairly well understood that the very existence of title insurance is harmful to consumers, which is why the state of Iowa has continued to ban title insurance companies from selling within their state and why the Iowa Bar has called title insurance a “fleecing of America”.  According to the Consumer Federation of America:   
 
The real costs for creating the title insurance policy are very low, a few hundred dollars for the title search and taxes and 5 percent of the premium price for losses, but consumers are being charged considerably more than the cost of the product plus a reasonable amount for profits. For a $500,000 home in the Washington, D.C. metropolitan area, title insurers are charging about $1,775 (First American Title Fee Calculator, Basic ALTA Coverage Premium Quote, accessed April 18, 2006).  The direct cost of the policy to the underwriter is about $200 to perform the associated administrative title services and 5 percent of the “market” premium, about $90, for a total of under $300 – about a sixth of the price being charged by title carriers. The remainder may be the split the underwriter pays the real estate agent, mortgage broker or title agent. The title industry maintains that title insurance can’t be compared to other insurance products because of much higher operating expenses (i.e., maintenance and records search expenses) than other lines of insurance, but the overwhelming majority of these costs are related to the commission split that is paid to the title agents.
 
My clients NEED a transfer fee monetization in order to (i) stay in their properties and avoid foreclosure or (ii) finish their developments and put consumers to work.  Consumers need my clients to avoid foreclosure to maintain property values.  They don’t need to be paying a 600% markup to title insurance companies in policy premiums.

 

 
by dirt lawyer | 2010/03/02 | log in or register to post a reply

Who's pounding the table?

Apparently, the various state supreme court cases I have cited don't count as "law."  The Restatement is not law until a court adopts the position and as of yet, I haven't found any cases where a court has adopted the Restatement view with respect to these covenants.  In fact, the recent cases I have cited show that the courts are still applying the "touch and concern" analysis.  But, even if the Restatement view is adopted I find it unlikely that these covenants would be upheld.

You nelect (sic) to tell your readers that the Freehold fee is not perpetual so this illustration has no relevance to this discussion.

I think I pointed out quite clearly that the Freehold covenant applies for 99-years.  No, it is not perpetual but it is more closely related to that illustration, that concludes with it being unconscionable, than any other provided in the Restatement.  I think longer than most of our life-times would be pretty darn close to perpetual for all practical purposes.  The others, where the covenants were illustrated to be valid, pertained to covenants which provided some benefit to the land owner.

It must be pointed out that every person who ulitmately (sic) pays this fee does so on property that they purchased knowing that the fee was in place and that this fee was an important part of teh (sic) consideration when they purchased the property.

You are making wild assumptions.  See this video - which indicates that buyers are unlikely to be aware of the covenant until it comes time to pay the fee.  CC&Rs are routine exceptions on title policies and very few buyers actually read them at closing.  I suppose that they should, but in reality we know that many people will be taken by surprise when they find out that they have to pay 1% to someone they don't know and never met when they sell their home.

You also assume that buyers will get a reduced purchase price to account for the covenant when they buy the home.  I find that hard to believe.  I have never met an appraiser that conducted a title search (particularly a 99-year search) when appraising property.  They will inspect the home and check comparable sales in the area, but it is doubtful that they will be aware of the covenant or take it into consideration when they prepare the appraisal.  Even if they are aware of it... how does one actually account for it in the value of the home?  The future value of the home at the time of the sale is unknown - you can't even be sure when the home will sell or how much it might appreciate in the mean time. 

Importantly, there are benefits arising from the Freehold covenant that do touch and concern the land. The covenant is an important financing tool for the developer that is used to enhance the property, pay for infrastructure and effect its sales price favorably for the intial (sic) and subsquent (sic) buyers.  Additioanlly (sic)  there is a valulable (sic) charitable component that benefits the community where the land is located. All of these would make the covenant permissable (sic) and not run afoul of section 3.7.

Seriously?  You can put lipstick on a pig, but it's still a pig.  The value of the infrastructure has already been added to the property.  The transfer fee does not add any value.  In fact, a recent ALTA study that examined the effect on two hypothetical properties with an initial value of $250,000, one with such a covenant and one without, concluded that the property encumbered by the covenant actually lost value (in the form of lost appreciation and fees paid).  After 4 sales and 21 years, the encumbered property lost $2,123.77 in appreciation and the sellers paid $9,349.62 in transfer fees compared to the other home. 

And, just how much is going to charity?  I'm sure it is a de minimus amount just so it can be claimed that there is a chartable benefit.  Section 7.12 of the Restatement would likely allow for modification or termination of the Freehold covenant.

A covenant to pay money or provide services in exchange for services or facilities provided to the burdened estate may be modified or terminated if the obligation becomes excessive in relation to the cost of providing the services or facilities or to the value received by the burdened estate

Because there are no services or facilities being provided by the transfer fee, it would seem that even under the Restatement view the transfer fee would be excessive and could be terminated. 

The Texas statute only provides that a buyer cannot pay the fee in residential transactions.

I have addressed this issue with another of your Freehold friends in a prior blog comment.  Your constrained interpretation of "buyer" is perplexing.  The prohibition on paying the transfer fee in Texas applies to "a transferee of residential real property or the transferee's heirs, successors, or assigns."  I cited numerous cases in the prior post to demonstrate that such language includes subsequent owners.  Again, in case you missed it, I'm pounding the law, not the desk.

And if I may interject a bit of logic into the argument - the Texas statute would be rendered moot by your interpretation because there is no such thing as a covenant that could be binding on a buyer.  There is no privity of estate until title is acquired.  Surely the Texas legislature knew that.

In the discussions regarding the statute which was supported by the Texas Realtors, it seemed that their concern for the Texas consumers was misplaced when it was pointed out that they get paid 6% every time the property sales when they have done nothing to create or enahnce (sic) the property's value yet the covenants they were trying to ban were only 1% payable to the person who actually did create the value.

You are comparing apples to oranges.  I do believe that a 6% sales commission is ridiculous.  However, parties are free to enter into such contracts.  That is the difference - Realtors contract with the party paying the fee.  If a Realtor tried to record a covenant obligating future owners to pay the fee, I'd have the same problem with the arrangement.  Freehold is free to negotiate in contract with anyone willing to pay the fee - my contention is that it is unconscionable to attempt to bind future owners who are not receiving any benefit in return for the fee.  The fee doesn't go to maintain common areas or recreational facilities, it is merely a sum of money paid to the developer.

As has been pointed out, these covenants do not face the same risk of default as mortgage backed securities because their payment is not based upon the credit worthiness of borrowers.

You are correct.  But I would argue that these are worse than MBS because 100% of the value depends on the enforceability of the covenants, which in my estimation is doubtful.  They are likely binding on the first purchaser who is in privity of contract with the covenantor, but I do not believe that they are binding on subsequent purchasers. 

 It seems that only those who have a vested shortsighted interest to control closing costs and fees paid at closing are opposed.

I suppose if you discount all of the opinions of land title associations, the Realtors, and legislators who have been actively working to ban the freehold-type covenants as those with an "interest to control closing costs" you are right.  But, that doesn't mean that these are in the best interest of consumers.  ALTA has stated that "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."  I'm inclined to agree with them.

You guys at Freehold should be commended for your persistence.  I appreciate the spirited debate but I haven't seen anyone cite anything to convince me I'm wrong.  I have cited case law and even the Restatement, since you seem so dedicated to arguing that the law is wrong, to support my position on the issue.  Yet... you seem to fault me for "pounding on the table." 

As I have said before, this is ultimately for the courts and legislatures to decide.  I have expressed my opinion, supported by legal authority, but since no court has yet ruled on this issue we just don't know who is right.  If you are aware of any decision involving a Freehold covenant and a subsequent purchaser, please let me know. 

I just noticed that "Dirt Lawyer" submitted another comment... if it's okay with you, I'm going to need a break before I tackle that one.

 
by Robert Franco | 2010/03/02 | log in or register to post a reply

Addressing Dirt Lawyer's Arguments...

1.       Monetization.  I understand the concept but it seems premature to be selling the pools before any of the lots have been sold with the burden of the covenant.  It is particularly disturbing that anyone would consider such a controversial investment in light of the doubtful enforceability.  From my perspective, if your client can't afford to develop the property without resorting to a Freehold covenant, he probably shouldn't be moving forward with the project.

2       Touch & Concern.  I understand what the Restatement has proposed in lieu of the touch and concern analysis.  However, it is just that... a proposal.  Under well established law, in order for a covenant to run with the land it must provide some benefit to the owner's property or the community at large.  Your contention that a depressed property value is a benefit because the owner can sell his lot for less is a little disturbing.  Encumbering the land in order to depress the value of the land is hardly a benefit to the owner.  As ALTA has pointed out, the depressed value will cause the future owners to lose out on future appreciation and subject them to thousands of dollars in needless fees. 

The same result could be accomplished by developing a landfill on adjacent property.  That would depress property values and operating the landfill would provide future returns to the developer.  That would hardly be a benefit, would it?  Frankly, it stinks (pun intended).

If you really have an opinion from a "top-rated national firm" indicating that these covenants are enforceable, I'd love to read it.  (you can email it to me).  I have done the research and I cannot figure out what law they could possibly base such an opinion on.  I'd be happy to review their opinion and if there is actually some legal support for the position, I'll post it.

Regarding your comment that the title companies are concerned about tracking down the beneficiaries, I don't share that concern.  My concern is that the covenants purport to run with the land for 99 years and it is rare that any title company searches that far back for a residential real estate transaction.  In Ohio, most searches for residential sales are searched about 40 years back in the chain.  It is even becoming more common to see short searches of only the previous couple of owners.  It is only a matter of time until the covenant is missed and an unsuspecting purchaser gets the surprise of a life-time when he sells.  If he actually purchased an owner's policy of title insurance, there will surely be a claim for the agent and title insurer to deal with.

I particularly want to address this comment:

Obviously, if the covenant were an illegal servitude, there would be no need for a legislative ban.

This is not quite accurate.  A statute would just codify the common law, something that is done very often in the legislative process.  It is needed because people like yourself and Freehold are developing very creative arguments that, theoretically, some judge could buy and in effect change the common law.  The statute would provide a higher authority that would be binding on the court so that can't happen. 

3.      Responses to My Questions.  First, I'm shocked that we cannot agree on the absurdity of the covenants I hypothesized as an illustration of why the homeowner must receive a benefit from the transfer fee in order for it to be binding on subsequent purchasers.  All I can say is... "want to buy my house?"

Second, your strict adherence to contract law has a flaw.  Certainly, you and I could agree on any price and corresponding future obligation we can conjure because we are in privity of contract.  But, let's take it a step further.  You buy my house subject to the agreed covenant.  Years later you sell it to someone else.  An appraiser compares the value of my home to others in my neighborhood and provides a value.  No title search was done by the appraiser, so she is unaware of the covenant.  The buyer thinks he is getting a fair price at market value (assuming no encumbrances).  Further assume that, as is common, the title company updates a previous title policy that takes exception to all CC&Rs of record, they do not actually provide any details of the covenant and they buyer does not opt for an owner's policy.  

Can you honestly say that the poor "schlub" you sold the house to actually agreed to be bound by the covenant?  You keep arguing that "A subsequent owner has a choice to assume the obligation or not when he purchases the property.  He will price the property accordingly.  I think it would be absolutely unfair for him to pay less and then avoid the obligation by arguing some archaic “touch and concern” principle."  I think I have shown that the buyer here had no real choice and he was not aware of all of the facts and circumstances to negotiate the sales price accordingly.  He paid the appraised value and thought he was getting a fair deal.  This is exactly why the law of covenants and servitudes differs from the law of contracts.  You are arguing that "constructive notice" is sufficient to conclude that the buyer agreed to the terms of the covenant and the law says that will only be the case if the covenant benefits the property.  The Restatement reaches the same result by finding that it is invalid as unconscionable if there is no corresponding benefit to the land.

Even under a contract approach, a subsequent purchaser isn't even a third-party beneficiary because he is not receiving any benefit.  And, if he were a third-party beneficiary, it would only give him the right to enforce the contract against the promissor or promissee, it wouldn't necessarily be enforceable against him.  In order for a contract to be valid, the parties must manifest intent to be bound by the contract.  The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents. (Restatement 2d of Contracts).  It could be argued that the subsequent owner without actual knowledge of the covenant could not have assented to the creation of a contractual obligation.  And there would seem to be a consideration problem; if he pays fair market value for the property he is receiving no consideration.

You seem to want the best of both worlds - you want to say that this is a binding contract because that was the intent of the original parties, who assented to its creation.  Then you want to bind subsequent owners for 99 years because the recorded covenant provides constructive notice.  In essence, you are creating a new hybrid of contract law and property law to create a "third-party promissor."  It is novel, for sure, but it stands the law on its head to reach an absurd result.

4.     Unconscionability.  I think you are missing a key part of the Restatement.

 As you mention, “the payment of a transfer fee is not considered unconscionable where the ‘owners receive contemporaneous services of value roughly equivalent to the required payments.’  Under the Freehold program, the original owner would sell the transfer fee and invest the proceeds in the property, thereby benefiting successors.

"Contemporaneous" means "occurring during the same period of time."  Under your description of the Freehold system, you claim that the developer will sell the rights to his transfer fees in order to receive a lump sum payment that he will invest in the property in order to complete the development.  That indicates that the "benefit" you refer to was provided previous to all of transfer fee payments - there is no "contemporaneous services of value."  I find it quite a stretch to attempt to qualify the lower property value and lost appreciation as a "benefit" of any kind.

5.      Conclusion.  It has been argued that title insurance is over-priced.  I am no longer a title agent, but I have a different opinion.  Briefly, I don't think title insurance is over-priced, but I have often criticized the title industry for over-valuing their product.  They have gotten in the habit of taking short-cuts, by not doing a thorough title search, that reduces the value of the insurance.  And, unfortunately, there has been no corresponding reduction in the premium.  However, there is still a difference between title insurance and the covenant you propose - the consumer doesn't have to buy it.  Owner's policies are optional and, although some lenders require loan policies there are still some local lenders around here that do not.

Aside from that, you indicate the premium for a $500,000 home is about $1,775 and you claim that the buyer doesn't get the full-value returned.  However, the value of insurance coverage is debatable - if there is claim, the policy would pay out up to $500,000.  That is certainly worth something and an insurance policy is a contract freely entered into between the insurer and the insured.  How they value the coverage is between them.  There is nothing in a title policy that requires any third-party to ever pay a premium... ever. 

Contrast that with the Freehold covenant on the same home.  The transfer fee would be $5,000 and the owner receives no contemporaneous benefit whatsoever.  Further, the subsequent owners were never a party to the original contract.  Again, you are trying to bootstrap privity of contract by tying the contract to the land, but the covenant doesn't run with the land because it does not provide the requisite benefit to the land owner.  This is precisely why we have different laws for covenants and contracts.  The law will find the privity only where the covenant is "real", not where it is "personal."

Clearly, we have different philosophies on what is an acceptable covenant that runs with the land.  The fact that you don't see any agreement between a buyer and seller that purports to bind subsequent owners as offensive to the law of covenants is an indication to me that your position must be wrong.  The law has been consistent on this point.  For reasons of public policy there are  limits to the extent that a property owner can encumber real property.  The mere obligation to pay a sum of money has always been held to be personal in nature and does not run with the land.

Again, send me your "top-rated firm's" opinion and I'll consider their analysis.  For now, I am still under the impression that subsequent owners cannot be bound by the Freehold covenant.  As states continue to pass legislation codifying the common law, this issue will become even more clear.

 
by Robert Franco | 2010/03/03 | log in or register to post a reply

Peter

I am an attorney and developer by default.  I have inherited several neighborhood investments after my developer investment partners filed bankrutpcy.  If Freehold can monetize a 1% covenant on my property - a one time event - it will provide enough funding to pay off the community banks who invested their loans here -  and complete the development of property.  The present owners in the neighborhood who do not have reconveyance fees on their lots will have assurance the neighborhood can be completed in a quality way comparable to the first phase built before the crash in real estate. Future buyers with the covenants on the land can buy their lots for less which will more than make up for the 1% fee.  If I don't get this financing, then I will be forced by the existing market to sell the balance of the neighborhood to a lower cost buider that will change the nature of the neighborhood....and nobody wins.   I would only do this Freehold financing if I could sell the instrument now and gain the funds to pay off the bank and develop the land.

Also, in my community the Freehold financing, if approved for the existing struggling developments would not only pay off the community bank loans, but would overnight start creating hundreds of construction jobs. Nationwide with the 650 billion of development property now in the pool, over 2 million construction and related  industry jobs could result.

This is  a good system that if done right can be the lifeblood of many neighborhoods and banks.The key is that they covenants are disclosed so that there is no question they are on the land.  If a buyer knows the covenants are on the land they may demand a 2% reduction in the property buy. That would be fine.

I live in a neighborhood in Florida where deed covenants are on the land and provide a regular source of income to the company that developed the neighborhood.  True here it is a non-profit controlled by the developer, but I assure you it comes in handy for the developer's uses.

Before you are so visceral in your efforts to discredit Freehold, please consider how this may be beneficial to many parts of the country and be a shot in the arm to  the housing and real estate industry.  You cannot get financing any other way.  If my property can self-finance and my development can be kept out of bankruptcy and not be a burden to my bank, that can be a blessing to our community. 

I am not  fat cat developer....just a person who owns a development who cannot get financing the finish the development any other way.  As soon as I can get out of debt I will probably never develop again.  But any way you look at it, the Freehold financing can be a win win all the way around...for realtors who will have more to sell, for homeowners who will have a better neighborhood, for the banks who will not take over a problem loan, and for the land owners who are facing a crisis that is unprecedented in our lifetime. There are few developers even left in business now.  Let's help the few that are remaining and do this right.

This is also a private property right.  Not something that should be illegalized...but only regulated in terms of notice requirements.

Thanks for considering how this may be beneficial and how it can be channeled for the good of all involved.

 
by PETER JOHNSON | 2010/03/03 | log in or register to post a reply

A Follow Up

Hello Robert,

Thank you for ther reply.  Just a few comments in response:

I did not ignore your cited supreme court cases, they simply don't support your argument.  Saying that a covenant must touch and concern the land to be enforceable does not support the conclusion that these covenants are not enforceable. As I pointed out there are many benefits of these covenants that touch and concern the land.  You may call them "putting lipstick on a pig" in your opinion,  but that doesn't change the fact that they are real benefits. Can you truly argue that a financial tool that allows the developer to develop the property in the first place, develop it  at a lower cost, sell the property at a lower cost, spread the cost of the infrasturcture beyond the shoulders of the first buyer, give back to the community through a charitable contribution  and decrease the buyers closing and selling costs is not a benefit?  If so then I think you are simply not willing to see it.

We can argue all day about the trends of the courts as it relates to the concept of touch and concern or whether there is a move towards contractual consideration for enforcement of covenants, ,but I think there is one thing we can agree upon and that is that people are free to contract.  The truth is that every person who purchases property with a transfer fee covenant on it assuming the title compnay does its job properly,  does so voluntarily with knowledge that the covenant is there. They are free not to buy the property or use the covenant to negotiate a lower price.

If your argument is that people don't read their covenants, then the problem lies with the disclosures made by the title company they have hired to do a title search.  Instead of attacking the covenants and singling out this type of covenant maybe the title company should give more detailed disclosures of the covenants that are on the property. Freehold supports full disclosure and in fact applauded the disclosure law passed in California and would like to see that in every state.  For example, if there is a covenant on a property that limits the size of a fence to 6 feet and the purchaser does not read that covenant when he buys the property and before he builds a 8 foot fence, then the coveant should be invalid? Or would you say it was there, it was noted in the title search and he should have read it?

As for the argument regarding the Texas law, I did read your previous blogs and disagree with your argument.  Words used in a statute are there for a reason and must be given meaning.  When the Texas statute uses the term transferee it did so on purpose, to prevent a buyer from being faced with the fee at closing and then to prevent that buyer from forcing a subesquent buyer to pay it.  The buyer when he sells the property becomes the transferor, he does not become an assignee of himself when he was the transferee.  But his buyer, who is the transferee as well as the assign of the original transferee, will not pay the fee. The realtors who supported this statute realized this legislative intent and attempted to get this language changed in the next legislative session and the amendment was defeated.

Your argument that a covenant is not binding on a buyer and the legislaure must have known that  so they included the term transferee in the statute is illogocal.  If the legislaure knew that they wouldn't have put that term in the statute at all, it would be meaningless.

As for your argument regarding the charitable component of these covenants,  I will ignore the cynical nature of your argument and simply state that with the current property in the Freehold program, the charitable contributions over the life of these covenants is reasonably estimated to be in the billions of dollars.  That is not an insiginifcant amount and I am sure is more then that which is generated from the charity given through the title insurance premiums and real estate brokers fees.

Finally, I must address your thoughts that comparing this fee to the real estate commissions is apples and oranges. The major resistence to this program comes from realtors who are protecting their commissions so comparing this fee to their fee is worthwhile. It is estimated that these properties will sell approximately 7 times over the 99 years. If so, the owners of this property will collectively pay 7% in transfer fees.  Those same owners will pay 42% in real estate commissions. To argue that consumers are being harmed by this fee while ignoring the much larger fee they are paying is disingenuous at best.

 

 

 
by Robert Wilson | 2010/03/04 | log in or register to post a reply

Give me some law...

Robert Wilson:  If you do not agree with the legal authority I have cited, give me something better to consider.  Developing the property "in the first place" is not a benefit that corresponds to the fee future owners would be required to pay.  The development of the subdivision is something that must be done to sell the home - you really cannot tout the roads, sewer system, storm drainage, etc., as "benefits."  That is merely a part of the property which must derive a benefit from the fee in order for the covenant to run with the land. 

All of the cases I have read look for something more - an ongoing homeowner's association, or a recreational facility to which the homeowner is entitled to use.  The future fees pay for the maintenance of these types of benefits.  So, when the fee is paid, the property receives a corresponding benefit. 

Generally, a lower property value is a detriment to the property, not a benefit.  Encumbering the property merely to depress the value just doesn't cut it in my book. 

As for the charitable aspect of the covenant.  Only a small percentage of the fee goes to charity so the fee would be considered excessive, if it would be acceptable at all.  I believe that a court would look at the benefit received by the property and at the very least reduce the transfer fee accordingly.

I really cannot explain the Texas legislation any better than I already have.  Simply, the "heirs, successors, and assigns" language is clear in my opinion.  It refers to subsequent owners of property burdened by the covenant.  Clearly, the Freehold covenant requires those subsequent owners to pay the transfer fee and it violates the statute.  Trying to escape the statute by claiming that when the subsequent owners pay the fee they are "transferors," not "transferees," ignores the fact that these are the same people merely at a different point in time.  I have looked for Texas cases interpreting the statute, but i don't think there have been any yet.  I'm sure we will see one sooner or later and we will see what the court's interpretation is.

Lastly, your analysis of the transfer fee as it compares to real estate fees is still way off base.  First, when you simply add the percentages to determine the percent paid over 7 transfers you are not quite understanding how percentages work.  If you want to add them up, you have to add the sales prices as well.  The percentages do not change.  It is still 1% for the transfer fee and 6% for the Realtor's commission.

But, I understand your point that the Realtor's charge more.  The difference is that each time a Realtor charges the fees, they are doing so with a new contract with the party that is paying the fee.  Each time, there is privity between the seller and Realtor and the fee is agreed to at the time the contract is formed.  With the Freehold covenant, future owners are not in privity of contract with the developer and the covenant attempts to bind them to the terms of the contract entered into between the developer and the first buyer of the home. 

Those future owners aren't getting anything of value in return for the transfer fee.  While they may be paying less, the home is also worth less because of the encumbrance. 

We seem to be bickering in circles at this point.  Clearly we do not agree, but it will be up to a court to decide on the enforceability of these covenants - not us. 

 
by Robert Franco | 2010/03/06 | log in or register to post a reply

Certainly, the developer benefits...

Peter:  Thank you for the comment.  I can certainly see how the developer benefits but it is the future owners I am concerned about.  I just don't see the depressed sales price as a corresponding benefit for the obligation to pay a transfer fee. 

It is a creative financing scheme, but there seems to be something inherently wrong where the developer gets "financing" and the future owners are required to pay for it.  As one of my old law professors used to say "it is too cute by half." 

The development is something that must be done to sell the property.  You just cannot point to something that was a part of what was purchased and claim that it is a benefit received for the future transfer fee.  It was something that was already accounted for in the purchase price.

Could you imagine buying a car like that? "Look at the low price of this car... you will have to pay 1% of the sales price to GM when you sell it, but in return you are getting 4 wheels, an engine, and seatbelts."  Just because GM (as an example) is in financial straights and needs the money, it doesn't make this a better way to sell a car.  And... it isn't a better way to sell a home.

 
by Robert Franco | 2010/03/06 | log in or register to post a reply

Freehold - Great Idea

The reality is that developers need liquidity, and if they can get it from selling off a future fee in return for lowering the sales price today, then so what.  They will HAVE to lower the sales price, so its a fair trade.  Does anyone seriously suggest that they will pay the same for a home with a transfer fee as they would for the same home without a transfer fee?  If not, there is no LOGICAL basis for complaining – it is simply an emotional response.  If your argument is that people are too ignorant to know that there is a fee, despite the title commitment, then you are really arguing for better disclosure.

 
by thomas moseley | 2010/03/09 | log in or register to post a reply

Buyers are dumb, or lazy

I don't buy your line that, "They will HAVE to lower the sales price".  Most buyers are

so......dumb or awestruck that they might not even know that there is a fee due

upon a future sale event.   Most people are dumb when it comes to buying a

parcel of real estate and don't even hire a shyster (sp) opps, I mean lawyer to

review the papers and attend the closing, yet alone read or question the documents

placed in front of them.

 
by george Hubka | 2010/03/14 | log in or register to post a reply

Sell out and move on

Peter,  If you can't swing the funds w/o being a "leech" on future buyers, sell

for what you can get and move on.   Sounds like you project was under-capitalized

from the get go, and your bluff (gamble) was a looser.

 
by george Hubka | 2010/03/14 | log in or register to post a reply

Remedial Property Law course? Right this way

Whenever I start to smell bullsh**t on a regular basis around the things a company says, I draw one of three possibilities:  1. they're lying (always a popular choice, but they just sound so earnest); 2. they're too stupid to understand what's wrong (another popular option; this seems less like garden variety stupid and more like drink-the-kool-aid stupid; they all use the same descriptions which are generally flawed); 3. they're making a big stinky play on the left side so that no one will look at the right side (rarely used but fine when done effectively; what's the stinky play we're not supposed to see in all this?). 

Couple of other corrections for the "top Texas lawyers" (there words not mine) who Freehold hired: 1. The Rule Against Perpetuities is violated if ownership does not vest during a life in being at the time of the creation plus 21 years; and it would vest between the developer and the next owner through privity of contract.  Beyond that, not so much.  You run straight into that whole life in being problem. 

Second: please...please...please...because I want someone to share the joy on this: download Freehold's brochure and flip to the part where they quote people from CA who "support" them.  Note the generous use of text omissions (indicated with a hearty "[...]").  Then...just for fun...go back and look at the original materials.  I've seen creative editing, but wow...this is ballsy.  Take this sentence as an example: Original text in the CA legislative report: "It is clear that reconveyance fees will do nothing but hurt the consumer, depress the market, and threaten title.'  Edited version: "It is clear that reconveyance fees will do nothing [to] [...] hurt the consumer, [...the] market, [or...title]."

Recall: this is language from a legislative publication designed to show the flaws in their program.  And they use the quotes out of conduct to say the exact opposite of what is true. 

TAKE HEED ye with loose cash.  If they're bs'ing you now, they will bs you later.

 
by Sam Luchow | 2010/04/25 | log in or register to post a reply

One can definitely smell the BS...
but its coming from Sam. First, the quote Sam describes with such glee as an example of selective editing was never on Freehold's site, nor has it ever been in its brochure. This includes any remote reference to the quote in question, whether in whole or in part, selectively edited or otherwise. I suspect this is easy enough to check, since my understanding is that prior versions of the web site and the old brochures contained therein are always indexed and discoverable online. This begs the question of why he would make this up, because clearly this is what he has done. For entertainment maybe? I'm guessing that Sam's rule #1 above applies to Sam's comments. What IS interesting is that I cannot find Sam's "quote" anywhere (except in Sam's post above). I googled the phrase "clear that a reconveyance fee will do nothing but hurt" and the only reference I found was.. Sam's. The Senate analysis I am aware of is one that concluded: "Reconveyance financing is an equitable method of paying those obligations over time and avoids saddling the first homebuyer with huge up-front costs. This method spreads the costs of funding these community benefits among the first and future homebuyers, thus ensuring that no one buyer shoulders a disproportionate burden for amenities that all homeowners will enjoy." http://info.sen.ca.gov/pub/07-08/bill/asm/ab_1551-1600/ab_1574_cfa_20070507_162822_asm_comm.html The bill passed into law, and California has one of the most favorable transfer fee statutes in the country. Second, no serious contention has ever been made that the Rule applies. The instrument terminates in 99 years from date of filing - hence no RAP violation. 
by J.B. Alderman | 2010/08/27 | log in or register to post a reply
Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
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